The digitization of financial services is upon us and with it comes an opportunity to grow—not just in our use of technology, but also in the way we serve clients. In this age of hybrid financial advice, where clients wish to experience the same autonomy they have on Amazon with the customized advice they get from their therapist, we have a lot of growing to do in the industry to meet these demands. Innovation is the key and technology is just a piece of the puzzle.
Written by: Dan Rafter
You’ve worked hard to build your own business, and you love the perk of being your own boss. But going solo does come with one big challenge: It can be tough to save enough for retirement.
When you work for a company, you often have access to a 401(k) plan in which you can automatically deposit money for your retirement. It’s not as simple when you’re self-employed. When you’re working for yourself, you need to develop a retirement plan and stick to it. Otherwise, you may face a long, stressful retirement, worried you won’t have enough money to pay for the lifestyle you want.
Here are some tips for building a retirement nest egg even when you’re self-employed.
Kevin Gallegos, senior vice president of client enrollment in the Phoenix office of Freedom Debt Relief, said the biggest challenge self-employed people face when saving for retirement is that their monthly income fluctuates so often.
It’s hard to save when your income soars to $10,000 one month but then crashes to $4,000 the next.
“Income that fluctuates from month to month does make it harder to establish any regular budgeting and savings, but it is doable with a different approach,” Gallegos said.
That different approach? Gallegos recommends that those who are self-employed create a budget that’s based not only on dollars and cents, but on goals, too.
These goals may include being able to retire at a certain age, taking regular vacations, buying a new car or just having the time to take a daily walk. Once you write down these objectives, you can build your budget with them in mind, Gallegos said.
Your budget should list your mandatory expenses each month – everything from your mortgage payment to your car loan to the minimum you need to pay each month on your credit cards. It should also record those regular monthly costs that fluctuate: items such as your utility bill, groceries and transportation. Estimate what these are, and don’t forget to factor in the money you spend on discretionary expenses, such as eating out and entertainment. Finally, your budget should include your regular monthly income.
When you look at your income and your goals, you might decide it’s time to make changes. You may have to scale back some of your loftier ambitions.
“It might mean modifying the hoped-for China vacation to, say, San Francisco’s Chinatown,” Gallegos said. “But whatever happens, you’ll find that you will be spending smartly and getting where you want to go.”
Work into your budget a line item for retirement savings in your expenses area. Gallegos recommends you choose a percent of your monthly income to designate for savings. Take a portion of that amount and save it in an IRA or other retirement savings vehicle to help steadily build your reserve.
Tommy Valmeyer, chief executive officer of San Francisco-based digital marketing company OpenKit.io, said the biggest challenge for the self-employed is remembering to contribute to a retirement fund at all.
“When you have a standard 9-to-5 with a company, they can automatically contribute a portion of your paycheck to retirement,” Valmeyer said. “This is not the case for the self-employed.”
The best solution? Valmeyer recommends that self-employed individuals find a checking account that allows them to automatically submit a certain amount of money each month to a retirement account. The key is to make the commitment to this deposit, and to keep it going even when your business might not be booming.
Howard Dvorkin, a certified public accountant and chairman of Debt.com, said self-employed individuals need to consider all their options when it comes to saving dollars for retirement.
“Being your own boss is awesome, but being your own retirement savings plan can be a real downer,” he said.
If you work for yourself, you probably already know of traditional and Roth IRAs. But Dvorkin said many who are self-employed don’t know about the benefits of a “solo” 401(k) account.
This type of retirement savings vehicle, also known as a Self-Employed 401(k) or Individual 401(k), was designed for employers who have no full-time employees other than themselves and their spouse. In other words, it’s designed for people who work for themselves.
This 401(k) plan offers the same benefits as traditional versions. You can contribute up to $19,000 in your solo 401(k) plan in 2019 when contributing as an employee or up to $24,500 if you are 50 or older. When contributing as an employer, you can contribute up to 25% of your compensation. The total amount you can contribute to your individual 401(k) account, not counting catch-up contributions if you are 50 or older, is $55,000 in 2019.
If you are contributing as an employer, your contributions to the 401(k) plan are tax-deductible. If you are contributing as the employee, your contributions will reduce your taxable income.
Windus Fernandez Brinkkord, managing vice president in the San Diego office of Trilogy Financial, said self-employed people have several options when it comes to retirement savings vehicles.
Those who aren’t going to save more than $5,500 in a year will do well with a traditional IRA, Brinkkord said. Once these individuals are ready to save more money, though, Brinkkord recommends they invest in an individual 401(k) plan.
“Self-employed people often put so much back into their business they forget to save for their own retirement,” Brinkkord said. “In many cases, the business is them and, therefore, not sellable. Be cognizant of saving for yourself.”
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Many grandparents are willing to help with college costs. One thing to keep in mind is that grandparent-owned 529s have a downside related to FAFSA, though there are workarounds.
There are several ways grandparents can help pay for a grandchild’s education without giving money directly to the student. Grandparents, parents, and students must understand each of the options before deciding which one may be appropriate for them.
For instance, they need to know whether the method they’re using jeopardizes a student’s prospects for need-based financial aid, or if it meshes well with the grandparents’ overall estate plan.
Here is a look at three ways grandparents can help fund a grandchild’s education, and the pros and cons of each:
1. Invest in a ‘529’ plan
Financial advisers often recommend the state-sponsored education-savings plans known as 529s to grandparents who want to help with college costs because of the many advantages this type of plan offers.
