How Much Retirement Savings Is Enough? Why Couples May Disagree

As couples combine their finances and think about their financial future, its common for the conversation to be uncomfortable or tricky. While one individual in the relationship might think about money one way, the other party could think about it completely different. Just know, it’s normal and okay to have different background and approaches to money, but that communication is key in coming to a solid compromise and understanding. 

The first step is communication. When discussing your finances, it’s important to communicate and feel open about discussing an often uncomfortable topic such as money. 

The Wall Street Journal highlighted an issue that can get overlooked in retirement planning: the financial burdens that women, in particular, face late in life.

A survey last year by the National Council on Aging and Ipsos, a polling and data firm, found that fully half (51%) of women age 60 and older are worried about outliving their savings. In the same survey, almost six in 10 women (59%) said they are worried about losing their independence.

According to the survey, women, of course, typically live longer than men—about five years, on average—and are more likely to live their final years alone. In 2019, almost half (44%) of women age 75 and older in the U.S. lived alone, according to the Administration on Aging. 

As you can see from the survey data reference above, both men and women often have different expectations on how much money they need for their future, which is normal. Again, make sure to communicate and research with your partner to insure both individuals are comfortable with their finances and savings. Of course, a good financial adviser also can make a difference. But the most important step is to talk about retirement and how your finances might play out before you get there. If you have any questions, or want to discuss retirement with us, please schedule a complimentary 30-minute consultation.

 

IRS Finalizes ABLE Account Regulations: Here’s What to Know

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The IRS recently published final regulations for Achieving a Better Life Experience, or ABLE, accounts for disabled Americans. ABLE accounts aim to help people with disabilities and their families save and pay for disability-related expenses. Even though the contributions aren’t deductible, distributions such as earnings are tax-free to the designated beneficiary if they’re used to pay for qualified disability expenses. These expenses can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services, along with other disability-related expenses.

The regulations come in response to and finalize two previously issued proposed regulations from the IRS. The first proposed regulation was published in 2015 after enactment of the ABLE Act under the Obama administration. The second proposed regulation was published in 2019 in response to the Tax Cuts and Jobs Act, which made some major changes to ABLE. 

Eligible individuals can now put more money into their ABLE account and roll money from their qualified tuition programs (529 plans) into their ABLE accounts. In addition, some contributions made to ABLE accounts by low- and moderate-income workers can now qualify for the Saver’s Credit.

The new regulations also offer guidance on the gift and generation-skipping transfer tax consequences of contributions to an ABLE account, as well as on the federal income, gift, and estate tax consequences of distributions from, and changes in the designated beneficiary of, an ABLE account.

In addition, before Jan. 1, 2026, funds can be rolled over from a designated beneficiary’s section 529 plan to an ABLE account for the same beneficiary or a family member. The regulations provide that rollovers from 529 plans, along with any contributions made to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) can’t exceed the annual ABLE contribution limit.

Lastly, the final regulations offer guidance on the record-keeping and reporting requirements of a qualified ABLE program. A qualified ABLE program must maintain records that enable the program to account to the Secretary with respect to all contributions, distributions, returns of excess contributions or additional accounts, income earned, and account balances for any designated beneficiary’s ABLE account. In addition, a qualified ABLE program must report to the Secretary the establishment of each ABLE account, including the name, address, and TIN of the designated beneficiary, information regarding the disability certification or other basis for eligibility of the designated beneficiary, and other relevant information regarding each account. 

For more information about ABLE accounts or if you have any questions regarding these regulatory changes, please contact us at info@shermanwealth.com or check out our other relevant blogs

What to Do If You Don’t Have a 401(k)

Piggybank on wooden table with stacks of coins beside it. A hand putting a coin into the piggy bank.

As the coronavirus sweeps the world and people take a step back to look at their financial picture, they are realizing that they do not have a company 401(K). 

Even though some of these people work at a company where they offer a 401(k), they may not be eligible due to not meeting criteria, such as length of employment, or they are not a full-time employee.

So, as people are stressing more about the importance of having a hefty savings account, it’s a great time to discuss options for individuals who are not eligible for their company 401(k) or do not have one through their workplace.  Below we will share several options for people in this situation according to an article by MorningStar.

1) Invest in an IRA.

A good first step for someone without a 401(k) is setting up an IRA. An IRA is a great other step to save for retirement and seek tax benefits. You are eligible to contribute $6,000 a year to your IRA.

