Nearing Retirement? Make Sure You’re Managing This Significant Risk

If you’re avoiding looking at your 401(k) balance during periods of market volatility, you’re not alone. While the S&P 500 has historically produced an average annual return of 11%, recent market downturns may be impacting your portfolio, especially if you are drawing down assets. If you are a retiree or nearing retirement, managing the sequence of return risk in your portfolio during a declining market is essential since it is a significant risk to your assets lasting through retirement. The sequence of returns impacts investors when they are either adding to or withdrawing money from their investments, which can create risk depending the market conditions at the time. If an investor is not doing either, there is no sequence of returns risk. However, suppose an investor is drawing down their portfolio and not contributing new capital, for example, when they’re retired. In that case, there is the risk that the timing of withdrawals will negatively impact the portfolio’s overall rate of return. The sequence of the withdraws is critical to the retirement portfolio lasting the investor’s lifetime: Timing is everything- the timing of the withdrawals can damage the overall return and the portfolio that may not be recoverable. Withdrawals during a bear market are more damaging than during a bull market. If a bear market lasts more than a few months, each withdrawal is not being offset by contributions, leaving the portfolio unable to recover what was withdrawn despite future gains. The sequence of return risk can impact market-sensitive investments. Diversified portfolios are less likely to be impacted by the sequence of return risk. When is the optimal time to review your portfolio? When the amount of risk you’re comfortable with

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When the Stock Market is Down, Should You Consider a Roth IRA Conversion?

A Roth IRA conversion involves repositioning traditional IRA or qualified employer-sponsored retirement plan assets into a Roth IRA. One reason people convert traditional IRAs or other retirement accounts into Roth IRAs is so they can enjoy tax-free income in retirement. Another reason is the Roth IRA’s flexibility not to make withdrawals if the money isn’t needed since there is no Required Minimum Distribution (RMD). Or, they may use a Roth IRA conversion as part of estate planning to lessen the impact of estate taxes on their estate. Whatever the reason for the Roth IRA conversion, investors often consider this a suitable time to do a Roth IRA conversion whenever the stock market is down. However, there are many questions to answer before putting this strategy into action: Does your qualified retirement plan allow Roth IRA conversions? If you have your monies inside your employer’s retirement savings plan, check the plan’s documents to see if a Roth IRA conversion is allowed. If not allowed and you initiate the conversion, the conversion may not occur, or a penalty will be applied when the conversion happens. Consult your employee handbook, contact your HR, or contact your employer-sponsored retirement plan’s custodian for answers about your situation. Can you pay the taxes? Since traditional IRAs and other qualified retirement plans are tax-deferred plans, upon converting assets into a Roth IRA, the account owner must pay income tax on the amount they convert. Also, the taxes are due upfront when the conversion occurs. Are you comfortable with your Adjusted Gross Income (AGI) increasing? A Roth IRA conversion will increase your income in the year that the conversion occurs. If you are retired, be mindful that Medicare Part

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What Homeowners Should Know About Estate Planning

If you have always thought estate planning was just for those nearing retirement or already retired, think again. If you own a home, it is important to have a plan in place. Without a will or other arrangements that allow your home to pass to your closest loved ones, it is subject to your state’s intestacy laws and probate, which may not result in the outcome you want. Here are five different ways your estate plan can pass your home on to your loved ones. Give Your Home as a Bequest One of the most common ways to pass a home along to heirs is by specifically naming a beneficiary in your will. When you leave your home in a will, the beneficiary receives a stepped-up cost basis. This provision means that if they later sell the house, they may only pay taxes on the difference in the value when they inherited it and the sale price. Before choosing someone to inherit your home, be sure they are up to the task. For some, the idea of taxes, insurance, and maintenance expenses may feel like anything but a gift. And if the beneficiary is receiving public benefits, like Medicaid, inheriting a home or another item of value may make them ineligible for future benefits until these assets have been sold or spent. Sell Your Home If you would rather not leave your home as a bequest to your beneficiaries, another option is to sell it. With the $250,000 capital gains tax exclusion (or up to $500,000 for married couples filing jointly), you may sell your home for a tidy profit, deposit or invest the tax-free gains, and pass these funds

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12 Things Investors Need to Know about the SECURE Act 2.0