These plans, which invest mainly in mutual funds, offer tax-deferred growth on every dollar invested, and distributions are tax-free when used for qualified educational purposes. Grandparents can pick any state’s 529 plan, and some states even offer residents a tax deduction on contributions. These plans also are flexible in that any unused funds can be transferred to another grandchild or blood relative.
Grandparents can put as much as $15,000 a year ($30,000 if they are married) per grandchild in a 529 plan without triggering gift-tax consequences. Even better, they can “bunch” five years of annual $15,000 gifts into a 529 in one year without triggering a taxable event, a potentially attractive benefit for those seeking to reduce the size of their estates.
“To me, the 529 is the turnkey solution for college planning,” says Jeff Motske, certified financial planner and president of Trilogy Financial, a financial planning firm in Huntington Beach, Calif.
Grandparents have the option of owning the 529 themselves or contributing to a 529 plan owned by the parent for the benefit of the child. One advantage of owning the account is that you “can control where the money goes right up until the time it’s used,” says Jody D’Agostini, a certified financial planner with AXA Advisors’ Falcon Financial Group in Morristown, N.J. Grandparents can even use the funds for themselves, albeit with tax consequences, should a financial need arise, she says.
INVESTING IN FUNDS
There is, however, a downside to grandparent-owned 529 plans for families seeking need-based financial aid: Distributions count as student income on the Free Application for Federal
Student Aid, or FAFSA, and student income is weighted much more heavily than parental income in the aid formula.
There are some potential workarounds, however. One option is to switch ownership of the 529 to the parent around the time the grandchild expects to start college. Not every state’s 529 allows for a change in ownership, however, so this is something to explore before choosing a plan, Ms. D’Agostini says.
Another option is to wait until after Jan. 1 of the beneficiary’s sophomore year in college to take a distribution, says Mark Kantrowitz, publisher and vice president of research at Savingforcollege.com. Since the FAFSA now asks for income and tax information from two years back, there would be no FAFSA on which to report the distribution if the student plans to graduate in four years. (If the student expects to graduate in five years, the family should wait until Jan. 1 of his or her junior year to take a distribution, Mr. Kantrowitz says.)
The grandparent also could roll over up to a year’s worth of college expenses to a parent’s 529 plan after the FAFSA has been filed. Provided all of the funds are spent on qualified educational expenses, it won’t have to be reported on the next year’s FAFSA, Mr. Kantrowitz says.
Some grandparents may not want the responsibility of owning the account, preferring instead to contribute a certain amount each year to a 529 plan owned by the parent for the child’s benefit. This may be appealing to those who want to give small amounts of money each year—around $1,000 or less.
In this scenario, “your grandchild gets all the benefits without you having to worry about maintaining the account,” says Joseph Conroy, a certified financial planner and financial consultant with Synergy Financial Group, a wealth-management firm in Towson, Md.
The downside, of course, is the grandparent cedes control of the money to the parent.
2. Direct payment to an educational institution
Grandparents can write a tuition check for any amount directly to a qualifying college or graduate school without triggering gift-tax implications, says Eric Brotman, chief executive of BFG Financial Advisors, a financial planning and wealth-management firm in Timonium, Md.
Some grandparents like this option because they can pay the university directly and still give the grandchild an additional $15,000 tax-free.
Grandparents, however, can’t claim a charitable distribution for tuition they pay on a grandchild’s behalf. Also, this exemption to the IRS’s gift-tax rules applies only to tuition expenses and not to other college-related expenses such as books and supplies. Another consideration is that the money isn’t refundable if the student decides to switch schools, so it isn’t advisable for grandparents to prepay tuition for all four years. Also, grandparents should be aware that this type of payment could have an impact on the student’s eligibility for need-based financial aid.
3. Fixed-indexed universal-life insurance policy
Another, less-talked-about option for paying for college—albeit a controversial one—is using cash-value permanent life insurance.
One type that some advisers like is fixed-indexed universal-life insurance. Mike Windle, a partner, and financial adviser at C. Curtis Financial Group, a financial-planning firm in Plymouth, Mich., recommends this option because of the flexible premiums and upside potential without the downside risk.
To make this strategy work, the policy should be owned by the grandparent, with the grandchild as the insured, making the cost of insurance inexpensive, says Mr. Windle, who owns these types of policies and offers them to clients.
Having such a policy allows grandparents to contribute after-tax money in a lump sum—monthly, quarterly or annually. When the funds are used, they are considered a loan against the cash value of the policy. They are tax-free at distribution, and they don’t count as income or assets on the student’s FAFSA, Mr. Windle says.
He generally recommends fixed-indexed universal-life insurance policies to clients whose grandchildren are 8 years old or younger. The policies he recommends have no cost to the grandparent to withdraw funds (and withdrawals aren’t counted against the grandparent’s yearly gift-tax limit) if the loans from the policy occur in the 10th year of the policy or later, Mr. Windle says. If grandparents take a withdrawal before the 10th anniversary, it could cost them about 2% of the loan, depending on the insurance company, he says.
Though premium rates aren’t guaranteed, Mr. Windle says the additional cost for a child would be minimal and is likely to be offset in part by growth in the policy’s cash value.
Another benefit is that the money can be used for multiple purposes—it isn’t limited to education. And the policies have a death benefit if something happens to the child.
There are downsides to using life insurance as a vehicle for college savings, however, and not everyone thinks it is a good idea. An insurance policy can be pricier and the investment selections more limited than with some other options grandparents have for funding college, financial experts say.
Before purchasing a life insurance policy for college-savings purposes, grandparents should consider the type of insurance and return on investment, as well as applicable costs, to ensure it’s the best option for their situation.
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