Money Talks Blog by Oxford Planning Group

Happy Labor Day Weekend! We hope everyone has a fun and safe couple of days and of course we hope you get to enjoy some crabs.

Kick off the weekend with some information to help you set yourself up for a healthy retirement.

As a country we have a retirement crisis.  A large percentage of retirees will not have adequate savings to last throughout their retirement.  In a study performed by John Hancock, they stated "nearly two-thirds of retirement plan participants say their retirement savings are "not so good" or "could be better".  And only 18% are very confident in their ability to make the right financial decisions."  It is up to employers and employees to find better ways to utilize these 401k's and other retirement programs.

There are many opportunities to improve and or take better advantage of your 401k's as an employee and an employer.

What To Do as an Employer:

As an employer, there are many reasons to get motivated.  First, a high-quality retirement plan can be a strong boost to employee morale and culture.  A 401k as part of an overall benefits plan, when structured properly shows that the employer is looking out for employees.  Studies have shown consistently that money is not the only reason employees stay at firms.  They want good benefits, a great work environment, a great culture and to know people care about them.  A good 401k plan should include the ability to do regular or Roth contributions and ideally have a match.  How generous the match will be is dependent on economics, but regardless-  it shows good faith to employees and gives them some extra motivation to be in the plan. 

Motivation for Employees

As an employee, there are several ways that you can help to improve your 401k or better utilize your 401k plan. 

• Are you taking advantage, as best possible, of your 401k or other retirement plan? 
• Are you contributing all you can to the plan? 
• Are you contributing enough to get all the employer matching offered? (Remember, that’s free money) Do your best to meet the max and don’t give up on that extra money.   

By being involved in the plan, you are helping it be more significant.  The more people in the plan, the lower the typical expenses and that will benefit you and everyone else.  Also, by helping your plan grow, it may be eligible for cheaper share classes of the funds offered in your plan.  Again, that’s a win for everyone including yourself.

Next, when you get a raise, your 401k should get a raise too. Put some of that extra earned money towards increasing your retirement plan contributions.  When it comes to the funds in your plan, make sure you are allocated appropriately for your age and risk tolerance.  If you are unsure how to do this, most good plans offer Target Date funds that approximately match your future retirement date.  These can be a great solution for anyone weary of doing their own allocation.

If you are an employer, I'd ask if you are offering the benefits listed below in your plan.  If you are an employee, review whether your plan offers these benefits and if not ask if they might be possible.

Auto Enrollment – greater than 90% of participants will utilize this.  It grows the plan, and it helps each employee save for retirement.

Auto Escalation – again greater than 90% of participants will do this.  It grows the plan size and increases individuals' contributions helping them reach retirement goals.

• This is where your plan automatically raises your deposit each year by 1% up to a limit.  This helps you save more money automatically, will generally reflect higher deposits by all participants and as stated before, helps the plan size grow.  Additionally, none of these benefits are forced on an employee, and anyone that wants to decline them can do so. 

Roth 401k option – for some participants, this is the only easy way to do a Roth contribution.  For those in lower tax brackets it can add valuable deferral of retirement assets that later distribute tax free.

HSA plan – this is not actually part of the 401k plan, but if your employer has a high deductible health insurance plan, ask if this is an option.  This money defers for Health expenses and no Social Security, Medicare, Federal or State taxes are paid on these contributions.

In summary, get involved in your 401k.  If you are an employer, do your best to promote retirement and provide high quality benefits to help your employees save and grow.  It’s great for your employees and your firm.  If you are an employee, get involved in your 401k plan, take advantage of what is offered, and do your best to save.  Your retirement will depend on this commitment. If your plan does not have some of these benefits, ask your employer or plan representative if these benefits can be added.  If they hear from enough employees, they may just add these to your plan.

As we work toward the end of the year it's a great time to consider year end planning around gifting. 

Do you typically gift any money to charity? 

We generally give to charities because we have a desire to help others. These funds are used by various nonprofits to support many great programs for those in need.  We also realize that clients want to receive the best tax benefits possible for the gifts they make.  With the 2018 tax law changes enacted, there has been a nationwide reduction in giving due to a decrease in the tax benefit of these gifts for many donors.

So how can you still make donations to those organizations and get the best tax benefits as well? 

Due to a decrease in deductions available and the new Standard deduction amounts, many individuals and couples don’t have enough deductions to get above the standard deduction limits.  For 2019, the standard deduction for a single person is $12,200 and the standard deduction for a married couple is $24,400.