In late 2019, SECURE Act was passed as a way to help Americans save more for their retirement. In March 2022, the SECURE Act 2.0 has passed in the U.S. House of Representatives and aims to improve the goals of the original SECURE Act. The Senate proposed a similar bill in May 2021, and as the House’s version moves forward, the two bills will likely combine before the final Senate vote. Here are what investors should know if the SECURE Act 2.0 passes as proposed: #1- Required Minimum Distribution (RMD) age will increase from age 72 to age 75 with this RMD schedule: Age 73 starting in 2023 (for individuals who reach age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2030). Age 74 starting in 2030 (for individuals who reach age 73 after Dec. 31, 2029, and age 74 before Jan. 1, 2033). Age 75 starting in 2033 (for individuals who reach age 74 after Dec. 31, 2032). #2- RMD penalties would decrease. Currently, for investors who forget to take their total RMD, there is a 50% penalty on the RMD amount missed. The SECURE Act 2.0 would decrease the liability to 25%, and if the mistake is promptly corrected, it drops to 15%. #3- Qualified Charitable Distributions (QCDs) would be enhanced. People aged 70½ and older can transfer up to $100,000 tax-free each year from their traditional IRAs directly to the charity. The SECURE Act 2.0 would index the cap each year for inflation. It would also allow a one-time transfer of $50,000 through a charitable remainder trust or charitable annuity. #4- Catch up provisions for 401(k) and 403(b) plan participants ages 62, 63, or 64 would

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Volatility Continues

2022 has been a challenging year for investors so far. The S&P 500 Index just had one of its worst Aprils in decades, and May is off to a rocky start. Bond investors have not fared much better as rising interest rates have pushed down bond prices. Bond losses have made the stock market volatility feel even worse than usual. Markets don’t like uncertainty but it’s getting a healthy dose of it this year, dealing with high inflation, tighter Federal Reserve monetary policy, COVID-19 shutdowns in China, and snarling global supply chains, all while the war in Ukraine continues. Investing mistakes often take place during periods of elevated volatility. One of the most frequent is trying to time the market by jumping in and out. Market timers must be right twice, and timing the return to the market can be extremely difficult to pull off. Markets can turn quickly, and missing even just one big up day can significantly reduce returns over time. The biggest daily gains tend to come in down markets, making them especially difficult to predict. Time in the market, not timing the market, may be more beneficial to long term investors. When markets are shaky, it can be helpful to look to long-term fundamentals that have provided the foundation of positive returns for stocks and bonds over the long run. For stocks, gains depend on the ability of corporations to grow earnings, which they have continued to do during first quarter earnings season—S&P 500 Index earnings per share are on track to increase 10% year over year. For bonds, the key fundamental has simply been the ability of borrowers to make required payments. Corporations and consumers

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Market Volatility and the Importance of Staying the Course at Different Ages

Market Volatility and the Importance of Staying the Course at Different Ages When you invest in the stock market, you want to see growth, but unfortunately, in most cases, investments do not grow all the time. Inevitably, the market goes up and down, and to safeguard your potential for long-term growth, you need to understand the importance of staying the course through market volatility. However, you also need to adjust your approach to investing at different ages. Staying the course through market volatility has different implications at ages 20, 30, 40, 50, and into retirement. Check out these tips. 20s to 30s At these ages, you should be actively saving for retirement. By investing early, you have the opportunity to amass more wealth than you do if you wait until you are older. When choosing your investments, keep your personal risk tolerance in mind, but don’t necessarily sell funds that drop in value. At these ages, you don’t need the funds for another 30 to 40 years, and as a result, you have the ability to ride through market volatility. Typically, at these ages, the best course of action when investments drop is to just do nothing. 40s to 50s At these ages, retirement is looming on the horizon, and ideally, you should be investing as much as you can. Even at these ages if your investments drop in value, you shouldn’t necessarily sell. But you should consult with a financial professional and make slight changes as needed. Keep in mind that while the market grows at an average of 7.2% per year, research indicates that the average investor only sees 5.3% growth per year — analysts speculate that this

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529 College Savings Plans: A Cheat Sheet for Common Questions