2) Look Into Self-employment accounts are an option.

For self-employed individuals, there are several options to consider. Some of them are similar to 401(k)s but are just set up a bit differently. Speak with a financial professional to see what options you can set up for yourself. 

3) Consider an HSA 

If you have a high-deductible health care plan you can consider setting up an HSA in order to save some of those dollars and grow your money tax deferred. 

4) Open a Taxable brokerage account.

While its always nice to grow your money tax deferred, investing in a regular taxable account is always a great option. You can speak with a tax professional to see how to do so in a tax efficient manner. 

5) Be part of the solution.

Lastly, if you work for a small employer without a 401(k), maybe ask them to see if it’s something they are interested in starting. Never hurts to ask! 

As always, if you have any questions about your current 401(k) or need help investing money in order to supplement a lack of one, please reach out to us and we would be happy to discuss your future financial goals.  

Top 5 Pieces of Financial Advice

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As we are all adjusting to the new norm that the coronavirus pandemic has created in our world, we are also learning pieces of advice that we could share from this experience. When going through an economic crisis, it’s important to keep some tips at top-of-mind to help you navigate the bumpy waters. In a CNBC Select Article, we found 5 great pieces of financial advice that we want to share with you to put in your financial repertoire.

First and foremost, try not to accumulate credit card debt. Racking up credit card debt can have very negative long term consequences, so it’s important that you pay the full balance on time. When you do not pay the full balance on time, your card will quickly accumulate interest, which often can get so high that it’s hard to pay off. 

According to recent Federal Reserve data released in September, the average interest rate for all credit card accounts is 14.87%. Among accounts assessed interest, or accounts with outstanding finance charges, the average interest rate rises to 16.88%. But for consumers with credit scores below 670, interest rates can near 30%, CNBC Select reports.

Next, make sure you don’t buy things you can’t afford. Although this one seems obvious, it’s much more common than you think. Avoid overspending and spending on things you can live without. Start putting that extra money into savings accounts where you can be accruing interest and earning money. 

Third, invest the year’s expenses or anything saved after you have the year’s expenses saved? Before the pandemic, many people were saying how you should have several months of rent and expenses in a savings account for a rainy day, but as we have seen the economic hardships the coronavirus has inflicted upon our society, we are suggesting to save about a year’s worth of expenses before investing it elsewhere. 

Fourth, start to think like a savvy businessman or woman. Learn to negotiate. Especially in the world we are living in today, make sure you are constantly looking for deals and inquiring about credit card versus cash options. Oftentimes, places will charge you less if you pay in cash. So, before swiping that card, make sure you think about all your options. 

Lastly, buy in bulk. With Amazon becoming increasingly popular and making it possible to get what you need in a matter of hours, take advantage of deals and places you can buy in bulk. If you can save a few dollars here and there, take advantage of it. It’s important to be a smart shopper, especially when buying something pricey, such as groceries for a large family. 

By implementing some of these basic money management tips into your daily routine, you will find yourself becoming a more savvy shopper and saving more money. It is especially important during an economic recession to take these concepts into consideration and make the most of your finances. If you have any questions on other ways you can maximize your financial portfolio and find places in your budget where you can save money, please reach out to us at info@shermanwealth.com or visit our site at www.shermanwealth.com. Check out our other blog posts for more financial advice and tips! 

 

Here’s How The Pandemic Has Upended The Financial Lives Of Average Americans: CNBC + Acorns Survey

not all negative during covid

The coronavirus pandemic has upended many Americans’ financial lives. While millions are unemployed and sufferings, there is actually more positive financial data than you would think. 

According to CNBC and an Acorns Survey, many are saving more and spending less. In fact, 46% of the respondents said they are “more of a saver now” compared to before the pandemic. Additionally, 60% consider themselves “savers,” up from 54% last year. The poll, conducted by SurveyMonkey Aug. 13-20, surveyed 5,401 U.S. adults and has a margin of error of +/-2%.

 

About half, or 49%, said their monthly spending has decreased, compared to 33% last year. Some of those savings can be attributed to the fact that people stayed home and didn’t do things like dining out, said personal finance expert Jean Chatzky, co-founder of HerMoney.

While many have been struggling these last few months, others have picked up on some financial skills, learning how to save dollars here and there, cutting out old subscriptions, and being smarter spenders. By prioritizing wants versus needs and taking a look at how much money is going out each month, people have picked up better spending habits that will help them navigate these bumpy waters ahead. 