How can you best benefit with these new standard deduction amounts?  Let's say you want to make a $10,000 charitable gift each year for two years, but your other deductions don't give you enough to get above the $24,200 married standard deduction amount.  One way to increase your benefit would be to group your gifts.  Instead of making a 2019 donation, give your gift in early 2020 instead and make another similar gift at the end of 2020.  This way the charity still gets the same donation, but you get a better tax benefit.  See the below scenarios.

If you have reached age 70 ½, another way to give to charity is through Qualified Charitable Deductions (QCD) from your IRA.   Normally at age 70 ½, all individuals must begin making required minimum distributions (RMD) annually from their IRA accounts.  Using the benefit of QCD, you can make a direct donation to charity from your IRA account which also counts toward your required minimum distribution.  This allows you to use untaxed money to go to charity and helps reduce the amount of your RMD - especially helpful if you do not need the full amount.

These are two ways you might better benefit from donations made to charity. Both of these strategies require you to follow specific steps to ensure you are able to claim the benefit you desire.  We recommend working with your financial advisor to review these and other strategies that may benefit you. 

Most of us never think about the possibility of becoming disabled.  If you have had a friend or relative who has been through this or if you have had some prior personal experience in this area, you may be more familiar.

So, what does a disability look like?  It could be any illness or physical impairment that prevents you from working.  Most people have some sort of sick days and vacation available to them to cover short term events.  In those cases, the paychecks keep coming, you recover, and everything goes back to normal.

What if you had a stroke, a brain tumor, were in a severe accident (all things I've seen)?  After your sick leave and other paid time off is used up, what will happen next?  In most cases your employer will have to let you know that they can no longer pay you while you are recovering. 

What are your odds of a disabling injury or illness?

You probably insure your home, your car and other personal assets. But what about the income that provides those assets? You might be surprised to learn what poses the greatest threat to most people during the course of one year.

Consider these statistics:

1 out of 5 : That your auto will be damaged in an accident

1 out of 21 : That you will have a disabling accident

1 out of 96 : That you will have a fire

1 out of 114 : That you will die

                      Source: Field Guide 2001, National Safety Council, World Almanac

Did you know: During the course of your career, you are three and a half times more likely to be injured and need disability coverage then you are to die and need life insurance.

                       Source: Health Insurance Association of America, 2000

Did you know: Approximately 30% of all people ages 35 to 65 will suffer a disability for at least 90 days, and about one in seven can expect to become disabled for five years or more.

Conditions Causing Limitations                 Number in 1000's             Percent of All Conditions

• Heart Disease                                                         7,932                                     13%
• Deformities, orthopedic impairments               7,672                                     12.6%

              & disorders of the spine or back

• Osteoarthritis and allied disorder                       5,048                                     8.3%
• Orthopedic impairment of lower extremity      2,817                                     4.6%

• Asthma                                                                   2,592                                     4.2%                     
• Diabetes                                                                 2,569                                     4.2%
• Mental Disorders                                                  2,035                                     3%
• Cancer                                                                    1,342                                     2.2%

Source: Health Conditions and Impairments Causing Disability, US Department of Education. National Institute on Disability and Rehabilitation (NIDRR). Abstract No.16, Table 2, September, 1996

Disability Insurance can be a life saver in the event of a disability 

In some cases, employers offer employer paid disability insurance that can cover up to two thirds of your salary depending on the policy paid for by the employer.  This benefit is great as it is employer paid and added value to you.  The downside is that the amount received is fully taxable, so you may be netting much less pay than you’re accustomed to.

The other type of disability policy is one you purchase individually.  The downside is you pay the premium, but the upside is that benefits receive are tax free and the policy goes where ever you go and is not limited by the current job you have.  If you have an employer paid policy, in most cases these are not portable, and you would lose the policy if you change jobs.

To make policies more affordable, it’s common that an individual would have to wait at least 90 days before receiving benefits.  So there needs to be a plan for that gap in coverage.  Also, some policies will limit benefits to a specific number of years and then other more expensive plans will provide coverage through retirement.  Its important to look at all the options and utilize adequate insurance as part of your overall plan.

While waiting for coverage (if available), your first line of defense should be emergency reserves.  We recommend between 4 – 8 months of emergency reserves be saved where possible.  This money will give you a little flexibility to pay a few bills while you figure out what's next.

When deciding whether you need an individual policy or whether to use your employer offered plan, (not all employers offer plans) it’s a good idea to think about the likelihood that you will be with one employer long term or whether you are likely to change jobs more often.  Sometimes it's beyond your control.  Layoffs and shut downs are beyond your control and sometimes just bad luck.  Overall affordability will play into your decision as well.  We recognize there are a lot of priorities competing for your money.

