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Financial Planning Actions to Take Before the New Year

By
Mike Loo, MBA
September 12, 2018
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Before the year’s end, in the midst of the holiday events, travel, and overall busyness, the last thing you want to think about is tackling your finances. But considering how finance-related resolutions are the third most popular New Year’s resolution, why don’t you give yourself a head start on next year’s financial goals by finishing this year strong? Here are ten critical financial actions you’ll be glad you took when the ball drops on New Year’s Eve!

  1. Amp Up Your Retirement Savings

If possible, max out your contributions to your 401(k) by the end of the year to make the most of your retirement savings. For 2018, you can contribute as much as $18,500 (or $24,500 if you are age 50 or older). You might also consider contributing to a Roth IRA. For 2018, you can contribute as much as $5,500 (or $6,500 if you are age 50 or older). Keep in mind that if your income is over $199,000 and you’re married filing jointly, you won’t be eligible to contribute to a Roth IRA.

  1. Use Your Medical And Dental Benefits

Did you have good intentions of taking care of some dental work, blood tests, or other medical procedures? Now’s the time to take advantage of all your healthcare needs before your deductible resets. Dental plans in particular often have a maximum coverage amount. If you haven’t used up the full amount and anticipate any treatments, make an appointment before December 31st.

  1. Verify Expiring Sick And Vacation Time

Depending on your company, your sick or vacation time might expire at the end of the year. Check with your HR department to learn about any expiration dates. If your sick or vacation time does expire, fit in a last-minute vacation, a staycation, or trips to the doctor to use up these benefits.

  1. Use Your Flexible Spending Account

Like your health insurance benefits, you’ll want to use up your FSA (Flexible Spending Account) dollars by the end of the year. Your benefits won’t carry over and you’ll lose any unspent money in your account. Check the restrictions for your account to see what the money can and cannot be used for.

  1. Double-Check RMDs

If you’re retired, review your retirement accounts’ required minimum distributions (RMDs). An RMD is the annual payout savers must take from their retirement accounts, including 401(k)s, SIMPLE IRAs, SEP IRAs, and traditional IRAs, when they turn 70½. If you don’t, you may face the steep penalty of 50% of the distribution you should have taken. To calculate your RMD, use one of the IRS worksheets.

  1. Stay On Top Of Charitable Contributions

If you made a charitable contribution in 2018, you might be able to lower your total tax bill when you file early next year. It can be especially advantageous if you donated appreciated securities to avoid paying taxes on the gains. Along with your other tax documents, find and organize any receipts you have from your donations to charities, whether it was a cash, securities contribution, or another type of gift.

  1. Review Your Insurance Coverages

A lot can happen in a year. As you experience life changes, from the birth of a child to marriage to a new career, it’s important to regularly review your insurance coverages and your designated beneficiaries. Now is the ideal time to review your current insurance policies and make sure they are up to date. You might also want to evaluate your need for other types of insurance you may not currently have, such as long-term care insurance.

  1. Prepare For A Market Correction

We are currently in the longest bull market in history2 and the stock market just keeps hitting record highs3. But we know that what comes up must eventually come down. Prepare yourself and your money by sticking to a long-term strategy, rebalancing your portfolio, and keeping your emotions in check. As long as you are following sound investment principles, only investing long-term money, and keeping your assets within your risk tolerance, you should have no reason to panic when we experience a market downturn.

  1. Talk To Your Kids About Money

The holidays are usually a time for families to get together and reconnect. Use this time intentionally by talking with your kids about money. No matter how old they are, you can give them sound wisdom that will set them up for success. Make sure they understand the importance of saving for retirement and having the proper amount of insurance coverage. Another way to help your kids financially is to create an estate plan to make sure you leave a legacy and avoid passing down a significant tax burden or legal headaches to your kids. If you’ve already taken the time and energy to create an estate plan, you’ll want to check in periodically to ensure all the documents are up to date and no major details have changed.

  1. Give Without Gift Tax Consequences

It’s never too early to start planning for the legacy you want to leave your loved ones without sharing a good portion of it with Uncle Sam. You may want to consider gifting. Each year you can gift up to $14,000 to as many people as you wish without those gifts counting against your lifetime exemption of $5 million. If you’ve yet to gift this year or haven’t reached $14,000, consider gifting to your children or grandchildren by December 31st.

  1. http://www.statisticbrain.com/new-years-resolution-statistics/
  2. https://www.cnbc.com/2018/08/22/longest-bull-market-since-world-war-ii-likely-to-go-on-because-us-is-best-game-in-town.html
  3. https://www.usatoday.com/story/money/2018/08/21/stocks-hit-record-highs/922315002/

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By
David McDonough
May 31, 2019

It’s graduation season, and there’s an excitement in the air about starting a new chapter. Mixed in with this excitement is an element of stress to make the right decisions: decisions on how things should be done, when they should be done and where they should be done. All these decisions are common, but they often distract from the purpose of what comes after high school.

We need to remember that higher education has a purpose. It’s more than an experience. The purpose of a college degree is employment. It is an investment, and as with any other investment, you should be calculating the return on that investment.  Spending $100,000 for a degree that secures a job with an annual salary of $40,000 is not the best rate of return.

There are plenty of creative ways to get a great college education without breaking the bank. Parents can start a 529 plan, the earlier the better, to help cover costs. Students can begin their higher education at a community college or secure college credit via Advance Placement (AP) exams. Additionally, students need to be sure that the field they are spending their time and energy on is going to reciprocate by providing solid career opportunities.

Making the wrong decision is not simply an unwise financial move. It can have lasting implications. Recent figures show that outstanding student loan debt has reached $1.5 trillion[i]. Our younger generation is not only struggling under this debt, they are also pushing off other personal and financial milestones, such as purchasing a house[ii], getting married or starting a family[iii]. These decisions can have long-lasting and far-reaching consequences.