With extra cash and savings in the bank, it’s important to talk with an advisor about options and investing that makes the most sense for you, whether it be saving for retirement, college tuition, or something else. If you have any questions for us, please reach out at info@shermanwealth.com and we would be happy to set up a time to discuss a financial plan for your future.

 

How Much Longer Until The US Economy Is Back To Normal? This New Index Shows We Have A Long Way To Go

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As we approach the six month mark from when COVID-19 turned our world upside down, we are beginning to adjust our lives to this new “normal”. As we continue to adapt to this different way of life, some things are seeming back to the way they were before, but much remains new and strange. We are going about our days wearing masks and social distancing, watching our favorite sports teams play in “bubbles”, empty stadiums and arenas, and spending our work day in sweats and from the comfort of our homes. 

As we begin to normalize some of these news ways of living, it raises the question of how far we really are from our old way of life? How much progress are we making towards this new “normal” that will be our future? As of right now, we’re seeing what’s called a “K” shape recovery, which is that the stock market is recovered, but the economy and mainstreet remains suffering. People are wondering if there will be a double dip recession potentially in the fall and winter months if the virus comes back. 

We’ve been thinking about how to tackle these difficult and unknown questions and found an interesting article by CNN Business and Moody’s Analytics, which raises some of these questions as they relate to the economy.

According to their analytics team, the U.S. economy remains far from normal. Based on the back-to-normal Index that they constructed, which takes into account 37 indicators, including traditional government stats and metrics from a host of private firms to capture economic trends in real time, the U.S. economy was operating at only 78% of normal as of August 19th. They are using the economic data from prior to when the pandemic struck in early March as a baseline as “normal”. They are saying that the “economic activity nationwide is down by almost one-fourth from its pre-pandemic level-far from normal”. 

Even though that data is not so promising, it’s important to note that it is substantially better than the darkest days of the pandemic in mid-April, when we were unsure of how dangerous this virus could be. As business re-opened between mid-April and mid-June, according to their back-to-normal index, the economy opened too quickly, with many surges in coronavirus cases throughout the summer leading to states halting their reopening plans. 

While our country is recovering slowly but surely from this deadly pandemic that has swept our world, we still have ways to go to reach our pre-pandemic “normal”. While the economy still needs time to recover, it’s the best time to think about your finances and how to manage your money to make sure you come out of these unprecedented times strong. Find out how much risk you are taking on, what investments you have and where you want to be given the circumstances and with the all time highs in the markets. If you have any questions about your portfolio or ways you can manage your money during these rocky times, please reach out to us and we’d be happy to help. 

What’s Ahead For Your Taxes If Biden Takes The Presidency

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With the election around the corner and recent news of Joe Biden’s running mate, Kamala Harris, we wanted to take a look at his proposed tax plan and what impact it may have on the finances and current tax plans of Americans.

As Biden accepts his party’s nomination for president this week at the Democratic National Convention, high-income earners are beginning to wonder if it’s time to revisit their tax plans. Indeed, taxpayers with taxable income over $400,000 could see their individual income taxes tick up under a Biden presidency. The former vice president has also called for raising taxes on wealth transfer.

Below we will outline Biden’s proposed tax plan, which CNBC has sliced into two categories, income taxes and estate planning. 

Income Tax 

On the income tax side, Biden calls for raising the top individual income tax rate to 39.6% from 37%, and applying it to taxpayers with taxable income over $400,000, according to an analysis from the Tax Policy Center.

He’s also talking about an increase to payroll taxes. Biden would apply the 12.4% portion of the Social Security tax — which is normally shared by both the employee and employer — to earnings over $400,000, the Tax Policy Center found. Currently, the Social Security tax is subject to a wage cap of $137,700 and is adjusted annually.

Finally, Biden would also boost rates on long-term capital gains and qualified dividends to 39.6% — the same top rate as ordinary income — for those with income over $1 million, according to theTax Foundation.  The long-term capital gains tax rate in 2020 is 20% for single households with more than $441,451 in taxable income ($496,601 for married-filing-jointly).

Estate Planning 

Last month, the Democratic presidential contender collaborated with Sen. Bernie Sanders, I-Vt., and the two formed six task forces to release a 110-page policy document. The document gives some insight on what we might expect from a Biden administration. “Estate taxes should also be raised back to the historical norm,” the task force wrote in the policy plan.         

