Financial Goals Archives

Four Things Entrepreneurs Can do Now to Save for Retirement

While retirement may seem a long way off when you’re young and just starting to build a business – or older and rebooting – it’s important to have a retirement savings plan and stick to it to create the future you want.

Retirement planning can be difficult for anyone, but entrepreneurs and small business owners can face unique challenges. According to a 2013 American Express survey, 60 percent of small business owners said they weren’t saving enough for retirement, and over 73 percent said they were worried about not being able to afford the lifestyle they want in retirement.

While many employees can choose to make automatic deductions from their paycheck towards a 401k, for instance, entrepreneurs have to make a conscious decision to sock away money for retirement, as well as find plans that work for them.

Fortunately there are several things that you can begin doing now to contributing to your long-term financial future. As always, please review these and other options with your financial planner to see what strategy may be most suitable for your individual situation.

1) Open an IRA

If you haven’t already, now may be as good a time as any to open an Individual Retirement Account (IRA). IRAs are long term investments that allow you to save money for the future in a tax efficient way. They also offer catch up contributions if you’re over 50.

Traditional vs. Roth

Traditional IRAs allow you to deduct contributions the year in which they are made, then pay taxes when you withdraw the money. A Roth IRA allows you to pay taxes on your contributions now, rather than upon withdrawal and earnings and distributions may not be taxable if held in the Roth IRA for up to 5 years.

For older investors who are approaching retirement, traditional IRAs probably make more sense, as their tax rate may likely be lower in retirement than it is currently. Younger investors, however, may want to consider a Roth IRA if they believe their tax rate could be higher in the future than when they make their contributions.

Contribution Limitations

Regardless of whether you elect to contribute to a Roth or Traditional IRA the IRS sets annual limits each year stating the maximum individuals can contribute to their IRA based on their annual earnings. For instance, in 2015 you are limited to a maximum of $5,500 annually (or $6,500 if you are 50 or over).

Finally, with either type of IRA, there are penalties and taxes for early withdrawals prior to 59 ½ years old!

Please consult your tax professional regarding your specific situation and the specific rules that apply to you.

2) Consider alternative forms of IRAs to increase your contribution limits

If you are your company’s only employee, or you only have a couple of other employees, you may want to look into setting up either an SEP-IRA or a SIMPLE-IRA.

SEP-IRA

SEP-IRAs allow you to contribute up to 25% of your salary, or $53,000 (as of 2015) whichever is smaller. This is significantly more than what non-SEP-IRAs allow for.

Setting up a SEP-IRA may be an easy choice if you and your spouse are your only employees, but there can be other costs associated if you have other people working for you.

SIMPLE-IRAs

SIMPLE-IRAs provide an alternative that is cheaper for companies with several employees.

With the SIMPLE-IRA, the employer creates an IRA for each employee. Employees have the option to contribute a certain percentage of their income to their IRA. Employers are then required to match that percentage up to a maximum of three percent of the person’s salary, or contribute two percent of each person’s salary into the IRA.

By creating a SIMPLE-IRA the owner is then able to contribute an additional $12,500 ($15,500 for those 50 and over) to his or her own IRA.

If you have only a few employees working for you and you expect to contribute either the full $12,500 or a large portion of it, there is a good chance that your tax savings may more than pay for the cost of contributing to your employee’s IRAs. Please consult your tax professional for more specific information about how this could affect you and your employees.

3) Setup Automatic Deductions

Unfortunately, we all have a tendency to procrastinate, and thinking about retirement is often not at the top of our priorities! It’s easy for entrepreneurs and small business owners in particular to become distracted and forget to contribute to your retirement account(s). Automatic deductions solve this problem.

By setting up your IRA and other retirement accounts to take money directly out of your bank account or paycheck each week (or month,) you can ensure that you contribute as much money as you feel you can, up to the full tax deductible amount, each year. You no longer have to worry about forgetting to, or putting off, contributing.

With any IRA, think carefully about how much you can realistically contribute. They are considered long term investments and you cannot access the money prior to a specific age without incurring taxes and significant penalties for making early withdrawals. Please make sure you are carefully considering your short and medium term goals. And remember: starting to save early is a good way to get on the road to achieving your goals.