This blog is not meant to provide an exhaustive education on disability insurance, but to provide a baseline recognition of the need for a plan for disability.  Insurance planning is part of an overall financial plan and it's important to make sure you and your family are properly taken care of.

If you have further questions and want to lean more about your options, we are here to help.

By now, many of you have completed your 2018 Tax Returns or have filed for an extension.  Were you surprised by any results of your tax return?  Did you get a larger than expected refund?  Did you owe more taxes than expected?

Now’s the time to make sure you are in good shape for 2019.

Here are a few things to review:

Review all your retirement plan options.

                If you are in a higher tax bracket, maximizing your retirement plan deferrals may be a benefit to minimize taxes.  Also, make sure you are taking full advantage of any free money from employer matching.

Do you have an HSA option?

                HSA plans can be used to pay for medical expenses but can also grow tax deferred to help pay for medical expenses in retirement, unlike an FSA account. After age 65, withdrawals do not have to be used solely for medical expenses. The money deposited into an HSA account also avoids Social Security & Medicare Taxes. It’s estimated that at retirement, individuals will likely have over $260,000 in out-of-pocket medical expenses and even higher for couples.

Are you going to turn 70 ½ this year?

                If you are turning 70 ½ and will be taking a Required Minimum Distribution, make sure you have planned for the additional income and that you are adjusting your tax deductions so that you don’t have a bad surprise at the end of 2019.

Self-employed?

                Make sure to coordinate with your Tax Advisor and Financial Planner.  You may have some extra deductions that are not available to someone that is not self-employed.

Education Plans.

                If you are helping to save for children's or grandchildren's education, make sure that you are taking advantage of the deductions and deferral opportunities available.  Make sure to review eligibility limits to determine if you are eligible for any Maryland tax benefits. 

Is your investment portfolio tax efficient?

                Depending on when you need income from your portfolio and your current tax bracket, be sure to review whether your portfolio is set up to best benefit you on an after-tax basis.  During the growth years of your portfolio, capital gains taxes are typically less expensive than income tax brackets.  Compare tax free bonds to taxable bonds to see which gives you the best after tax benefit.  Equity markets have been experiencing regular volatility lately.  This create opportunities for tax loss harvesting that may help to reduce taxes from your portfolio. 

These are just a few ideas to help you reduce your taxes and to be more tax efficient.  Financial planning involves a lot of moving parts.  Oxford Planning Group is here to help our clients simplify their finances and to help increase our clients’ long-term financial success.

Are you prepared for Retirement?

Years ago, it was not uncommon to estimate that at retirement you might need 75% to 80% of your current expenses to survive and enjoy your retirement years. However, this number can be misleading for a few reasons.

• There are many differences in households and their income needs.
• People are living longer today than our parents' generations.
• Health care costs have skyrocketed and could play a much higher part of future expenses than previously expected.

It's important to think about your own expected longevity so that you can properly and safely estimate how long your income will need to continue in retirement. For example, for those fortunate enough to have good health, traveling more frequently may be a desire and needs to be planned for accordingly.

Questions to Ask Yourself

• What are your current spending needs to pay your bills and have some fun?
• How will your spending needs change overtime?
  • Will your mortgage be paid off? 
  • Will you need the insurance coverages you may own at retirement?
  • Will your healthcare costs go up or down?
  • Maybe if you're no longer working, your dry-cleaning bills will go down.

Every household is different and unique. Regardless of your personal situation it’s important to sit down and review your current expenses and see what will apply when you are retired.  We generally calculate everything in today's dollars to make it easier to compare but know that inflation will make those actual numbers higher at retirement.

Let's say you determine that your retirement expenses will be ten percent less than your current expenses.  That’s a factor of 0.9 (or 90% of current expenses).

After you have a good handle on what your expenses may look like in the future, it’s important to look at all your income sources to determine if you have adequate income to support those expenses.  Income may include:

• Pensions, social security, retirement earnings from employment while retired
• Income from investments or any other source of income that applies to you

Hopefully when you review your income and then deduct your expected expenses, you’re left with a positive cash flow.  If not- then it’s time to look deeper:

• Run scenarios on how long your money should last
•  What expenses could be further reduced

You will want to be sure you are able to meet your retirement expenses and hopefully enjoy life and have some fun along the way.

Oxford Planning Group works with our clients to help determine these numbers.  It’s important to use conservative numbers in estimating portfolio returns, taxes and other estimates so that future predictions and estimates are based on realistic values.  As always, we are here to help.  We are "Focused on your Tomorrows".