Indeed, the Tax Cuts and Jobs Act roughly doubled the amount that you can transfer to other people — either at death or as a gift during life — without facing the 40% estate and gift tax. The gift-and-estate tax exemption is $11.58 million per individual in 2020.

Biden has set his sights on the “step-up in basis,” a provision in the tax code that allows an individual to hold onto an asset for years, watch it appreciate and then bequeath it to an heir at death. The owner’s basis — the original investment in the asset — steps up to market value at death, which means the heir is subject to little to no capital gains taxes if he sells it. Biden proposes taxing the unrealized capital gains in the asset at death, which essentially does away with the step-up. Wealthy households are likely to use gifting strategies to head off this change, said Bertles of Tiedemann Advisors. “This can be as simple as giving assets to a trust or outright to kids or grandkids while using the exemption,” he said.

Make sure to take a look at Biden’s proposal and think about how that may impact your situation. In just a few short months, this plan could be put into effect, so start thinking about any changes you could make to your tax plan and talk to an advisor for some guidance. As always, we are here to help if you have any questions regarding what these changes could mean for you. 

 

You’re Running out of Time to Reverse this Retirement Withdrawal and Save on Taxes

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Required Minimum Distributions (RMDs) are the annual withdrawals you must take from your individual retirement account and 401(k) plans after you reach age 72 (or age 70 ½ if you turned 70 ½ prior to January 1, 2020).  The CARES Act, the coronavirus relief act that took effect this spring, allowed retirement account holders to bypass required minimum distributions for 2020. Those that inherited IRAs are also allowed to skip the RMD this year.  (https://www.irs.gov/pub/irs-drop/n-20-51.pdf)

For those of you who have taken a Required Minimum Distribution (RMD) from your retirement savings at some point in the year, the clock is ticking for you to put that money back. If you already took the money out, you have until August 31st to put it back.  However, you shouldn’t wait much longer than August 20th, as there are several steps and contacts involved in the process. In order to avoid any errors in the transaction, it is advised to return any RMD funds as soon as possible. It’s important to note that this RMD waiver only qualifies for 2020, meaning next year you’ll be required to take your distribution as per usual. 

RMDs from traditional IRAs and 401(k) plans are subject to income taxes, so waiving the distribution or returning the funds could help you save on levies. But, make sure to give back the income taxes your custodian may have withheld, not just the net amount you may have received.

In other cases, some retirees opt to split their annual RMDs into 12 monthly disbursements, which means they have to return their monthly RMDs. In this scenario, you may have taken multiple distributions over the course of the year. Therefore, you’ll have to contact your custodian and have them hold the payments for the remainder of the year. You are allowed to replace the payments you have already received, too, but just ensure you cover the taxes withheld and act quickly.

Lastly, since the tax rules changed so rapidly this spring amid the coronavirus pandemic, savers should ensure that their custodians are marking the transaction as a “return of funds” and not a “contribution”, where you’d essentially be getting additionally taxed. 

Make sure to talk with your custodian to see if you are squared away and eligible to return your mandatory distribution for the year. If you have any questions or concerns about your RMDs, please reach out to us at info@shermanwealth.com and we’d be happy to assist you in any way. 

Did You Take A Required Minimum Distribution In 2020 From Your Retirement Account? If So, You May Be Able To Put It Back.

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If you took a required minimum distribution from your retirement account this year and want to reverse it, you now may be able to. The IRS announced on 6/23/20 that anyone who already has taken an RMD in 2020 from certain retirement accounts has until Aug. 31 to put the money back. (https://www.irs.gov/pub/irs-drop/n-20-51.pdf) The announcement comes several months after the CARES Act eliminated those mandated distributions for the year — yet some people already had taken them before the law’s passage.

The CARES Act, signed into law in late March, enables any taxpayer facing an RMD in 2020 from their defined-contribution retirement plan — including a 401(k) or 403(b) plan — or their individual retirement account, to skip those withdrawals this year. This includes anyone who turned age 70½ in 2019 and would have had to take the first RMD by April 1, 2020. The waiver does not apply to defined-benefit plans (i.e., pensions.)

