Have you noticed how we often make rational choices in our minds when we look ahead, only to ignore that wisdom when we have to make the same choice in the present? Economists call this behavior hyperbolic discounting or present bias.
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Most investors are so focused on their stock portfolios that bonds are often just an afterthought. For many of them, a bond portfolio means stable value or money market funds. However, the role of bonds is just as important as the role of stocks for a successful investment experience, and even more important for some goals. The right bonds help you avoid unnecessary risks and make the most out of your portfolio, particularly in a low interest rate environment. A good bond portfolio acts like a reliable brake system on a racecar: good brakes won’t make the car go faster, but it will make it go faster around the track. If you are not the race type, you know that good breaks help you arrive safely at your destination. That’s the role of bonds, and more.
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As we approach the year-end and get ready for the holidays, let’s consider doing some tax planning for 2020 and beyond. This year, we break our discussion of year-end tax planning into two parts. We cover some business tax planning tools in this post, and continue with individual tax planning in the next post.
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The college goal is one of the top financial priorities of families, right up there with a good retirement. However, many parents don’t have dedicated accounts, like a 529, to save for this important goal. Or if they do, they may underutilize them. 529 plans are savings plans that are specifically designed to help you save for college and offer great tax and other advantages. Given the high-and-rising costs of higher education, most parents would benefit from using 529 accounts. So let’s review some of the benefits of these plans, and get started today!
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A common piece of advice is to start saving for retirement early and do it through your employer plan, like a 401(k) plan or similar. Employer-sponsored plans are tax-advantaged and the employer typically matches at least a portion of your contribution. The common advice is great advice if you work for a company that offers such a plan. But what if you are self-employed or work for a company that does not offer a retirement plan? What can you do then?
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Open enrollment affects several areas of your overall financial plan, including health care costs and benefits, life and disability insurance, retirement planning, tax planning, and more. So why only devote a few minutes right before the deadline to it? It’s worth doing some homework, using the suggestions we provide below as a start. We think these decisions are so important that we created an open enrollment service.
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One of the hardest questions for anyone planning for retirement is to translate what their savings plans mean for their ability to replace income in retirement. You have money in your 401(k), IRAs, and taxable accounts. But what does all that mean in terms of the retirement income that you can expect it to deliver when you retire? Are you contributing enough for the retirement you want? Will you have enough by your desired retirement age? Or when will you accumulate enough to sustain your needs in retirement?
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One of the hardest questions for people approaching retirement is to figure out how much annual income their retirement savings can generate. That’s the $64,000 question for retirees because they equate income to the living standard they are accustomed to. A careful answer should consider the overall financial picture, retirement horizon, retirement goals, preferences, and each household’s ability to adjust to setbacks.
We use historical data to define a reasonable range as a starting point, and then point to considerations to help refine what may work for you. The approach should at least help you get started, and help you understand the nature of the question.
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High investment costs are the most reliable predictor of poor investment performance, and investment taxes are often the largest component of such costs. Left unchecked, the performance drag due to taxes can compound to substantial amounts.
While you can’t eliminate taxes, there is some good news for investors: the effect of taxes on performance is largely under your control.
A few principles when selecting your investments can go a long way in reducing the tax drag and increase the efficiency of your savings over time.
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Many people think their health care in retirement will be free or close to it because of Medicare. Here is some bad news for you: Medicare is subsidized, but not free. According to estimates by Fidelity, a single retiree can be expected to pay between $140,000 (men) and $150,000 (women) in health-care related expenses throughout their retirement, starting at age 65. For a couple, the expense is twice as much, close to $300,000. The sooner you learn the basics about Medicare and its likely costs, the more you’ll be able to plan and cover these costs.
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