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Building wealth has grown more accessible than ever, thanks to declining trading costs and fractional share investing. Many brokerage firms already offer zero-commission online and exchange-traded fund (ETF) trading, and now, behemoth financial firm Fidelity Investments has brought one more …

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","

Fidelity Investments, which administers $11.1 trillion in assets, filed documents with the Securities & Exchange Commission on January 19, 2022, to launch the first professionally-managed direct-indexing product for retail investors. Called Fidelity Managed FidFolios, Fidelity’s newest offering aims to combine direct indexing with fractional shares – opening a once capital-heavy investment strategy to any investor who can meet the $5,000 account minimum.

","

Investors often leverage direct indexing to reduce their tax burden or implement a specialized investment strategy, enabling them to save more for retirement and build wealth faster. A qualified financial advisor can help you determine if such strategies are an appropriate option for you.

","

FidFolios: Inside Fidelity’s New Product

","

Fidelity already manages $33 billion in direct-investing assets under its separately managed accounts (SMAs), which Fidelity says “seek index-like returns with enhanced after-tax” benefits. However, Fidelity’s new product is designed with the average person in mind: though the company’s existing direct-investing accounts require a $100,000 minimum to open, the new FidFolio requires 20 times less.

","

Direct indexing is not a new strategy. Since you cannot directly buy shares of an index, such as the S&P 500, many investors commonly attempt to replicate an index’s performance by buying mutual funds and ETFs to track it. An alternative to buying managed funds is to invest directly, buying the individual stocks of an index so your investments have similar characteristics. This is called direct indexing.

","

Why not just buy a fund that tracks it instead? Generally, investors build direct-indexed portfolios (both professionally managed and individually built) to maximize after-tax returns or customize for environmental or social causes.

","

Direct Investing for the Masses

","

In 2020, Fidelity joined other major investment firms to offer free stock trades and fractional investing, making it possible to build substantial portfolios for much less than it cost in the past. By lowering the requirements to open a direct-indexing account to $5,000, Fidelity is further revolutionizing the industry, opening managed accounts to the mass market.

","

Especially useful for investors who are just beginning to diversify their wealth-building strategies, these new accounts break down what might be very high-cost indexed stocks into smaller, fractional shares, thus spreading each stock’s cost among its fractions. Although fractional investments correlate to fractional gains, the ability to partake in a previously-limited investment strategy can help lower-net-worth individuals build wealth and save for retirement in a way that was not possible before.

","

What are the Benefits of Direct Indexing?

","

In fact, a key advantage of direct-indexing accounts is the ability to leverage certain tax strategies, such as tax-loss harvesting. If you own shares of a mutual fund or an ETF, you can only buy or sell one at a time. On the other hand, holding hundreds of individual stocks rather than shares of an index-tracking fund allows investors to harvest multiple losses from selling individual positions, thereby balancing those losses against other taxable gains. This can effectively lower a retail investor’s tax bracket if employed properly.

","

But one of the possible questions surrounding this new product is whether mom-and-pop investors would truly be interested in a direct-indexing account – especially given the 0.4% account fee. Expense ratios can vary widely, with passively-managed ETFs charging as low as 0.2% and actively-managed mutual funds going as high as 1.5%, and the FidFolio fee falls at the higher end of the passively-managed range.

","

Then again, these direct-indexing accounts may offer more than tax benefits. Fidelity’s new product has a fully digital interface, allowing customers to personalize an index to reflect investing preferences. Sustainable and thematic investment strategies could potentially appeal to broad demographics, with customization options that remove individual stocks or entire industries.

","

Fidelity Managed FidFolios are still only in the pilot phase, but the company will soon offer the product to all investors within the coming months.

","

Bottom Line

","$29","

Wealth-Building Tips

","$2a","

Photo credit: ©iStock.com/RomoloTavani, ©iStock.com/PeopleImages, ©iStock.com/arthon meekodong

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Long-term financial planning can be difficult, and while new automatic enrollment and contribution escalation make it easier than before to save for retirement, actually reaching retirement can be even more stressful. Switching from saving mode to the active retirement phase …

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","

Investment advisor Edelman Financial Engines have a new product aimed at helping savers transition through that major life event. Here’s how this new program could help.

","

A financial advisor could help you save for retirement and select investments that align with your financial goals. Find a qualified advisor today.

