Putney-Klein Associates, Inc. Articles

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Today it’s imperative to take charge of your retirement plans. With fewer and fewer employers funding retirement plans and the future of Social Security in doubt it is up to you, the individual to take charge of 401(k) plan opportunities.

The benefits of a 401(k) plan are hard to beat. Your contributions are tax-deductible, you typically get a matching contribution from your employer, and both your contributions and earnings grow tax-deferred until they are withdrawn. A maximum 401(k) contribution of $15,500, ($20,500 if age 50 or older) may save up to $9,081of tax (Federal and California).

To maximize your pre-tax wealth accumulation we suggest the following timely strategies:

1. Know Your Plan

The past few years have brought about many improvements to 401(k) plans -more investment choices, enhanced employer contributions, and better reporting, to name a few. To maximize the benefits of your 401(k), you need to know and understand your plan and its features. Take the time to read the material your employer provides.

1. Contribute the Maximum

To get the most out of your 401(k), you have to put the most into it. Your company sets the maximum contribution as percentage of your salary up to the IRS limit (currently $15,500). Keep in mind that each dollar you contribute to your 401(k) is deducted from your taxable income so you avoid paying income taxes on that money until you withdraw it, typically at retirement. And since all the interest, dividends and capital gains earned in your 401(k) grow tax-free until withdrawn, your money grows at a much faster rate than it would as a taxable investment.

Most companies that offer 401(k) plans match all or part of your contribution, which significantly raises your rate of return. If you cannot contribute the maximum the law allows, at the very least try to contribute enough to earn the full employer match.

1. Invest for the Long-Term

Most company plans provide a broad range of investment options. Typically a plan will offer one or more stock mutual funds, a bond fund or fixed-income contracts, a balanced fund, a money market mutual fund, and perhaps, international fund. Oftentimes investment in the company’s stock is another option.

Strive for a diversified mix of investments. A soundly allocated portfolio will grow and preserve your money over the long-term. Many academic studies have shown that a long-term soundly allocated portfolio will produce rates of return of from 10.5 % to 12.5%, and that allocation of the portfolio plays a very significant role in the rate of return. Your allocation between stocks and fixed-income assets is a function of your time frame and risk tolerance. Generally when you are younger you can have a heavier allocation in stocks.

1. Monitor Your Investments

It’s your responsibility to keep a close watch on the performance of your 401(k) investments. Most plans provide quarterly reports and some even have a toll-free number or a web site for up-to-date balance figures. At the very least, the law requires that you receive an annual statement. Review your reports carefully and compare your fund’s performance to those in the Standard & Poor’s 500-Stock Index or to other performance averages for the different types of funds you hold. It is important that you regularly rebalance your 401(k) holdings to reflect your long-term goals. How often you can change your investments and your allocations depends on your plan’s rules. Some have fixed dates, some permit daily adjustments and some permit only a certain number of transfers per year. Just don’t get carried away trying to time the market. Again, many academic studies have shown that the odds are against successfully timing the markets, by a factor over nine to one. A good rule of thumb is to re-balance once or twice a year.

1. Keep an Eye on Expenses

The do-it-yourself nature of 401(k) plans extends to paying investment expenses and administrative costs. Your are responsible for paying these expenses, which are typically deducted from your plan and reduce your earnings. If you feel these expenses are too high, don’t be shy about bringing your concerns to your employer’s attention.

1. Keep All of Your Funds in Your Plan Until Retirement

Do not withdraw your funds from your 401(k) plan prematurely. Premature withdrawals do two very serious damages to your retirement financial independence: (1) The combination of income taxes and income penalties can wipe out over half of your account’s value and (2) You lose the accumulated compounding leverage of those funds. Alternatively if borrowing is available from your 401(k) do not do it, short of the most dire of financial crises. While you do earn the interest that you pay back into your account, you lose any of the long-term growth of that money, and if you should change jobs the unpaid balance is deemed to be a taxable (…and, maybe premature) distribution.

 

Putney Klein Associates, Inc.
Financial Advisory | Tax Service | Estate Planning
1243 Alpine Road, Suite 219|
Walnut Creek, CA 94596
(925) 932-2612
Fax (925) 932-2118

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Whether you are just beginning your marriage career or you are celebrating your 30th anniversary, its never too early or late to get to the heart of planning for your financial future. Personal financial planning is a key ingredient to achieving your goals and plays an important role in achieving financial harmony in your marriage. Our experience in working with clients clearly shows that tax planning and financial planning work very close, together. Here are eleven tips to get you started.

