The Secret of the Solo 401(k)

By | August 29th, 2019|retirement|

Self-employment has may perks, but there’s at least one significant drawback: the lack of an employer-sponsored retirement plan like a 401(k).

We have a solution for you!

The solo 401(k) is designed for self-employed workers with no employees, and mimics many of the features of an employer-sponsored plan.

THE BASICS:

  1. Save up to $19,000 (over 50? Make that $25,000)
  2. Profit sharing options of up to 25% of income on top of the 19k
  3. Flexibility – rollover, roth, loan options
  4. High earners can take advantage of a supersized pension option of up to 100k

Interested?

Check out our Solo 401(k) ebook here and contact us today!

Back to School!

By | August 26th, 2019|College Planning|

As of today, colleges are back in session in most of the country, and many parents are likely thinking about how best to prepare for their children’s future college expenses. NOW is a good time to sharpen one’s pencil for a few important lessons before heading back into the investing classroom to tackle the issue.

 

THE CALCULUS OF PLANNING FOR FUTURE COLLEGE EXPENSES

According to recent data published by the College Board, the annual cost of attending college in the US in 2017–2018 averaged $20,770 at public schools, plus an additional $15,650 if one is attending from out of state. At private schools, tuition and fees averaged $46,950.

It is important to note that these figures are averages, meaning actual costs will be higher at certain schools and lower at others. Additionally, these figures do not include the separate cost of books and supplies or the potential benefit of scholarships and other types of financial aid. As a result, actual education costs can vary considerably from family to family.

Exhibit 1. Average Published Cost of Attending College in the US

ABCtable
Source: The College Board, “Trends in College Pricing 2017.”

To complicate matters further, the amount of goods and services $1 can purchase tends to decline over time. This is called inflation. One measure of inflation looks at changes in the price level of a basket of goods and services purchased by households, known as the Consumer Price Index (CPI). Tuition, fees, books, food, and rent are among the goods and services included in the CPI basket. In the US over the past 50 years, inflation measured by this index has averaged around 4% per year. With 4% inflation over 18 years, the purchasing power of $1 would decline by about 50%. If inflation were lower, say 3%, the purchasing power of $1 would decline by about 40%. If it were higher, say 5%, it would decline by around 60%.

While we do not know what inflation will be in the future, we should expect that the amount of goods and services $1 can purchase will decline over time. Going forward, we also do not know what the cost of attending college will be. But again, we should expect that education costs will likely be higher in the future than they are today. So, what can parents do to prepare for the costs of a college education? How can they plan for and make progress toward affording those costs?

DOING YOUR HOMEWORK ON INVESTING

To help reduce the expected costs of funding future college expenses, parents can invest in assets that are expected to grow their savings at a rate of return that outpaces inflation. By doing this, college expenses may ultimately be funded with fewer dollars saved. Because these higher rates of return come with the risk of capital loss, this approach should make use of a robust risk management framework. Additionally, by using a tax-deferred savings vehicle, such as a 529 plan, parents may not pay taxes on the growth of their savings, which can help lower the cost of funding future college expenses.

While inflation has averaged about 4% annually over the past 50 years, stocks (as measured by the S&P 500 Index) have returned around 10% annually during the same period. Therefore, the “real” (inflation-adjusted) growth rate for stocks has been around 6% per annum. Looked at another way, $10,000 of purchasing power invested at this rate over the course of 18 years would result in over $28,000 of purchasing power later on. We can expect the real rate of return on stocks to grow the purchasing power of an investor’s savings over time. We can also expect that the longer the horizon, the greater the expected growth. By investing in stocks, and by starting to save many years before children are college age, parents can expect to afford more college expenses with fewer savings.

It is important to recognize, however, that investing in stocks also comes with investment risks. Like teenage students, investing can be volatile, full of surprises, and, if one is not careful, expensive. While sometimes easy to forget during periods of increased uncertainty in capital markets, volatility is a normal part of investing. Tuning out short-term noise is often difficult to do, but historically, investors who have maintained a disciplined approach over time have been rewarded for doing so.

RISK MANAGEMENT AND DIVERSIFICATION: THE FRIENDS YOU SHOULD ALWAYS SIT WITH AT LUNCH

Working with a trusted advisor who has a transparent approach based on sound investment principles, consistency, and trust can help investors identify an appropriate risk management strategy. Such an approach can limit unpleasant (and often costly) surprises and ultimately may contribute to better investment outcomes.

A key part of maintaining this discipline throughout the investing process is starting with a well-defined investment goal. This allows for investment instruments to be selected that can reduce uncertainty with respect to that goal. When saving for college, risk management assets (e.g., bonds) can help reduce the uncertainty of the level of college expenses a portfolio can support by enrollment time. These types of investments can help one tune out short‑term noise and bring more clarity to the overall investment process. As kids get closer to college age, the right balance of assets is likely to shift from high expected return growth assets to risk management assets.

Diversification is also a key part of an overall risk management strategy for education planning. Nobel laureate Merton Miller used to say, “Diversification is your buddy.” Combined with a long-term approach, broad diversification is essential for risk management. By diversifying an investment portfolio, investors can help reduce the impact of any one company or market segment negatively impacting their wealth. Additionally, diversification helps take the guesswork out of investing. Trying to pick the best performing investment every year is a guessing game. We believe that by holding a broadly diversified portfolio, investors are better positioned to capture returns wherever those returns occur.

CONCLUSION

Higher education may come with a high and increasing price tag, so it makes sense to plan well in advance. There are many unknowns involved in education planning, and no “one-size-fits-all” approach can solve the problem. By having a disciplined approach toward saving and investing, however, parents can remove some of the uncertainty from the process. A trusted advisor can help parents craft a plan to address their family’s higher education goals.

Rising annual health care costs in retirement

By | August 21st, 2019|retirement|

Health care is traditionally one of the largest expenses in retirement. Planning for these costs, and keeping up with it as you age is crucial.

Given variation in health care cost inflation from year to year, it may be prudent to assume an annual health care inflation rate of 6.5% which may require growth as well as current income from your retirement portfolio.

This chart illustrates the current out-of-pocket health care costs experienced by today’s 65-year-old, and how those costs may increase over time. These costs include traditional Medicare with a Medigap Plan G, which is fairly comprehensive. Supplemental policies, called Medigap, fill in gaps in Medicare coverage such as co-pays and deductibles but not for most prescriptions. Part D for prescription drugs and out-of-pocket expenses are also included. Median costs are about $5,160 per person. These costs are projected to more than triple over 20 years for three reasons:  1) higher than average inflation for health care expenses; 2) increased use of health care such as drugs at older ages; and 3) Medigap premiums that increase not only with inflation but also due to increased age. It is important to note that these costs do not include most long-term care expenses.

Video Series: Reacting to Markets

By | August 13th, 2019|DFA, Dimensional Fund Advisors, Markets|

This 1 minute video says it all! Nobel laureate Eugene Fama provides perspective for long-term investors on why they shouldn’t pay a lot of attention to short-term results.

“If you have a bad period in the risky part of your portfolio and you get out as a consequence…What that says is you NEVER should have been there!”

The most free way of thinking about investing is understanding what the possibilities are…good or bad.

Retirement Insights Tip #7: Effects of withdrawal rates and portfolio allocation

By | August 8th, 2019|Markets|

ONE SIZE DOES NOT FIT ALL

Higher initial withdrawal rates or overly conservative portfolios can put your retirement at risk. But setting it too low can lead to sacrifices in retirement. You may want to consider a dynamic approach to spending.

Setting an initial withdrawal rate and an appropriate portfolio allocation is necessary to sustain 30+ years of spending in retirement. The chart on the left illustrates the effects of different initial withdrawal rates assuming a 40% equity / 60% bond allocation. The 4% initial withdrawal rate—a general rule of thumb introduced in 1994, which adjusts the initial withdrawal amount for inflation over time to preserve purchasing power—is valid as is 5% but the 6% initial withdrawal rate proves not as successful and may put retirement at risk. The right chart illustrates the 4% withdrawal rate, but assuming various portfolio allocations. The more conservative the investor, the more difficult it may be to sustain the 4% rule over long periods of time. Consider a more dynamic approach to ensure that you efficiently use your savings to support your lifestyle while ensuring that you don’t run out of assets too quickly.

Want to talk about a distribution strategy? Give us a call!

Video series: What’s the upside of risk?

By | August 7th, 2019|DFA, Dimensional Fund Advisors, Markets, Video|

In this short video, Nobel laureate Eugene Fama discusses how financial markets work, what fuels innovation, and the upside and downside of risk.

July Performance Dashboard

By | August 2nd, 2019|Markets|

After a record June, U.S. equities continued to post gains, thanks to strong earnings and economic growth. Dovish sentiment from the Fed was short-circuited on the final trading day of the month. Despite a well-telegraphed 25 bps reduction in the target federal funds rate, the trajectory for future rate cuts remains uncertain. Large, mid and small-caps gained, with the S&P 500®, S&P MidCap 400® and S&P SmallCap 600® all up 1%.

  • Enhanced Value was the top performing factor, and has outperformed the S&P 500 in 6 out of the past 12 months. Across sectors, Communication Services was the top performer, while Energy was the laggard.
  • International markets posted losses, with the S&P Developed Ex-U.S. and the S&P Emerging BMI both down 1%, with headwinds including U.S. dollar strength.
dashboard-us-2019-07
Load More Posts