","

Edelman Launches New Retirement Income Program for 401(k) Participants

","

As the largest independent U.S. investment advisory, Edelman has recently launched a new program aimed at helping retirement plan participants through their transition into retirement. Called the Income Beyond Retirement (IBR) program, it combines portfolio management with financial advisor support to create flexible retirement income plans and strategies to support employees as they retire.

","

“Transitioning into retirement can be an anxious time of life, and our Income Beyond Retirement solution helps solve a complex challenge while simplifying what employees need to do each step of the way – and providing near-retirees with peace of mind,” said Edelman Senior Vice President Stephen Rubino.

","

IBR offers near-retirees aged 55 and up a Retirement Checkup with a financial advisor, and together they develop a tailored retirement plan. The approach is holistic and focuses on critical retirement decisions, such as when to claim Social Security benefits and evaluating income streams.

","

Program participants can also expect an integrated digital experience that allows near-retirees to assess their after-tax spending capability in multiple scenarios. IBR’s income-planning and scenario analysis can help participants navigate market uncertainty, sequence of returns, interest rates, inflation and even longevity uncertainty.

","

How Retirement Savers Can Take Advantage

","

","

The firm has already begun offering the program to multiple Fortune 500 companies, notably Boeing, Lenovo and Equifax. Currently IBR is live with its direct provider partners and will roll out to all plan sponsor partners soon.

","

However, given that Edelman’s Income Beyond Retirement program is currently available only to a select group of 401(k) plan participants, savers approaching retirement might not realize how such an integrated offering can benefit them. Boiled down to its essence, IBR is a one-stop shop for near-retirees, rolling together a financial planning service with ongoing retirement income optimization.

","

Even if your 401(k) sponsor doesn’t offer the program, you can reap similar advantages. While part of the program’s ongoing benefit stems from its suite of online resources, much of the planning starts with a financial consultation. Retirement savers can speak with an expert at any stage, but those nearing retirement can especially benefit from advisor analysis.

","

IBR aims to optimize retirement income, and near-retirees should focus on shifting their assets to an allocation that matches their risk tolerance and changing time horizon. Consultation with an expert can help pinpoint potential and current in-retirement income sources, integrate withdrawals from all household accounts, both tax-deferred and taxable, and take into account future plans. That said, savvy investors can certainly DIY their retirement plans, but complex situations may require additional help.

","

Bottom Line

","

Financial advisory firm Edelman Financial Engines has recently launched a new retirement income program aimed at helping 401(k) plan participants transition into retirement. A combination of digital experience and financial consultation, the Income Beyond Retirement program has already been rolled out to major partners and will continue to expand availability over the coming months. While not accessible to everyone, retirement savers can benefit from similarly consulting an expert as they approach retirement in order to optimize their retirement income and later-life planning.

","

Retirement Planning Tips

","$38","

Don’t miss out on news that could impact your finances. Get news and tips to make smarter financial decisions with SmartAsset’s semi-weekly email. It’s 100% free and you can unsubscribe at any time. Sign up today.

","

For important disclosures regarding SmartAsset, please click here.

","

Photo credit: ©iStock.com/PeopleImages, ©iStock.com/Marvin Samuel Tolentino Pineda, ©iStock.com/pixelfit

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Retirement plan participants broke record levels of savings in 2021, with higher levels of participation and contributions leading to an average 10% increase in account balances over course of the year. Yet, confronted with increasing inflation and uncontrolled healthcare costs, Americans are faced with growing concerns about retirement viability. Even changing jobs and pursuing a higher salary might not be enough, as a third of workers earning more than $250,000 still live paycheck to paycheck. But what if you could save $90,000 or more by avoiding one simple mistake?

","

A financial advisor could help you save for retirement and select investments that align with your financial goals. Find a qualified advisor today.

","

The True Cost of Forgotten 401(k) Accounts = $700,000 Over a Lifetime

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As many workers know, the U.S. retirement system is heavily reliant on employer-sponsored retirement plans. Employees contribute pre-tax dollars to their retirement, employers have the opportunity to match those contributions and savers see their funds grow over time. But Americans also tend to change jobs every couple of years, and since direct contribution plans like your 401(k) are tied to employers, oftentimes those savings accounts get left behind.