1. Talk about money openly – Marriage is more than an emotional partnership, it’s a financial one as well. Be open and honest in sharing your thoughts about saving and spending, investing and borrowing. Wealth building in a marriage is best accomplished when it’s a team effort, but since attitudes about money are acquired over a lifetime, be willing to make some allowances for each other’s money habits.
2. Appoint a money handler – If you’re just starting out you need to decide who will handle money management tasks like balancing the checkbook, paying the bills, and monitoring investments. If you’ve been married for a while and one of you has been in charge of family finances for many years, perhaps it’s time to make a switch. Regardless of which one of you handles the day-to-day money management, get together frequently to review your budget, investment portfolio, and tax situation, and discuss major purchases and important financial decisions.
3. Identify financial goals – Saving money is much easier when you have specific goals in mind. Take the time to talk regularly about what is important to you both. By setting short-and long-term financial goals and reasonable time frames for each, you can establish priorities and define the type of lifestyle you want to live, both now and in the future. If you have been married a while and already have financial goals in place, take the time to update your goals and assess your progress.
4. Pay yourself first – The key to saving is discipline. Perhaps the best strategy for achieving your financial goals is to automate your savings plan. Have $200 (or whatever amount you’re comfortable with) taken out of your paycheck or checking account each month and put into a money market or mutual fund. This pay-yourself-first strategy works infinitely better than settling for saving whatever, if anything, is left over at the end of the month.
5. Reduce Debt – Whether you’ve each brought your share of debt into the marriage or have built up a large credit card balance together, it’s time to come up with a plan for reducing debt. If you find you can pay only the minimum due on your credit card bills, try trimming a couple of items in your monthly budget (like dinners out and movies) and use the savings to pay down debt. You also might consider consolidating your credit card balances onto the card with lowest interest rate or taking out a home equity loan to pay off your credit card debt. For many couples, putting the roof over their heads at risk with a home equity loan is a step they take only as a last resort – squeezing savings out of your budget or taking out a personal loan are safer alternatives.
6. Update your insurance – Couples (young and old) should review life, disability, medical, and property insurance coverage needs at regular intervals. Two-income couples should compare the health care coverage their employers provide and decide whether it makes sense to maintain individual coverage or switch (as employee and dependent) to the plan with better benefits. If you were single )or married to someone else) when you bought your life insurance policy, you may need to update the policy’s beneficiary designation to reflect your new status. And remember to update them as necessary, you might still be carrying your ex, or your deceased Great Sara, as your beneficiary.
7. Invest for the future – Remember that it’s never too soon or too late to save for retirement. One of the best strategies is to put the maximum amount possible into your employer-sponsored retirement plan. Most newlyweds should consider investing a substantial proportion of their portfolios in stock type investments, which tend to offer higher rates of return than bonds over the long term.
8. Improve your financial literacy – Read the money and business sections of your newspaper, subscribe to a personal finance magazine, or take a personal finance course at your local high school or community college. You also can find a wealth of financial educational material and advice on the internet.
9. Setup a will or living trust – When you die without a will, the state determines who gets your assets. If you and your spouse don’t have wills, have them drawn up. If your will have been in place for a while, review them to determine whether they should be updated to reflect any changes in your life status. If you have assets of over $100,000, you should strongly consider setting up a living trust. A living trust avoids the time, cost and delays of probate.
10. Keep your taxes current – If you’re an employee you need to be sure that you withholding matches your taxes due. Over withholding gives the government an interest free loan and under-withholding may cause you to pay costly penalties. If you are self-employed or are retired and do not have withholding, you need to pay in "estimated taxes" each quarter of the year. Failure to pay in estimated taxes can cause you to pay large penalties. Getting behind in paying your income taxes, can compound into a very serious tax problem. Such a serious tax problem can mushroom into a very serious financial problem that can wreak financial havoc as and seriously damage a marriage.
11. Make tax planning a year-round strategy – Keep taxes in mind throughout the year as you plan your overall financial strategy. Take advantage of every opportunity (from income shifting to using a tax-deferred retirement plan, from bunching deductions to offsetting capital gains) to save valuable tax dollars. Remember, every dollar you cut from your taxes is another dollar you can put toward achieving your financial goals.

 

Putney Klein Associates, Inc.
Financial Advisory | Tax Service | Estate Planning
1243 Alpine Road, Suite 219|
Walnut Creek, CA 94596
(925) 932-2612
Fax (925) 932-2118