The IRS’s new relief applies to individuals who face RMDs either due to their age or because they inherited an account that comes with those mandated withdrawals.  If you have any questions about these new rules, please contact your CPA for guidance.  And, as always, please contact us if you have any questions relating to RMDs or other issues related to your finances.

Has Your Employer Suspended Its 401(k) Matching During COVID-19?

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According to a recent survey, 16.1 percent of organizations have suspended matching employer contributions due to financial hardships caused by COVID-19. Worse yet, 1.3 percent of businesses have terminated their 401(k) plans altogether.1 401(k) plans and their matching employer contributions are relied on by millions of Americans to bolster their savings for retirement. If your employer has recently made an adjustment to its 401(k) offerings, you may want to consider how this could impact your future retirement and the next steps you should be taking.

Why Are Employers Changing Their 401(k) Plans?

COVID-19 has had a tremendous impact on businesses throughout the globe. With most states implementing stay-at-home orders, businesses have been forced to reduce hours or cease operation altogether. As Americans were encouraged to stay home throughout March, April and May, foot traffic all but vanished across America for months.

Even though some states have begun relaxing measures and stores are starting to open back up, America remains suspended in a fairly volatile market. People are worried about what the future will look like.  Many of them are strapped for cash and not willing to spend like they used to. In return, businesses are suffering and searching for ways to save. Unfortunately, one of the first things to go is often employer-sponsored benefits such as 401(k) plans or their matching contributions.

Is it Legal for an Employer to Suspend Matching Contributions?

In most cases, it is legal for an employer to suspend matching 401(k) contributions. While it may have been an enticing addition to your benefits package upon your hiring, employers do have the power to simply stop offering this benefit. The most important thing an employer can do in this instance is to effectively communicate with employees who will be affected by the change. For example, explaining that cutting these benefits is their solution to avoiding layoffs will likely make employees more understanding and receptive to the change.

If your employer doesn’t provide you with an explanation or any idea of if/when contributions will start up again, speak to your manager or HR department. If your employer offers contribution matches to a safe harbor 401(k) plan, they must offer notice to employees 30 to 90 days in advance of suspending contributions.  

What Should You Do if Your Matching Contributions Are Suspended?

In the case that your employer does suspend matching contributions, there are a few next steps you can take to help maintain and grow your retirement savings.

Having an employer suspend matching contributions, even if it’s only temporary, is a sign of the times. We’re facing a global pandemic, the stock market’s unpredictable and people are worried about money. If you have been personally impacted by the coronavirus, you can even withdraw up to $100,000 penalty-free as part of the recently passed CARES Act,3 although this should only be done if you are in dire need of financial assistance.  Withdrawing any amount from your 401(k) now will only rob your future retirement. 

If you have questions regarding your company 401(k), please reach out to your financial advisor.  Your advisor’s sole responsibility is to help you make unbiased, educated and objective decisions about your money. Use him or her as a sounding board to voice your concerns and discuss potential paths forward. How will you make up for the missing contributions? What financial impact will this change have on your future retirement? The market is volatile and economic confidence is low amongst investors. If you haven’t already, use this as an opportunity to reevaluate your current asset allocations and investment strategies. You likely have plenty of questions regarding any changes to your 401(k) and other investments and your advisor may be able to help you identify potential areas for improvement based on your current tolerance for risk.

Even if your employer has slashed matching contributions, that doesn’t mean you still can’t contribute to your 401(k). If you have the means to do so, consider upping your contributions, for now at least, to help offset the loss of any missing contribution matches. The contribution limit for a 401(k) increased in 2020 to $19,500. If you’re over 50, you’re allowed to contribute an additional $6,500 in catch-up contributions.4

In these challenging times, you are not alone if you find yourself working for a company that has suspended its 401(k) matching contributions.  Hopefully, these changes are just temporary, but it is necessary to plan accordingly for what is happening in the present.  Every penny counts when it comes to preparing for retirement and it is important to know how these 401(k) changes will affect your future savings.  If you have any questions about the impact this may have on your future retirement earnings and what you should be doing right now to make up for any lost funds, please contact us.  We are here to help!

  1. https://www.psca.org/sites/psca.org/files/uploads/Research/snapshot_surveys/CARES%20Act%20Snapshot%20Summary.pdf
  2. https://www.irs.gov/retirement-plans/mid-year-changes-to-safe-harbor-401k-plans-and-notices
  3. https://www.congress.gov/bill/116th-congress/house-bill/748/
  4. https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500