","

Retirement investment platform Capitalize recently released a white paper estimating exactly how much money gets left behind every year – and the impact is huge. As of May 2021, Capitalize says that there are 24.3 million forgotten 401(k) accounts in the U.S., reaching 25 million by the end of last year.

","

Each year employees changing their jobs leave behind another 2.8 million 401(k) retirement accounts, and with the average employee changing jobs 12 times over the course of a career, the amount of retirement savings really adds up. 401(k) plans hold roughly $6.7 trillion in total assets and about 20%, an eye-popping $1.35 trillion, is held in those forgotten accounts.

","

Many employees also underestimate the cost of keeping multiple 401(k) accounts. A 2018 survey found that 85% of employers pass on all investment management costs to their employees, and a 2020 survey from TD Bank found that 73% of plan participants had no idea how much they were paying in 401(k) fees.

","

Fees vary widely between plan administrators, from 0.4% to over 2% of total assets. In a low-fee individual retirement account (IRA), a participant paying 0.4% averages $220 in fees per year. In contrast, an account with a high fee of 1.5% equates to roughly four times that amount, or $825 a year in fees. Over 30 years, the difference amounts to $90,000 in total account balance.

","

Further compounding the issue is the lack of rebalancing in these forgotten accounts. Capitalize notes that a well-balanced retirement account can dramatically outperform a forgotten 401(k) by over nine times. The difference grows even more if a low-balance, forgotten 401(k) is forcefully rolled into a Safe Harbor IRA by administrators, where the money is usually put into a low-yield money market fund.

","

Over a lifetime, “a string of forgotten 401(k) accounts could cost an individual almost $700,000 in foregone retirement savings,” Capitalize concludes.

","

How Retirement Savers Can Take Advantage

","

Based on an analysis of data from the Department of Labor, 401(k) recordkeepers and Census Bureau, the average forgotten 401(k) holds $55,400. Capitalize calculates that a forgotten 401(k) held in a 1%-yield money market mutual fund with an average 0.85% in yearly fees will only grow to $57,616 over 30 years. The same account held in a stable value fund with an annual return of 2.2% would grow to $83,349 over the same time frame.

","

Notably, if the same amount of money is held in a well-allocated, low-fee IRA or 401(k) with an average 9% annual growth, that same investor could have $751,378 by age 65. Savings on fees alone would gain the average retirement saver $90,000, and the power of compounding returns could add up to a wildly significant amount over the investor’s lifetime.

","

Unfortunately there is no national database to locate old 401(k) accounts at this time. As a result, it’s important for workers to keep an eye on their retirement savings plans. One of the easiest ways to manage this is by rolling your 401(k) savings into your new employer’s 401(k) account if permitted. Another option is to roll your retirement savings into a low-fee IRA at a brokerage firm. By keeping your retirement funds all in the same place, you’ll be more likely to maintain your portfolio and maximize your potential for a solid retirement.

","

Bottom Line

","

According to retirement investment platform Capitalize, forgotten 401(k) accounts amount to over $1 trillion in missing retirement assets. Employees leave behind nearly 2.8 million retirement accounts every year as they change jobs, potentially robbing themselves of hundreds of thousands of dollars that could be used to ensure a smooth retirement. Instead of leaving your 401(k) funds behind, it’s important to consolidate your savings so you can better manage them. Consider rolling over your retirement savings to your new 401(k) plan or into a low-fee IRA to maximize your retirement potential.

","

Retirement Planning Tips

","$4f","

","

For important disclosures regarding SmartAsset, please click here.

","

Photo credit: ©iStock.com/tommaso79, ©iStock.com/LdF, ©iStock.com/evgenyatamanenko