4) Speak with as Experienced Financial Planner to Help You Create a Plan

Taking care of long-term financial goals can be a challenge but fortunately you don’t have to go it alone. Financial planning professionals can help you create an individualized plan focused on your specific goals. Whether they are:

Saving for retirement
Saving for your children’s education
Buying a home
Having a baby

Financial planners are here to help you plan for the future you envision for yourself and your family.

With over a decade’s worth of experience in financial services, Brad Sherman is committed to helping his clients pursue their financial goals. Contact Brad today to learn more about how you can better prepare for retirement.

Learn more about our Retirement Planning services.

Discussing Personal Finance is Difficult for Many – but Critical

Money can be a difficult subject for any of us to talk about, although it seems to be particularly challenging, statistically, for women.

According to a recent study released by Fidelity, 80% of women surveyed said that they had refrained from discussing financial issues with friends or family, despite the fact that over 92% of those surveyed expressed an interest in learning more about financial planning. Among those surveyed, some of the most common reasons given were that money was too personal a topic, it felt uncomfortable to talk about, or it was considered “taboo.” Additionally, women are also more likely to feel that they don’t know enough about the subject to speak about it intelligently. This is despite the fact that studies have shown that women tend to be better investors than men.

Money is, however, a critical subject that we all need to discuss – and discuss often – in relationships. A little while ago I wrote about the 7 Things Married Couples Should Discuss Today, where I talked about why it is critical that married couples go over their finances together. Marriage is not, however, the only relationship that requires having difficult conversations about money.

We need to communicate with our parents and children about money, and even friends, coworkers and extended family members in some cases.

With money playing such an important role in our daily lives, it’s critical that we learn to overcome our desire to avoid the topic and learn how to effectively and confidently communicate about financial matters.

Fortunately there are a few things you can do to make the topic of money easier to discuss:

1. Realize that difficult conversations are sometimes necessary

Whether you need to confront your parents about their retirement plans, your spouse about where to allocate investments, or your children about their spending habits money can be a difficult topic to talk about. By reminding yourself that these are conversations that you will ultimately need to have however you are setting yourself up for success.

2. Find someone knowledgeable about finances who you can trust

No one has all the answers when it comes to money, which is why it is often helpful to turn to others for ideas and suggestions. You should find someone – whether it’s a friend, family member or a financial advisor – who is knowledgeable, who you know has your best interests at heart, and with whom you feel comfortable speaking.

This will give you the opportunity to ask questions, bounce around ideas, and learn and grow. It will also give you the confidence to discuss finances with others.

3. Get educated

One of the best ways to feel comfortable discussing money with others is by learning as much about the subject as you can. Read books, ask questions, and get help when needed. By learning as much as you can, you feel more comfortable giving advice, making financial decisions and having what would otherwise be difficult conversations.

4. Don’t procrastinate when discussing finances

If there is a money-related conversation that you have been putting off, bring it up now or at the next time possible. Don’t wait!

Here are a few more suggestions for important conversation starters:

With your spouse:

Family’s budget
Retirement savings
Saving for children’s college fund
Where to invest money

With your children:

Allowance
Spending
Basic financial principles

With your parents:

Their retirement plans
Location of legal documents including wills, trusts and insurance paperwork

If you’re like most people, chances are there are many other subjects that you need to discuss with those you’re close to. It may be a good idea to contact a financial advisor to help you with these as well as other issues revolving around money.

Brad Sherman is a financial planner in Gaithersburg, Maryland who is committed to helping individuals and families achieve financial independence and gain confidence with regard to financial issues.

Call him today to see if his services are a good fit for your needs.

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Finding Financial Independence

Financial Independence has become the goal for many who struggle with the overwhelming task of funding a long term retirement strategy that is so far away. In a world where jobs are constantly changing, skills need continual updating and stability is hard to find, many are rethinking how retirement is viewed. Instead of thinking of retirement as a destination 30 or 40 years from now that must be funded with a huge cash reserve, thinking of creating financial independence through passive income streams feels more attainable.

