Planning for retirement as a small business owner comes with its own set of challenges, and the earlier you begin preparing for the transition, the better.Continue reading
Whether you’re early on in your working career, approaching retirement, or already transitioning out of the workforce, it’s important to be realistic about what you should expect to pay for medical costs in retirement.Continue reading
Whether you’re retiring soon or just getting started, there are questions to answer and steps to take to make sure you’re prepared for what comes next. Think of retirement income planning as your map to the future you wish to create.Continue reading
As a single woman, it can be scary facing retirement alone. Single women face different challenges when retiring, including living longer and needing more financial resources. These challenges require advice for single women in retirement to be different than typical retirement advice. Continue reading to learn what things to do when retiring as a single woman.
Create a Retirement Plan
Having a plan for your finances in your golden years is crucial. No one wants to have to worry about making ends meet when trying to enjoy their retirement. When sitting down to set up a plan, you can find the best opportunities for you and avoid several mistakes. This plan includes at what age you can retire, how much you need to pay yourself in retirement, and what your sources of retirement income are.
Know Your Debt and Expenses
In retirement, you will be living off of a fixed income. To ensure that you will be using your money wisely, you will want to make a list of the debts that you owe and the current expenses you have before retirement. While you are still working, pay off your high-interest debt and begin to account for the low-interest debt that you will continue to pay off in retirement. Go through your other expenses to see where you can lower them to save extra money.
Avoid Taking Social Security as Long as Possible
Social Security is a reliable source of retirement income, but if you delay starting Social Security, you can receive more money. You could begin taking Social Security at the age of 62, but for each year that you wait, your benefit increases. The latest you should begin taking Social Security is at 70 years old because your benefit stops increasing.
Learn about Investing
Leveraging investing to grow your retirement savings is extremely helpful. Women are less likely to invest to avoid risk, but investing can provide a plentiful retirement income in your IRAs and 401(k)s. With women having a longer lifespan, they need to fund a longer retirement. Having a more aggressive investment strategy can provide more money to live off of in retirement.
Prioritize Your Health
One would not normally think about their health during retirement planning. Healthcare costs can be crippling in retirement if not planned for properly. It is inevitable that the older you are, the more expensive your medical bills will be. If you begin to be healthier, you can avoid the expensive medical bills for several years.
Utilizing a financial advisor can help you have a successful retirement plan. An advisor can assess your specific financial situation and provide guidance on how to improve. Here at California Wealth Transitions, we want to help women feel confident in their retirement plans.
While getting divorced is a very difficult time, there are several other things that will change along with your marital status. You and your spouse’s finances will need to be divided during the divorce, but this is a great opportunity to evaluate your financial standing.Continue reading
“I make too much money to contribute to a ROTH retirement account.”
How many times have we heard this as advisors? The good news is, no you don’t!
Many working individuals believe they are ineligible for ROTH accounts. What if I told you there are strategies to deposit funds into a ROTH every year regardless of your income?
It’s true. Many investors and professional advisors are not well versed in how to utilize the tremendous benefits of ROTH retirement accounts.
Please note, this is a guide to familiarize you with this strategy, if you’d like to learn more, you can speak with one of our financial advisors here.
Retirement Account Basics
Regular retirement accounts, IRA, SEP, 401k, 403b and Profit Sharing Pension plans all grow tax deferred. This means you do not pay taxes on the earnings in these retirement accounts until the funds are withdrawn, usually in retirement. In contrast, ROTH retirement accounts do not pay taxes on their earnings even when the funds are withdrawn in retirement. Money you contribute to a Roth truly becomes tax-free.
Chances are you have a 401k plan at work. You know you can put part of your salary in a retirement account before you pay tax on it, and that money grows tax-deferred. Your company usually matches a portion of what you put into the account as well. Since the money you put into these accounts do not incur any tax until you take it out, it’s a great way to save for retirement as your money grows more quickly than it would in a traditional investment account.
In addition, many plans also allow for Roth contributions, where the money is taxed before it goes into the 401k, but it then grows tax-free (assuming you meet several requirements). This may be a great strategy depending on your situation but many savers are reluctant to give up the tax deduction from the normal pre-tax contributions.
What Can You Contribute to a 401k?
Everyone wants to know how much they can contribute to a 401k. A simple Google search will tell you that the IRS does limit what you can put into these accounts. In 2020, the maximum you can contribute to a 401k plan is $19,500 (if you are over 50 you can add an additional $6,500 for a total of $26,000 per year). However, this is where most people’s understanding of their 401k plan ends.
If your knowledge ends here, know that you aren’t alone. There are so many subtle nuances in the different types of 401k plans and various advantages and drawbacks of each. This is why a customized financial plan is crucial; an advisor can help look at your overall situation with the specific type of plan you have, and make more informed decisions for you to efficiently plan for the future.
Enter the Mega Back-Door Roth Strategy
If you regularly max out those traditional 401k limits, you’ll want to pay attention here. What most people may not know is that the actual 2020 IRS limit for the total amount of Employee and Employer contributions is 100% of your income or $57,000 whichever is less (or $63,500 if you’re over age 50.)
Most people contribute the maximum deferral of $19,500 in each year, their company puts in an additional $5,000-10,000, and that’s it. For high earners, this usually results in excess money going into a savings account where it sits in cash and doesn’t grow, or into brokerage account each month where it’s at least growing, but that growth is subject to taxation, eating into the overall return. Financial planning is all about efficiency and making sure you are taking advantage of everything you can to maximize the growth of your money. So, after you’ve maxed your 401k contribution, where should you contribute next?
Most high earners contribute the maximum pre-tax contribution of $19,500 and stop there, even though the IRS allows you to put up to $57,000! This is a huge benefit that few people take advantage of simply because they were unaware. What if you could contribute an additional $20,000 to $30,000 per year and have those funds grow tax free? Would this be of benefit to you? Not all 401k plans allow these types of contributions but we can help you to determine if your plan has this option.
Even if your 401k plan does not have the appropriate features to allow for these additional deposits, there is one additional strategy to allow for annual ROTH IRA deposits up to $14,000 per year for a married couple. Are you a business owner? Consider setting up your solo plan to allow for these additional benefits.
Remember, both the ROTH 401k strategy and the ROTH IRA strategy are available regardless of your income.
If you are a high earner, and find yourself in a position of uncertainty around what accounts you should be utilizing for your savings, I urge you to contact one of our financial planners here.