Whether your child was just born or is heading toward high school graduation, a 529 savings plan may help you put aside funds to pay for college expenses without paying taxes (federal and some states) on any dividends and gains.1 However, 529 plans have some specific rules, regulations, and restrictions that parents must know before college begins. Here are the answers to some of the most commonly-asked questions about 529 college savings plans. What Are Qualified Expenses? Generally, 529 funds are tax-free when spent on qualified expenses, such as tuition, books, fees, and room and board. However, understanding what constitutes an eligible expense is sometimes challenging. Here are some things to know about qualified expenses: Books, supplies, and equipment are qualified; however, laptops and other tech devices are qualified expenses only if required for enrollment or attendance at a school. Airfare or driving expenses to and from college are not qualified expenses. Health insurance is not a qualified expense. Room and board, including off-campus housing, is a qualified expense. However, it is capped at the room and board amount your college estimates in its total cost of attendance. This rule means that if your college publishes its cost of attendance as including $10,000 in room and board, but you have an off-campus apartment that costs $2,000 per month, you may only be able to use your 529 withdrawal to pay for $10,000 of your rent. What Happens if Your Child Gets a Scholarship? Getting a full-tuition scholarship may create a challenge. You may need to change what to do with the 529 funds earmarked to pay for college tuition. Fortunately, several options allow a 529 custodian to avoid paying penalty

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4 Key Investments You Should Consider as a Small-Business Owner

As a small-business owner, you may be looking for the next big thing—an investment that might double your profits within the next year or allow you to maintain your income while working just a few hours a week. However, business success may depend on many incremental investments you make along the way. By including investments that fall outside the financial realm, you may better position your business and yourself to take advantage of future opportunities. Here are four key investments that may help your business thrive. Invest in Your Health Starting a company is all-consuming. You may find yourself relying on too many fast-food meals and getting too little exercise as you put in the long hours needed to get your business going. Nevertheless, business success may be anticlimactic if you are not healthy enough to enjoy it. Invest in yourself by taking time for self-care, exercise, time with family, and healthy meals. Realize that your business may only be as healthy as you are. Invest in Your Education Education is more accessible than ever, including pay-per-credit-hour classes at local community colleges and online courses from some of the country’s most reputable universities. Small-business owners may take advantage of these educational opportunities to expand their knowledge on any number of subjects. Perhaps you want a greater understanding of grants or loan opportunities that may be available. You might desire to learn about a new marketing strategy. Investing in your education may give you a knowledge base to support you throughout your entrepreneurial efforts. Invest in Financial Professionals If you try to run your business while also doing your taxes and keeping your books, you may find that there are not

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Life Insurance Needs: Taking a Closer Look

Without a doubt, it is important to have enough life insurance coverage to handle any financial contingencies that may affect your family if you die prematurely. However, determining the amount of life insurance you need is not that simple. One past rule of thumb was that you should have enough life insurance to equal five times your annual salary. But more frequently, having the appropriate amount of life insurance coverage requires careful “Needs Analysis” rather than using an arbitrary formula.   The Needs Analysis approach incorporates an evaluation of your family’s most important financial obligations and goals. This could include insurance coverage for mortgage debt, college expenses, future family income, and creating liquidity for future estate tax liabilities.   Continuing income for your family. The amount of income you will need to help provide for your surviving spouse and dependents will vary greatly according to your other assets, retirement plan benefits, Social Security benefits, age, health, and your spouse’s earning power. Many surviving spouses may already be employed or will find employment, but their income is based on education, training, and experience. Your spouse’s income alone, may be insufficient to cover the monthly expenses of your family’s current lifestyle. Providing a supplemental income fund will help your family maintain its standard of living.   Mortgage debt. You need to consider whether your life insurance proceeds are sufficient to help pay the remaining mortgage on your home. If you are carrying a large mortgage, you may need a sizable amount. If you own a second home, the mortgage on that home also needs to be factored into the formula.   College expenses. Many people want life insurance proceeds large enough to

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Invest in Your Financial Education During Financial Literacy Month

April brings more than possible rain showers. It also marks Financial Literacy Month in the U.S. Whether you’re interested in a quick refresher or seeking to learn something new, it may be worth the effort to brush up on some financial concepts that give you a broader knowledge base from which to make financial decisions. Here are several ways to invest in your financial education for this Financial Literacy Month. Check Out the Library With financial topics and discussions available in online articles, blogs, podcasts, radio, television shows and just about every other type of media, the library may be an overlooked resource for those seeking to improve their financial literacy. However, it may be cost-effective to check out a book from the library since it is free. Your librarian may be an invaluable resource for identifying areas of knowledge that you would like to boost and helping you select the appropriate books to read. Think About Your Budget and Taxes Whether you are good at budgeting or tend to take whatever comes financially, spring presents an opportune time to take a hard look at your income and spending and decide what changes may be worth making. While gathering the information you need to file your income tax return, you may be able to identify patterns and get an early start on any changes you would like to make this year. For example, if you did not contribute to a 401(k) or traditional individual retirement account (IRA) last year, running a few calculations might help give you a good idea of how much you may save in taxes by starting contributions now. Suppose your overall tax rate is quite low

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