If financial independence is a strategy that will provide ongoing income there are several things that must be accomplished to make this a reality. Here are some tips and ideas on creating passive income.

What Is Passive Income

Creating a passive income stream, looks at investment opportunities through the lens of providing ongoing income, rather than accumulating large amounts of investments that will be withdrawn at some point in the future. The traditional passive income streams were social security and pension plans which would pay a set amount of money each month until you die. With these passive income streams additional work was not required and the funds would last until you died, ensuring you would never outlive the money.

Today those traditional passive income streams like pensions cannot be relied on. This has left workers with 401ks and IRAs as the funding options for retirement. These are great options, but with jobs changing and the average worker going through a dozen or more jobs in a career, even this is not enough to provide ongoing security. This has required Millennials to be more creative when they think about savings, investing and preparing for an uncertain future.

Having an investment portfolio that can provide a monthly income stream, a business that produces ongoing income, rental property, part time work or freelancing are all options for ongoing income. In the beginning these options require work and forethought but over time they can produce a passive income stream that can provide much higher levels of security.

Keys to Building Passive Income

Start Early

As with all investments the more time a plan has to work and develop the better it will work for you. If you have a hobby you are passionate about that you can build into a viable business, starting now will give you decades to build the business into an operation that requires less of your time and attention. This income can then provide as a respite if you have employment gaps throughout your career. With both nontraditional and traditional investments alike, starting early will reap the highest level of benefits and income.

Watch Spending

Living frugally became a buzzword a few years back as it became more mainstream. Living within your means will always provide money that can be invested in your future, instead of paying for yesterday’s spending. The other advantage to frugal living is that you need less passive income to maintain your quality of life. As your income increases throughout your career, keeping your spending in tact will be rewarded with more investments that can be directed toward passive income opportunities.

Keep Your Eyes Open for Opportunities

Passive income requires creativity with investments. It means thinking in terms of multiple streams of income and investment options that will grow during your working years and then produce income when you need it. Many opportunities do not produce passive income immediately, but will over time.

When you look at adding activities to your life that are more fulfilling, investment opportunities will present themselves. This might be a chance to earn a second income doing something you love. It might mean nontraditional ways of earning money. Thinking outside the box is the key. One friend buys fireworks when they really inexpensive, before the season and then sells them during the holidays where fireworks are popular (4^th of July and New Year’s being the two best holidays). This gives him a boost of several thousand dollars a few times a year. He then takes those earnings and invests them to build a portfolio of passive income that he can later use. Income and investment opportunities are everywhere when you are looking for them.

Be Patient

While we get used to instant gratification, the best things in life take both our time and energy. They do not always work out like we planned but they are worth our time and effort because in the end they pay off. Investments are the same way. When looking for passive income streams be willing to look at the long term benefits and dedicate the time necessary to grow your investments in a strategic way.

It is a lot less overwhelming to think in terms of establishing an income stream of $3,000 to $4,000 a month, than to think in terms of needing to save a million dollars for a comfortable retirement. Changing the way you look at investments might be just what you need to get started on your way to financial independence.

Learn more about our Retirement Planning services.

7 Ways to Maximize A Bonus or a Raise

Just got a bonus or a raise? Read these tips before you start Googling airfares to Thailand…

Using a bonus or a raise to catch up in financial areas where you’ve fallen behind is a great way to jump start 2015. From paying off high interest debt to setting up a college savings plan, there are plenty of smart ways to put that chunk of change to good use.

Pay off High Interest Loans

It may feel impossible to escape the credit card damage you did in college or mounting loans. But you actually can make a dent in your debt by using your bonus for a large payment. This lowers your balance and minimizes some of those high interest charges moving forward. Get a snapshot of where you stand with the Debt Repayment Calculator from Credit Karma.

Rebalance Your Investment Portfolio

Those extra funds are a great reason to take a closer look at your assets and determine what’s working and what’s not. We can help you adjust to create the right balance between return and risk, ensuring you’re pursing both long and short-term financial goals.