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\n","featuredImage":{"id":"cG9zdDoxOTgzNDI=","databaseId":198342,"altText":"pro rata rule","date":"2023-05-09T22:03:12","fileSize":27551,"mimeType":"image/jpeg","modified":"2023-05-09T22:03:12","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2022/06/retirement-picture-id868995860.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-11-27","readable":"November 27, 2024","readableExtended":"November 27, 2024, 3:14pm ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMzY=","databaseId":136,"userId":136,"avatar":{"url":"https://secure.gravatar.com/avatar/0e89a6629b5049077641f2e8656dfec7163822262770b225cd49ccf1d7d2ff1e?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Jeff White is an Editor for SmartAsset. He's an expert in a variety of personal finance topics, such as investing, banking and retirement, and also holds the Certified Educator in Personal Finance (CEPF®) designation. Jeff has received his JD and MBA and has been featured in a number of publications, such as Investopedia, The Street, Forbes, Yahoo! Finance and more. He currently resides in Utah with his wife and five children, where they cheer for the Denver Broncos and make it to the water to sail whenever given the chance.","additionalMeta":{"expertise":"Financial Planning, Small Business, Retirement, Banking","__typename":"User_Additionalmeta"},"email":null,"firstName":"Jeff","fullName":"Jeff White, CEPF®","lastName":"White, CEPF®","name":"Jeff White, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":16,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"jwhite","__typename":"User"},"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/retirement/a-guide-to-the-pro-rata-rule-and-roth-iras","metaDesc":"The pro-rate rule dictates how withdrawals made from Roth IRAs are taxed. It focuses on the percentage of tax-free and taxable money when you withdraw.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":6,"title":"A Guide to the Pro-Rata Rule and Roth IRAs","__typename":"PostTypeSEO"},"slug":"a-guide-to-the-pro-rata-rule-and-roth-iras","status":"publish","title":"A Guide to the Pro-Rata Rule and Roth IRAs","postType":"post","subtitle":null,"uri":"/retirement/a-guide-to-the-pro-rata-rule-and-roth-iras","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjoxMzA=","databaseId":130,"userId":130,"avatar":"$51","description":null,"additionalMeta":"$52","email":null,"firstName":"Christine","fullName":"Christine Williams","lastName":"Williams","name":"Christine Williams","postCount":"$53","slug":"christine-williams","__typename":"User"},"editedBy":{"id":"dXNlcjoxMzY=","databaseId":136,"userId":136,"avatar":"$56","description":"Jeff White is an Editor for SmartAsset. He's an expert in a variety of personal finance topics, such as investing, banking and retirement, and also holds the Certified Educator in Personal Finance (CEPF®) designation. Jeff has received his JD and MBA and has been featured in a number of publications, such as Investopedia, The Street, Forbes, Yahoo! Finance and more. He currently resides in Utah with his wife and five children, where they cheer for the Denver Broncos and make it to the water to sail whenever given the chance.","additionalMeta":"$57","email":null,"firstName":"Jeff","fullName":"Jeff White, CEPF®","lastName":"White, CEPF®","name":"Jeff White, CEPF®","postCount":"$58","slug":"jeff-white-cepf","__typename":"User"},"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxOTQ3Ng==","children":"$5b","databaseId":19476,"categoryId":19476,"link":"https://smartasset.com/roth-and-traditional-iras/articles","name":"Roth & Traditional IRAs","postCount":153,"slug":"roth-and-traditional-iras","ancestors":"$5d","parent":"$60","__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

Roth Individual Retirement Accounts (IRAs) can prove a powerful tool in your retirement plan, so it may come as no surprise that Roth conversions are a popular method of bypassing Roth IRA income limits. However, many retirement savers are unaware that Roth conversions can trigger a complicated tax bill because of a little-known regulation called the Pro-Rata rule. Here’s a guide on how that works.

","

A financial advisor could help you plan for retirement and help you determine if a Roth conversion is the best option for you. Find an advisor today.

","

What Is a Roth IRA?

","

Roth IRAs are tax-leveraged retirement accounts that allow you to grow after-tax money without paying more taxes at retirement. As a result, they are subject to specific rules that govern tax-free withdrawals.

","

Because withdrawals can be tax- and penalty-free, Roth IRAs restrict contributions to earners who make less than a certain income. In 2022, the limit for married couples filing joint taxes is $214,000.

","

What Is a Backdoor Roth or Roth IRA Conversion?

","

High-earners who wish to benefit from tax-free withdrawals often turn to Roth conversions as a way to bypass the strict income limits on Roth contributions, especially because there is no limit to how much you can convert over to a Roth IRA. The idea is to take Traditional IRA funds, pay taxes on the amount you wish to transfer into a Roth account and then benefit from tax-free growth until retirement. This conversion is often called a Backdoor Roth contribution.

