Personal Finance Articles

Make it your New Year’s resolution to take control of your retirement by reviewing your retirement plans. You may think maintaining a qualified retirement plan offered by a former employer, such as a 401(k), 403(b), or government 457 plan, is enough. But is it?

If you have a retirement account with just one employer, you may have satisfactory investment options and pay low fees, so it might make sense to leave your retirement assets in your former employer’s retirement plan.

But if you have multiple retirement accounts with different former employers, you might want to consider combining your assets into a traditional Individual Retirement Account (IRA). Here’s why.

First, retirement plans such as 401(k)s may offer limited investment options. That could put your retirement savings at risk, particularly if your savings are concentrated in just a few funds. In contrast, self-directed rollover IRAs offer a variety of investment options.

It could also be difficult to manage investments spread among multiple plans. If you have more than one retirement account, consolidating your retirement assets into a single rollover IRA can make it easier to manage, with considerably less paperwork. Plus, having one plan can help simplify estate planning, including beneficiary designations.

Lastly, the mutual funds available through your current plan may have high expense ratios. Reducing just half a percentage point in fund expenses, for example, can ultimately save you thousands of dollars over just a few years.

The best news: when you make a direct rollover, no money is actually distributed to you; it moves straight into the IRA, so you’re not taxed (until you withdraw the money later), and 100% of your retirement assets can continue to grow tax-deferred.

We can help you decide if a rollover is right for you. Please call or email us for assistance.

Retirement and healthcare are inextricably linked. The golden years, which used to require only a comfortable pension, now necessitate some serious healthcare planning. The new year is a good time to evaluate these needs. Medicare requires premiums and copayments. It also may not cover all the services you need. Additionally, Medicare may be depleted or at least be in a period of financial hardship before you really need it.

Medicaid, meanwhile, pays for medical assistance for certain individuals and families with low incomes and assets, but it will cover some long-term care costs. Plus, to be eligible, you have to exhaust virtually all of your personal resources. As a result, failing to factor health costs into your retirement plan can be financially devastating. It’s a good idea to do some advance planning.

How much will you need? According to the Employee Benefit Research Institute (EBRI), a 65-year-old man needs roughly $73,000 in savings and a 65-year-old woman needs roughly $95,000 in savings for a 50% chance of having enough to cover medical insurance premiums and prescription drugs in retirement.

Health savings accounts (HSAs) may be an option. They allow individuals who purchase high-deductible health insurance to save money annually on a tax-free basis ($3,650 in 2022, and $1,000 extra if you are age 55 or older). And they are great if you start young. If you start with $3,650, contribute the same every year for 10 years and generate a 6% annual return, you will have $57,533 after 10 years, $98,802 after 15 years and $154,029 after 20 years. Worried about how you’ll pay for your healthcare needs in retirement? Call or email us. We’re here to help.

Medicare generally covers only about three months of nursing home care immediately following a hospitalization, but you have other options, including Medicaid.

To be eligible for Medicaid’s long-term care coverage, you must exhaust many of your personal resources. In general, the person entering the nursing facility may have no more than $2,000 in “countable” assets.

Believing this, many couples purchase long-term care insurance, which can be expensive. But middle-income married couples may be able to bypass long-term care insurance and rely on Medicaid for long-term care due to spend-down exclusions.

While the person entering the nursing facility may have no more than $2,000 in countable assets, in 2021, a nursing home patient’s spouse can keep half of the couple’s countable joint assets up to certain limits (around $100,000). Some states are even more generous.

And not all assets are counted against this limit. Excluded, for example, are the couple’s principal residence, if the spouse not entering the nursing home or another dependent relative lives there; one motor vehicle of any value; personal possessions, such as clothing, furniture and jewelry; prepaid funeral plans; a small amount of life insurance; and other assets that are considered inaccessible for one reason or another. Plus, the spouse does not have to use his or her income to support the nursing home spouse receiving Medicaid benefits.

Say you and your spouse have a home worth $400,000, a car worth $20,000 and savings worth $200,000. If you enter a nursing home, your spouse would keep the house and the car, but for Medicaid to kick in, you’d have to spend down your savings and investments to roughly $100,000.

Of course, this is only the tip of the iceberg. If you need help understanding Medicaid spend-down rules, we can provide additional input. Please call or email us.