Start a College Savings Plan

Even if your kids are in diapers, it’s never too early to start saving for their college education. By starting early and using the variety of college savings programs available today, you can get a good head start on a college savings account. There are a couple of different types of college savings savings plans and each has different features and potential tax benefits. A financial advisor can help you determine the plan that suits your situation. The College Savings Plan Network also offers great resources and tips for getting started.

Think About Retiring

Unless you received a really enormous bonus, we don’t mean retire now. But if you haven’t reached your company’s 401(k) contribution limits, use your bonus to max out those weekly or monthly contributions. If your employer matches… consider that bonus doubled.

Open an Investment Account

Planning for the future can be daunting, especially when you have large expenses to deal with now. But the earlier you start investing (even low monthly contributions), the longer your money has to grow. Rather than let it sit in your checking account, create an investment account with your bonus to kick-start a financial safety net.

Prep for an Emergency

Fun? No. Smart? Yes. Unexpected issues pop up and can throw your monthly budget off track. Get prepared by setting up a fund for irregular expenses and circumstances like job loss, repairs, or costly medical bills for people and pets. A good rule of thumb is to have three to six months of expenses saved up for those worst-case scenarios.

Save for a Rainy Day

It may be tempting to book a trip somewhere warm or buy a TV that covers every square inch of your wall space. While it’s best to take care of outstanding debt and invest wisely, you deserve to have a little fun for burning the midnight oil at the office all year. Be sure to put a small portion of your bonus aside to treat yourself or your family to something special when the time is right.

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5 Big Picture Things Many Investors Don’t Do

These simple strategies can make a big impact on your long term portfolio.

Investing and finances can be overwhelming and confusing. Having so many options available, how is an investor to choose which direction to go. For those who seek to understand, it can become paralysis by analysis, where the more you study, the more you realize you need to know. With all of its complexity, simple investment strategies can be very effective, if the right choices are made.

Here are 5 Strategies most average investors don’t focus on, but should.

Have a thought out strategy with a purpose. A common mistake of investors is to put money in an account without a lot of thought as to the goals you want to achieve. Starting an investment fund without goals is like driving in a car with no destination in mind. Without a purpose for the money, it is impossible to measure the success or failure of the investment.

Start Early with a Time Horizon. Starting early gives your money more time to grow. The longer the money is invested, the better it can weather market fluctuations and the more likely you are to successfully reach your goals. Along these same lines, set specific goals around a time horizon. How long will each bucket of money be invested? This is a very important piece to your overall strategy because it will help evaluate the specific investments that will be most beneficial. If you are 15 years away from your goal, investment choices will be much different than if you are 5. The closer you get to the destination, the less able you are weather market fluctuations. This should be considered in your overall strategy.

Increase The Amount Invested Each Year. When looking over your investment strategy, separate the performance and the contributions. The performance is how much your money has grown through your investment strategies. Contributions are the dollar amount that you have added to your investment accounts. These two factors make up the total growth of your portfolio. Both of these numbers are important to your overall strategy. The account performance should be reviewed independent of contributions to help you stay on track with the right investment choices for your risk tolerance and time horizon. The amount you have added in contributions is what you have built into your budget for long term financial goals. When you increase those contributions each year, your account should grow significantly faster. Small increases are often not felt in the monthly budget.Let’s say you currently contribute 6% from your paycheck into your 401k. In addition to that you are putting $50 a month into your IRA and $50 a month into a college fund. At the beginning of the year, increase your 401k contribution by 1%. Now you are putting away 7% in pretax dollars for retirement. Then the next quarter increase your IRA contribution to $75 a month and the quarter after that, increase your college fund contributions by $25 a month. These small increments will barely be noticed in your monthly budget. The $25 a month increase is less than $1 a day. If you are earning $50,000 a year, the 1% increase with your 401k is only around $21 a paycheck if you get paid bi-monthly, in pretax dollars. Meaning your paycheck will be reduced by less than $20 a paycheck due to the pretax allocation. If you increase the contribution at the time of your annual raise, it will only be noticed in the form of larger investment accounts.

Review your asset allocation as a whole picture. When you have separate investments for different financial goals, it is more of a challenge to see your portfolio in a complete picture. Having investments with different companies can increase these challenges. When you have a 401k at a current job, and maybe one or two from previous jobs, they are more difficult to keep up with. Then you might have current investments for retirement, college and savings for your first home. Taking a holistic view of all your investments will help to ensure you have the best asset allocation possible. When your allocation gets out of whack, you might end up taking on more risk than you are comfortable with, without realizing it. It is not always possible to have all your investments under one roof, especially with a current 401k. However, including these investments in all financial reviews will help you stay on track for your overall investment goals as well as ensuring your asset allocation and risk profile are appropriate.

Understanding what you can control. In life we like to have control over our current and future destinations. Happiness and success often come from recognizing what we can control and focusing on that. Investing is no different. We cannot control the markets and we cannot control the economy. There is a host of circumstances and events that are outside of our control. Stressing and worrying about those things is not beneficial. You can control spending and investment rate. You can control which investments you choose and the amount of risk in your portfolio. Staying focused on these elements will lead to higher comfort levels which will encourage staying the course.

Financial investing success has more to do with implementing sound strategies, rather than luck or great market timing. It is more about staying the course, than picking the “hot” stock that will make you a millionaire.

Learn more about our Investment Management services.

Mitigating Your Investment Volatility

Volatile markets can be unsettling. You work hard for your money and even losing money on paper, to market fluctuations, can make you want to put all your cash under the mattress. In reality most investments will have volatility. Fixed rate products like CD’s may not have volatility, but will have their own risk of not keeping up with inflation. Currently 1 year CD’s are paying around 1%, and 5 year CD’s are only paying around 2%, according to Bankrate. This makes it necessary to have investments in your portfolio, which will fluctuate in value, in order to potentially have the needed funds to pursue your financial goals.

With inflation averaging 3.22% per year from 1913 to 2013², it is easy to see that establishing an investment portfolio that provides higher returns than inflation is essential to any long term plan. Investors look to mitigate the risk of the volatile markets, while seeking a return that will build investment values.

For all its Bull and Bear markets, runs and crashes, stock market investments in the last 100 years has been positive when looking at any 10 year period from 1903 to December 1912³. The average stock market return since 1932 is around 7% and when inflation is taken into account the average return is over 10%⁴. So while the markets do go up and down on a daily basis, the overall market pattern has a consistent upward trend. However, past performance is not indicative of future results and your investments selection(s) and time horizon will affect your results.

Investing With Your Risk Tolerance in Mind

Investment risk, by definition, is the likelihood of losses in relation to an expected rate of return for a specific investment. All investments have some investment risk. The challenge for you is to determine which investments have risks you are willing to accept, and may be potentially rewarded with higher returns on a consistent enough basis.

This is where a Sherman Wealth Management financial professional comes in. They work with you to determine a level of risk that is suitable for you and provide the potential growth needed to pursue your financial objectives. This requires not only understanding specific investments but also having a good pulse on what you, as an investor, need.

In order to give the best advice, it is necessary to truly understand the client’s needs. Just asking, how much risk are you comfortable with, is not enough. Educating and teaching you about risk and what it may mean for your future, is the goal. This allows you to select investments that reflect your risk tolerance and financial aspirations.

Taking a high level of personal interest in the changing needs of our clients is our goal. We believe this is the best strategy for maintaining an investment portfolio that is designed to have the appropriate amount of risk to pursue your financial goals, while striving to minimize the risk taken on individual investment choices.

Each investor has individual needs and no investor’s taste for risk is the same. You need recommendations that take all of your circumstances and life goals into account. Added risk might lead to higher returns, but not always.

If you have a lower tolerance for risk, building an investment portfolio that is designed to withstand market turmoil is more appropriate. These strategies still experience ups and downs, but the right blend of investments potentially moderate the fluctuations to align with your tolerance for risk.

The stock market offers investments that carry various levels of risk. There are value, dividend paying stocks that have a lower volatility than emerging small cap stocks. Bonds are also available at various risk levels, allowing you to manage risk and performance within the portfolio.

Asset Allocation for Mitigating Volatility

Another method to help mitigate market risk and volatility is through Asset Allocation. This is the process of using several asset classes within an investment portfolio by apportioning a portfolio’s assets according to the individual goals, risk tolerance and investment horizon. Stock market investments have the general categories of stocks and bonds.

Stocks are broken down further between value stocks and growth stocks, with value generally being more conservative. Stocks that pay dividends are usually more conservative than stocks that do not, because investors are getting some return while they still hold the position. Stocks are also broken down by company size. These are denoted as large cap, mid cap and small cap stocks. Large cap stocks include companies like Microsoft, Apple, Bank of America and national names we all recognize. Small cap companies are those with 300 million to 2 billion in revenue, and mid-caps are between these two. The last large category is US companies and International or global companies.

Bonds are rated much like individual credit is rated. There are consumers that are a much lower risk than others and this is measured through individual credit scores. Bonds operate in a similar way. There are independent credit agencies like S&P and, Moody’s which rate company bond offerings. Bond ratings are expressed as letters ranging from ‘AAA‘, which is the highest grade, to ‘C’ (“junk“), which is the lowest grade. Different rating services use the same letter grades, but use various combinations of upper- and lower-case letters to differentiate themselves. Lower ratings represent higher default risk and thus higher interest rates to investors.

Selecting the best mix of stocks and bonds is a delicate balance. Spreading your investments choices across different categories may provide an effective way to reduce the overall volatility of a portfolio. As the market fluctuates not all stocks and bonds move up and down at the same rate or the same time. When asset allocation is used correctly there is a designed buffer against losses and the overall risk of the portfolio should be reduced.

Advantages of Dollar Cost Averaging

Dollar cost averaging is an investment strategy where you invest a fixed dollar amount on a regular schedule, regardless of the actual price of the stock, bond or other investment vehicle. There are several advantages to using this strategy.

Smaller amounts can be invested providing potential benefits of growth over time. Time in the market is much more important than market timing and dollar cost averaging gets you in the market on a regular basis.

Buying more shares when the stock has a lower price and less shares when the price is higher. . Even the best companies will see stock prices fluctuate based on a current news reports, events that impacts the industry, or seasonal fluctuations.

Dollar cost averaging helps reduce the risk of the overall portfolio because you are investing at regular intervals and buying more shares when the prices are low. This can be an effective way to grow your portfolio. Studies have shown that those who invest in regular intervals are more consistent with their investments, providing better overall growth, according to Morningstar⁵.

Dollar cost averaging does not protect against a loss in declining markets. Since such a plan involves continuous investments in securities regardless of the fluctuating price levels, the investor should consider his or her financial ability to continue such purchases through period of low price levels.

Financial strategies require a long term strategy. As such, volatility must be considered in your investment choices. Avoiding volatility because of fear can result in negative returns, when adding the impact of inflation. Working with a financial professional who understands volatility and uses strategies designed to enable you to build a portfolio which is suitable to your risk tolerance. Let us help you determine which investments are appropriate for your financial goals.

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Four Things Entrepreneurs Can do Now to Save for Retirement

1) Open an IRA

2) Consider alternative forms of IRAs to increase your contribution limits

3) Setup Automatic Deductions

4) Speak with as Experienced Financial Planner to Help You Create a Plan

Related Reading:

Discussing Personal Finance is Difficult for Many – but Critical

Finding Financial Independence

What Is Passive Income

Keys to Building Passive Income

Start Early

Watch Spending

Keep Your Eyes Open for Opportunities

Be Patient

Related Reading:

7 Ways to Maximize A Bonus or a Raise

Just got a bonus or a raise? Read these tips before you start Googling airfares to Thailand…

Pay off High Interest Loans

Rebalance Your Investment Portfolio

Start a College Savings Plan

Think About Retiring

Open an Investment Account

Prep for an Emergency

Save for a Rainy Day

5 Big Picture Things Many Investors Don’t Do

These simple strategies can make a big impact on your long term portfolio.

Here are 5 Strategies most average investors don’t focus on, but should.

Related Reading:

Mitigating Your Investment Volatility

Investing With Your Risk Tolerance in Mind

Asset Allocation for Mitigating Volatility

Related Reading:

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