","

However, many retirement savers are unaware of the tax implications that such a process can trigger. Roth IRAs are funded using after-tax dollars, so many assume that moving tax-deferred money to a Roth IRA means you will pay taxes on the amount to be converted and that’s it. Unfortunately, that’s only true if you have never contributed non-deductible, or after-tax, money to a Traditional IRA.

","

If you have ever topped up your Traditional IRA outside of a 401(k) rollover, your conversion tax bill may be more complicated than you think.

","

What Is the Pro-Rata Rule?

","

","

The Pro-Rata Rule is used to determine how tax-deferred money should be taxed upon withdrawal. Since a Backdoor Roth conversion involves withdrawing Traditional IRA funds and transferring them to a Roth IRA, the Pro-Rata rule applies.

","

If you have never contributed after-tax money to a Traditional IRA, the total amount you convert to a Roth IRA will be taxed at your normal income tax rate. The process is relatively straightforward. However, if your Traditional IRA contains both pre-tax (deductible) and after-tax (non-deductible) contributions, the Pro-Rata rule dictates that your Roth conversion will be taxed proportionate to your pre- and post-tax percentages. To prevent people from skirting the Roth income limit and manipulating funds to lower their tax bill, you are not allowed to choose which funds you convert.

","

How Do You Calculate Your Taxable Percentage With the Pro-Rata Rule?

","

Let’s say you have $100,000 in a Traditional IRA, $7,000 of which came from non-deductible contributions. Because you’ve already paid taxes on $7,000, the IRS will not require you to pay taxes on that amount twice. Some retirement savers believe that, since they’ve already paid taxes on that amount, they can then convert $7,000 to a Roth IRA without paying taxes again. By law, though, you cannot dictate that your Roth conversion will only use those after-tax funds.

","

If you’d like to convert $7,000 to a Roth IRA, you will need to calculate how much of your IRA funds are actually taxable. The IRS requires you to include the value of all your non-Roth IRAs as the basis. The formula for tax purposes looks like this:

","

(non-deductible amount) / (total of all non-Roth IRA balances) = non-taxable percentage
(amount to be converted to Roth IRA) x (non-taxable percentage) = amount of after-tax funds converted to Roth IRA

","

In other words, 7% of the $100,000 is non-taxable since you already paid taxes on those $7,000. But if you want to convert $7,000 to a Roth IRA, in reality, the converted amount comes from 93% pre-tax funds and only 7% after-tax funds. You’ll have to pay taxes on 93%, or $6,510, of the converted amount. By the same token, that means $6,510 of the original non-deductible $7,000 is still in the Traditional IRA, and any future after-tax contributions to your non-Roth IRAs will further complicate your Pro-Rata percentage, making future withdrawals messier than you might assume.

","

How to Avoid the Pro Rata Rule

","

The pro rata rule is a tax principle that can complicate converting a traditional IRA to a Roth IRA. This rule requires you to consider all your IRA accounts as a single entity when calculating taxes owed on a conversion. Essentially, if you have both pre-tax and after-tax contributions in your IRAs, the pro rata rule mandates that any conversion must include a proportional amount of both. This can lead to unexpected tax liabilities if not properly managed.

","

One effective strategy to avoid the complications of the pro-rata rule is to maintain separate accounts for pre-tax and after-tax contributions. Keeping these funds in distinct accounts, you can more easily manage conversions and minimize tax implications. For instance, rolling over pre-tax funds into a 401(k) plan, if your employer allows it, can isolate your after-tax contributions in an IRA, simplifying the conversion process to a Roth IRA.

","

Given the complexities involved with the pro rata rule, consulting a financial advisor can be invaluable. A professional can provide personalized advice tailored to your financial situation, helping you navigate the intricacies of IRA conversions.

","

Bottom Line

","

","

Backdoor Roth conversions are subject to the Pro-Rata rule, which dictates how non-Roth IRA funds are taxed at withdrawal. Some retirement savers believe that they can contribute after-tax money to a Traditional IRA and then convert the funds to a Roth IRA as a way to avoid Roth IRA income limits and benefit from tax-free growth, but the Pro-Rata rule prevents them from doing so. Instead, the IRS requires taxpayers to calculate their taxable contribution percentage and pay a proportionate amount when withdrawing from tax-deferred accounts. This can complicate matters and may result in an unexpected tax bill for the unwary.

","

Retirement Planning Tips

","$62","

For important disclosures regarding SmartAsset, please click here.

","

Photo credit: ©iStock.com/Kameleon007, ©iStock.com/Khanchit Khirisutchalual, ©iStock.com/kupicoo

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Investors interested in non-retirement investment accounts have likely heard of or already have a brokerage account. However, in recent years, many brokerage firms have also begun offering cash management accounts to their clients. Although offered by the same financial institution, …

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","

A financial advisor could help you plan for retirement and help you select investments that align with your financial goals. Find a qualified advisor today.

","

What Is a Brokerage Account?

","

A brokerage account is a taxable investment account that allows you to buy and sell assets, such as stocks, bonds, mutual funds, and exchange-traded funds. No matter your end goal, you can move money in and out of the account as needed, earning money (or losing it) through investment activities.

","

You can open a brokerage account with any brokerage firm that is licensed to buy and sell securities. Large, well-known firms include places like Fidelity Investments, Charles Schwab, E*Trade and TD Ameritrade, and different accounts you could consider are self-directed brokerage accounts, robo-advisory accounts and managed accounts.

","

What Is a Cash Management Account?

","$6b","

CMAs can either be held at partner banks and linked to your brokerage accounts or they can be held directly by the brokerage firm.

","

If you have a Fidelity investment account, for example, you can open a Fidelity CMA that is held and insured by a partner bank, have a debit card in order to spend the funds and have access to FDIC-insured, brokered certificates of deposit (CDs) so your money can earn interest.

","

Other brokerage firms like E*Trade offer cash management services through a cash management program, where the firm holds your uninvested cash and offers you 0.1% interest on the balance, or a cash sweep program, where the firm “sweeps” brokerage cash balances into interest-bearing partner bank accounts. In both cases, the funds are insured and the account holder has access to bonds and CDs while being able to spend the money as if it were held in a separate checking account.

","

However, the benefit to having a CMA and not a separate checking account has to do with the availability of your money. If you hold cash at a bank in a checking account, you will have to transfer the funds to the brokerage account prior to buying any securities. Then you would need to sell your securities, wait for the sale to clear and then transfer the funds back to your checking account in order to spend them. With a CMA, the funds are accessible at any time for investing but offer investors the flexibility to spend the cash balance when desired.

","

What Are the Differences Between a Brokerage and Cash Management Account?

","

Brokerage accounts and cash management accounts may be offered by the same institution, but they have several key differences.

","

Brokerage accounts are not FDIC insured, since they are for buying and selling securities and not for deposits. Instead, they are SIPC insured. Basically, if a brokerage firm has to liquidate its assets due to financial troubles, SIPC works to restore to customers the securities and cash that are in their accounts and does not protect the value of those assets. Brokerage accounts earn value primarily through appreciation of investment assets, with a potential for high earnings and losses.

","

CMAs, on the other hand, are essentially regular bank accounts. They are FDIC insured, which protects the account’s value up to a certain amount in case the bank fails. CMAs earn value through interest or insurable investments like bonds or CDs, and many times the account comes with a debit card and checks so the holder can spend the funds as needed.

","

The Bottom Line

","

Brokerage accounts and cash management accounts are often offered by the same brokerage firm, but they function differently. Brokerage accounts are solely used for investing purposes, and while the account value is not insured, the custody of securities is usually protected up to a certain limit. Cash management accounts are similar to regular checking accounts, with similar features available to account holders. But by offering such an account at a brokerage firm, investors can access their funds easily and without delay.

","

Tips for Building Wealth

","$6c","

","

For important disclosures regarding SmartAsset, please click here.

","

Photo credit: ©iStock.com/grinvalds, ©iStock.com/Prostock-Studio, ©iStock.com/William_Potter

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One of the most popular and enduring government programs in U.S. history, Social Security has funded the lives of senior citizens for more than 80 years. As a result, today the senior poverty rate clocks in at a mere 9%. Yet research indicates that the trust funds providing Social Security benefits will deplete their reserves by 2034. In an effort to extend the program’s solvency, Democrats have recently introduced a new bill aiming to expand Social Security – at a cost.

","

A financial advisor could help you save for retirement and select investments that align with your financial goals. Find a qualified advisor today.

","

Democrats Introduce New Bill to Fund Social Security for 75 More Years

","

Senator Bernie Sanders (I-VT), along with more than 15 Democratic co-sponsors, recently introduced the Social Security Expansion Act to the Senate floor. Aiming to enhance benefits and ensure the long-term solvency of the Social Security program, the bill proposes an increase in taxes to further support the aging U.S. population.

","$7a","

What Retirement Savers Need to Know

","

Important to note, however, is how the legislation would fund this expansion: increasing taxes.

","

The Social Security program limits the amount of earnings subject to taxation in a given year, currently set at a taxable maximum of $147,000 in 2022. The tax rate for wages is set at 6.2%, or 12.4% split evenly between employers and employees. The Social Security Expansion Act would amend this payroll tax and subject all income over $250,000 to the tax. The bill sponsors estimate that 93% of American households would see no increase, but high-earners could see a substantial impact in their net pay.

","

Furthermore the new bill would target the self-employed, business owners and investors. The self-employed would see the same tax increase as the salaried, with a new payroll tax on those earning more than $250,000. Net investment income taxes would jump from 3.8% to 16.4% in order to include additional taxes in lieu of Social Security and Medicare payroll taxes. Business owners, too, would be hit with a new 12.4% Social Security tax on business income not already covered by payroll taxes.

","

Bottom Line

","

A new bill aiming to expand the quickly-depleting Social Security fund could potentially increase taxes for high-earners. Taxable Social Security earnings are currently capped at $147,000 for the year, but this new legislation could tap individuals earning more than $250,000 and subject them to a further 6.2% in payroll taxes. The bill additionally proposes increased taxes on investors and businesses. While these changes could support millions more elderly Americans in their retirement, the impact on high-earners is significant.

","

Wealth-Building Tips

","$7b","

","

For important disclosures regarding SmartAsset, please click here.

","

Photo credit: ©iStock.com/mphillips007, ©iStock.com/Eoneren, ©iStock.com/Nicola Katie

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Regularly meeting with a financial advisor can help you maximize your money and keep on top of your long-term financial goals. Financial advisors can help you save more, reduce your debt and invest more wisely. Experts recommend speaking with your advisor at least once a year, but these meetings are only helpful if you review the right topics. Here are 10 key questions to ask your financial advisor during an annual review.

","

A financial advisor could help you plan for retirement and help you select investments that align with your financial goals. Find a qualified advisor today.

","

1. How Am I Doing Compared to My Financial Goals?

","

This is perhaps the most important question to ask your financial advisor. It’s important to understand how you’re progressing towards your long-term financial goals, whether that’s saving for retirement, a down payment on a house, or a child’s education. Your advisor should be able to provide you with a clear picture of your progress and any adjustments you need to make to stay on track.

","

2. How Has My Portfolio Performed?

","

Your investment portfolio is a critical component of your financial plan. It’s important to understand how your investments have performed over the past year and whether they’re aligned with your risk tolerance and long-term financial goals. Your advisor should be able to provide you with a performance review of your investments and recommendations for any adjustments that may be necessary.

","

3. What Fees Am I Paying and What Am I Getting in Return?

","

It’s important to understand the fees you’re paying for financial advice and services. Your advisor should be transparent about the fees you’re paying and what you’re getting in return. If you’re not sure what you’re paying or what you’re getting in return, don’t be afraid to ask.

","

4. How Has My Net Worth Changed?

","

Vital to understanding your financial picture is updating yourself on the current value of your accounts. This includes the values on all your accounts, savings rates, and current monthly contributions to retirement and investment accounts. This is where you and your advisor will discuss your portfolio’s performance over the past year and how that compares to your expectations.

","

5. What Are My Total Expenditures?

","

Whether saving for retirement or already retired, understanding how much you spend is important. That amount determines your savings rate, portfolio allocation and insurance recommendations.

","

6. How Is My Cash Flow?

","

Related to your expenses is how much cash you’re using or not every month. If you are using less cash than expected, for instance, you may be able to increase your contributions or savings instead of letting your money languish in a regular checking account. On the other hand, if your emergency savings account has dipped below a set dollar amount, you may need to replenish it.

","

7. Have You Taken Into Account Changes in My Health?

","

It may seem unusual, but discussing your health is important for your finances. As you age, healthcare costs will take up a larger portion of your cash needs, so your advisor will need to factor in any changes to your retirement plan.

","

8. How Have Medicare Costs Changed?

","

Many Americans are unaware that Medicare is not free and does not cover all healthcare costs in retirement. As a result, your financial advisor should work with you to estimate future costs based on your health expectations and discuss ideas on how you’ll pay for your portion of uninsured medical costs.

","

9. Will I Have Enough Money in Retirement to Last?

","

","

As gruesome as it may seem, part of a healthy retirement plan is not only calculating how much money you’ll need to retire but how long you’ll be able to live on those funds. You need to balance how much money you’ll have saved with how much you expect to spend every month. If you’re healthy and expect to live a long time, you may need more in your savings to enjoy a comfortable retirement.

","

10. Do All My Accounts Have Updated Beneficiaries?

","

Your financial advisor should have a systematic approach to checking the beneficiaries for all your qualified accounts, life insurance and annuities. New laws and regulations may change how IRAs and funds can be inherited, and that may affect any provisions you have in place for your loved ones.

","

11. Has My Wealth Transfer Strategy Changed?

","

As part of your annual checkup, you should make sure that changes in your net worth and business have not triggered changes in your wealth transfer strategy. By ensuring that you have a plan set in place, you can rest assured knowing your estate will be handled if you become ill or pass away.

","

12. Has My Tax Plan Changed as a Result of Major Life Changes?

","

You should always feel free to reach out to your financial advisor in the event of a major life change, but if you haven’t, make sure to mention it at your annual review. Your advisor will need to take into account any changes in annual income, which may result in changes to your tax planning. By reviewing these changes, your advisor will be able to leverage your situation to its best advantage.

","

13. What Should I Focus on This Upcoming Year?

","

After reviewing your financial situation, your financial advisor will be able to gauge your progress towards your long-term financial goals. You may need to further diversify your investments or realign your portfolio with changes in your current objectives. At the end, you should leave your meeting with a clear action plan for the next 12 months.

","

The Bottom Line

","

You should meet with your financial advisor at least once a year for a review of your finances. During your annual review you should ask important questions that can help direct the conversation and maximize your planning. Make sure to discuss your portfolio’s performance, your cash flow and your progress toward your financial goals.

","

Tips for Building Wealth

","$8c","

","

For important disclosures regarding SmartAsset, please click here.

","

Photo credit: ©iStock.com/Luke Chan, ©iStock.com/mapodile, ©iStock.com/PeopleImages

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The key to gaining financial security is to set financial goals and keep re-evaluating your progress. Without working toward anything specific, you’re likely to spend more than you should without realizing it, leaving you vulnerable to life’s unexpected moments. Financial planning doesn’t have to be difficult. You can speak with a financial advisor, who is best equipped to help you on your way to financial success, or you can educate yourself, sit down and write up a list. Follow this financial planning checklist and keep track of your financial planning goals for a firmer financial future.

","

Annual Planning Checklist

","

An annual financial plan is a way to re-evaluate your financial goals. While you may have already made a complete financial plan in the past, financial experts recommend annual check-ins to evaluate how your situation has changed over the preceding year. You’ll take your long-term financial goals into consideration and check off your progress. Here are the things you should consider evaluating.

","

1. Take a Personal Inventory of Your Finances

","

An annual personal inventory gives you a snapshot of your financial status, which makes it easy for you to compare your progress from any given year. If you have an inventory from last year–great news! Update it for this year, and you can easily compare across categories. If it’s your first time, this is how you make one:

","

Write a list of your assets and the amounts. That includes how much you get paid, savings, your retirement account values, any real estate equity, etc.
List your debts. This is where you add up your mortgage, your car loan, your student loans and credit card balances.
List your credit utilization ratio. This is the amount of debt you carry versus your total credit limit, and it lets you know exactly how much you rely on credit to get by.
Take a look at your credit report and credit score.

","

Evaluate the shape of your finances by comparing your financial snapshot with your financial plan. If your goal is to pay off your debt, have you made any progress? If you wanted to save more for retirement, did you add to your assets column?

","

2. Evaluate Major Life Changes

","

As part of your annual financial checkup, you’ll need to consider how your life has changed over the past year and how you think it may be in the next. