Comparing the old rules with the new.
The Tax Cuts and Jobs Act made dramatic changes to federal tax law. It is worth reviewing some of these changes as 2019 approaches and households and businesses refine their income tax strategies.
Income tax brackets have changed. The old 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% brackets have been restructured to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These new percentages are slated to apply through 2025. Here are the thresholds for these brackets in 2018.(1,2)
How much attention do you pay to this factor?
Will you pay higher taxes in retirement? Do you have a lot of money in a 401(k) or a traditional IRA? If so, you may receive significant retirement income. Those income distributions, however, will be taxed at the usual rate. If you have saved and invested well, you may end up retiring at your current marginal tax rate or even a higher one. The jump in income alone resulting from a Required Minimum Distribution could push you into a higher tax bracket.
While retirees with lower incomes may rely on Social Security as their prime income source, they may pay comparatively less income tax than you will in retirement – because up to half of their Social Security benefits won’t be counted as taxable income.1
Given these possibilities, affluent investors might do well to study the tax efficiency of their portfolios; not all investments will prove to be tax-efficient. Both pre-tax and after-tax investments have potential advantages.
Constructing a portfolio this way may help you ride through a bear market in retirement
Stocks sometimes retreat. That reality can be overlooked in a long bull market. Bear markets do appear, and a deep downturn could force you to sell securities in retirement, so you can pay for necessary expenses.
Right now, you might have too much money in stocks. Years of steady gains may have unbalanced your portfolio and heightened your risk exposure. If you are 60 or older, that constitutes a warning sign, especially given this bull market’s age. What would a downturn do to your retirement fund and your retirement income?
If you are wondering how to respond to this risk, consider the bucket approach to retirement income planning.
The bucket approach may help you through different market cycles in retirement. This investing strategy
A calm investor may realize better long-term returns than an overly concerned one.
Investors are people, and people are often impatient. No one likes to wait in line or wait longer than they have to for something, especially today when so much is just a click or two away.
This impatience also manifests itself in the equities markets. When the S&P 500, Dow, or Nasdaq take a tumble, some investors grow uneasy. Their impulse is to sell, get out, and get back in later. If they give into that impulse, they may effectively pay a price.1
Across the twenty years ending in 2015, the annual return of the S&P 500 averaged 9.85%. During this same period, the average retail investor realized a yearly return of just 5.19%. (These numbers come from Dalbar, a respected investment analytics firm.) Why the difference? It could partly stem from impatience.1
Diversification still matters. One day, this bull market will end.
History is riddled with examples. Think of the dot-com bust of 2000, the credit crisis of 2008, and the skyrocketing inflation of 1974. These developments wiped out bull markets; this bull market could potentially end as dramatically as those three did.3
A 20% correction would take the Dow down into the 16,000s. Emotionally, that would feel like a much more significant market drop – after all, the last time the blue chips fell 4,000 points was during the 2007-09 bear market.4
Take these financial lessons to heart
You have a chance to manage your money better than previous generations have. Some crucial financial steps may help you do just that.
Live below your means and refrain from living on margin. How much do you save per month? Generations ago, Americans routinely saved 10% or more of what they made, either depositing those savings or investing them. This kind of thriftiness is still found elsewhere in the world. Today, the average euro area household saves more than 12% of its earnings, and the current personal savings rate in Mexico is 20.6%.1
In 1975, the U.S. personal savings rate hit an all-time peak of 17.0%; it has been below 4% since June. Easy credit is one culprit; the tendency to overspend in a strong economy is another. Remember to pay yourself first, not credit card companies. Collect experiences rather than possessions.1
Why do so many people choose it rather than a traditional IRA?
The Roth IRA changed the whole retirement savings perspective. Since its introduction, it has become a fixture in many retirement planning strategies. Here is a closer look at the trade-off you make when you open and contribute to a Roth IRA – a trade-off many savers are happy to make.
Your approach to building wealth should be built around your goals & values.
Just what is comprehensive financial planning? As you invest and save for retirement, you may hear or read about it – but what does that phrase really mean? Just what does comprehensive financial planning entail, and why do knowledgeable investors request this kind of approach?
While the phrase may seem ambiguous to some, it can be simply defined.
Comprehensive financial planning is about building wealth through a process, not a product.
Financial products are everywhere, and simply putting money into an investment is not a gateway to getting rich, nor a solution to your financial issues.
2016 has come and gone. It started out in a very rocky fashion, with comparisons to 2008 that were too numerous to count.
Let’s be clear. As I’ve emphasized in past summaries, markets don’t always trade in a quiet and orderly fashion. But, just because we run into turbulence doesn’t mean it’s time to retreat into cash. Volatility has been and always will be part of the investment landscape. It’s how we manage and mitigate risk that is critical.
For the 40+ year period of 1961 to 2002, health care expenses followed a pretty steady upward trend, thanks to things like the introduction of Medicaid, coverage expansion and occasional price increases.1