Lastly, let’s not forget the countless parents who put their path to financial independence on hold to financially assist their struggling children. While wanting to financially help your loved ones is admirable, it helps no one to offer assistance at the expense of your own security. Just like when traveling by airplane, you need to put your own oxygen mask on and secure your safety first before aiding others. There are no scholarships for retirement, and you won’t have a financial safety net for the future if you don’t work towards creating it now.

College is truly an exciting time. Our young adults are learning who they are, where they want to go and how they intend to get there. At the same time, we cannot forget that college is a fleeting moment, one that is meant to arm the student with the tools needed to create a brighter and more successful future. Be sure to chat with your students to ensure that this experience does just that, rather than straddle these students with debt and stress.

[i] https://www.marketwatch.com/story/student-debt-just-hit-15-trillion-2018-05-08

[ii] https://www.businessinsider.com/student-debt-preventing-the-us-from-having-normal-housing-market-2019-5

[iii] https://www.bankrate.com/loans/student-loans/student-loans-survey-february-2019/

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

Disclaimer:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Investing in mutual funds involves risk, including possible loss of principal.

The principal value of a target fund is not guaranteed at any time, including at the target date. The target date is the approximate date when investors plan to start withdrawing their money.

No strategy assures success or protects against loss.

By
Mike Loo, MBA
March 21, 2018

When it comes to choosing your 401(k) lineup, it’s easy to become overwhelmed by your options. It’s likely why more than 70% of 401(k) plans include at least one target-date fund. Also known as lifecycle or age-based funds, target date funds were created to simplify the investment choices for 401(k) plan contributors. Depending on your company’s 401(k) plan, they may be named something like Target Date Fund 2050, meaning you anticipate retiring around 2050. Target-date funds give employees the option of choosing one fund that diversifies their investments among stocks, bonds, and cash (the allocation) throughout their working life.

Considered a “set-it-and-forget-it” investment option, some investors choose target date funds as a default so they can avoid having to rebalance and update their portfolio allocations over time. The theory is that younger participants, having more years until retirement, can take higher risks in order to achieve higher expected returns. Since the funds focus on a selected time frame or target date (usually retirement), its asset allocation mix becomes more conservative as that date approaches. The percentage of stocks is reduced, and the percentage of bonds and cash is increased.

While target date funds may help encourage employees to participate in their company’s 401(k), there are a few misconceptions about how they work, and it’s important to understand these considerations before choosing your 401(k)’s investment lineup.

Target Date Funds Can Significantly Vary

Many investors get caught up in the year attached to a target date fund. If they change jobs and contribute to a different 401(k) plan, they may assume the target date fund is the same as their previous plan. Or, they believe that a 2050 target date fund is nearly identical to a 2055 target date fund.

However, target date funds with the same target date can significantly vary in their portfolio lineup. Fund families typically have their own unique approach with their target date funds, meaning a John Hancock target date fund likely won’t offer the same ratio of stocks and bonds as a Fidelity plan.

Take a look at this example from InvestorJunkie:

The percent of equities at age 65 significantly differs between target date families. When each of the target date funds has its own fee structure, mix of assets, and risk tolerance, it’s nearly impossible to measure performance between these funds.

Target date funds don’t just vary by their lineup. They can also have different fees.

As we can see in the chart above, the expense ratios considerably vary based on the target date and the target date family. Fidelity Freedom is more than 0.5% higher than Vanguard, which can take a toll on your portfolio when you’re investing for several decades.

Should I Invest in a Target Date Fund?

Like Though not a panacea, target date funds offer a reasonable alternative to the often confusing world of too many investment choices. Ultimately, there isn’t a single recommendation one can make for everyone. Each person has unique needs and circumstances, and they need to be taken into consideration when selecting their 401(k) lineup.

Before choosing a target date fund, there are a few factors to consider.

What do you want the fund to do for you?

Do you want a fund that is at its most conservative allocation when you retire or a fund that will take you through retirement? A target date fund’s allocation changes based on a set timeframe. If your fund is designed to help you get TO retirement, the amount invested in stocks will substantially decrease as you near your retirement date.

A fund that’s designed to get you THROUGH retirement changes allocations based on your life expectancy. These funds will have a greater amount in stocks at retirement than the to funds and thus be higher risk. Knowing which type of fund you own is critical to your ability to assessing its riskiness, along with its long-term expected returns if you are able to stay the course with it through troubled times.

What are the funds’ target allocations?

Whether it’s a to or a through plan, what are its target allocations? How are decisions about allocation made and do those choices complement your needs?

What's your risk tolerance?

Target-date funds can be more aggressive or more conservative than expected. During the 2008 financial crisis, many investors with 2010 target-date funds suffered severe losses because they didn’t realize their portfolio was invested in more stocks than they thought. Would you have stayed invested if the fund had struggled in 2008? If not, perhaps you should look at a more conservative option.

What are the fees?

Target-date funds can often cost more than other funds because they’re known for their long horizons, and their fees will vary by target date family and target date. If you are more cost conscious, you may prefer to invest in index funds.

Choosing Your 401(K) Lineup.

When there are a plethora of investment options from which to choose, take the time to understand what you want from them and find a fund that meets your needs. If you would like to discuss target date funds or other 401(k) options. I encourage you to reach out to me. Call my office at (949) 221-8105 x 2128, or email me at michael.loo@lpl.com.

The target date is the approximate date when investors plan to start withdrawing their money.

The principal value of a target fund is not guaranteed at any time, including at the target date.

No strategy assures success or protects against loss

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