An improving economy generally means higher interest rates, and higher interest rates typically cause bond prices to fall. But that doesn’t mean you should avoid bonds altogether. The key is to select bonds that tend to not be as affected by interest rates as many others.

Municipal bonds are one option, depending on your individual financial situation. A municipal bond is a debt security issued by a state or local government or governmental entity, typically to raise money for building roads, schools, etc. The interest is usually exempt from federal income taxes. Bonds issued by the state in which you live are generally exempt from state taxes as well.

The tax advantages are why investors with high income levels have traditionally sought municipal bonds or bond funds. Although the actual yield may be lower than on a taxable investment, the “tax-equivalent yield” (the yield after you’ve factored in the fact that you aren’t taxed on the bond’s interest) may actually be higher. For example, assuming a combined 38% state and federal tax rate, a 4.15% yield on a 10-year municipal bond is equivalent to a 6.69% tax-equivalent yield.

But there are several other reasons to buy municipal bonds. Municipal bonds may not be as volatile as other fixed-income investments. Additionally, a strengthening economy, which typically accompanies an interest rate hike, can improve issuers’ financial health and bolster municipal bonds.

If you think municipal bonds might be right for you, we can help you select them, so please call or email us. We’re here for you.

What if we see more variants of COVID-19 develop? What if rising energy prices cause a fuel crisis? What if war breaks out in the Middle East? Those are a lot of ifs, but they are possibilities, and if they happen, where are the best places to have your money invested?

You may automatically think of instruments backed by the full faith and credit of the US government, such as US Treasuries, or FDIC-insured savings vehicles, such as fixed-rate CDs and savings accounts.

But these aren’t necessarily the best options, because investors in them are likely to see inflation eat away at their investment returns.

What are some other investment options for volatile times? There are two ways to approach market volatility. You can invest in securities that tend to hold their value regardless of market conditions, or you can try to take advantage of market volatility by investing in securities that are likely to do well because of the risks the world is facing.

If you prefer the first route, you might consider gold or real estate. Historically, gold has been considered a “safe haven” in times of economic, financial and geopolitical instability. And while real estate prices can fluctuate, they’re backed by something tangible: a property that you can live in or rent out if you cannot sell it.

But what if you want to invest offensively? In this case, your options are limited only by your creativity.

For example, if you think tensions in the Middle East might lead to rising energy prices, you could consider investing in energy stocks, such as those in the MSCI World Energy Index.

If you need help determining what kinds of investments meet your needs and risk tolerance in volatile times, we can provide additional input. Please call or email us.

To help cover long-term care costs, many individuals purchase private long-term care insurance. But how do you decide if it meets your needs?

Many of us will require long-term care, such as living in a nursing home or receiving in-home services, and the cost of such services can be overwhelming. According to Statista, nursing home care cost an average of $51,600 per year in 2020, including room and board, drugs and medical supplies. In-home health care can be even more expensive, costing an average of $53,768 per year.

Medicare generally covers only about three months of nursing home care immediately following a hospitalization. Medicaid will cover some long-term care costs, but only after you have exhausted virtually all your personal resources. As a result, many nursing home bills are paid out of pocket by individuals and their families.

Is long-term care insurance right for you? It depends on your income and savings. If you can afford to set aside enough money for about four years of care while still leaving enough to support a spouse or other dependent, you probably don’t need long-term care insurance. Conversely, if your income is $30,000 or less and your savings are not extensive, you are likely to qualify for Medicaid soon after entering a nursing home, so purchasing long-term insurance wouldn’t make sense.

Most people fall somewhere between these two extremes. If that’s the case with you, we can help you decide if you need long-term care insurance, so please call or email us. We’re here for you.

At times, international markets can offer higher potential returns, but it’s important to remember that more return potential means more risk potential. That said, there are ways to manage that risk.

Let’s begin by reviewing why international investing can be riskier than domestic investing.

First, economic instability, often caused by abrupt changes in interest rates, inflationary pressures, trade agreements and gross domestic product, can affect the profitability of an investment. And different governments may have varying regulations regarding industries or even individual companies.

Second, with some foreign markets, particularly small ones, trade limitations, different accounting standards and obsolete technology can, at times, make it difficult to trade certain securities; this illiquidity can make it hard to buy and sell at a good price.

Third, the value of foreign currency fluctuates with changes in the supply of and demand for both the foreign currency and the U.S. dollar. This can affect the value of your investment.

Although the risks involved with foreign investments cannot be completely eliminated, there are ways to manage those risks.

One way: have a long-term horizon. Overseas companies need time to adjust to the profound changes in international political and economic conditions, the pace of technological development and global competition. Because short-term fluctuations are typical, it’s important to maintain a long-term perspective.

You can also consider investing via mutual funds. Most individual investors don’t have the experience, expertise or financial ability to create international portfolios of the scope and quality offered by professional investment managers. In addition to providing professional management, mutual funds can also provide diversification by investing in a portfolio diversified by region, country and industry.

If you need help determining if international investments meet your needs and risk tolerance, we can provide additional input and help you choose the right investments to balance growth potential and risk. We’re just a call or email away.

The U.S. economy shifted into higher gear over the summer, and an improving economy generally means higher interest rates, which can affect your investments in numerous ways, good and bad.

Why are people worried about a rate hike? A growing economy can lead to inflation, and to keep it in check, the Federal Reserve (Fed) raises interest rates. A change in the federal funds rate has a ripple effect on other interest rates. People then borrow and spend less, the economy slows and inflation isn’t a problem.

So how are different investments affected?

The yields on money market funds tend to rise with the federal funds rate. This means money market funds may be a good short-term investment option when rate hikes are on the horizon. Bond prices, on the other hand, tend to move inversely to interest rates, so bond prices generally fall with rate hikes.

Stock performance can be mixed when rates are hiked. If an interest rate rise is on the horizon, it’s because the economy is doing well and central bankers at the Fed don’t want it to overheat; that means businesses are probably performing well. But when investors think the Fed is going to raise interest rates (and restrain the economy), stock prices often fall.

Now that the economy is improving, investors are worried about whether it’s time for a rate hike, so please call or email us if you want to better understand how to protect yourself from this eventuality. We’re here for you.

Investments involve many different kinds of risk, one of which is inflation. And that is particularly topical today, when the prospect of inflation looms large.

Inflation risk is the risk that the money earned on an investment won’t keep up with the rate of inflation. It hurts investors who are uncomfortable with volatility and decide to invest solely in Treasury bills, certificates of deposit and savings accounts.

Believe it or not, one of the riskiest things you can do with your money is not invest. Letting your money sit in a bank or in a money market account can chip away at your savings.

Let’s say when you were 45 years old you started investing $400 a month for retirement. You were convinced the market was going to tumble, so your money earned 5% a year in a low-risk investment vehicle. Today, 25 years later, you’re on the doorstep of retirement, and you have around $235,000. Will it last another 20 years or so? After 25 years, $235,000 is equivalent to around $112,000 (assuming annual inflation of 3%). That may not be enough for you to live on for 20 more years or so.

On the other hand, if you had invested that $400 a month in equities, your return could have been significantly higher. Of course, returns are not guaranteed when you invest in equities.

Please don’t hesitate to call or email us if you want to better understand how to protect your portfolio against inflation. We’re here for you.

Managing risk is important regardless of your financial circumstances, and diversification is a good way to manage risk.

Diversification is investing in different types of securities. When you have a mix of investments, you may be able to better weather the ups and downs of the market. That’s because as the values of some types of securities decline, the value of others could increase, helping to create a cushion for your overall investment portfolio and providing you with increased return potential.

You probably know enough about diversification to understand the importance of having a mix of stocks, bonds and cash. But diversification doesn’t end there. There are many types of equity investments: growth, value, large-cap, small-cap, international and domestic stocks.

At any given time, one type tends to outperform the others. For example, in the late 1970s, many of the biggest, best-known stocks (those that investors often refer to as large caps) suffered. Fortunately, small-company stocks came to the rescue. By 1975, the tables had turned, and stocks of young, flexible corporations were soaring while the stocks of big companies were languishing.

So smart investors spread their portfolios across stocks, bonds and cash, and they spread the equity portion of their portfolios among large- and small-company stocks, value and growth stocks and domestic and international stocks.

But diversification can take effort. You can’t just diversify and forget about it. Some parts of your portfolio may grow faster than other parts. Eventually, your portfolio will become unbalanced. You’ll want to check your portfolio at least once a year to see if it needs rebalancing.

If you need help determining an appropriate mix of funds that meets your risk tolerance and needs, we can provide additional input and help you choose the right investments to balance growth potential and risk. Please call or email us.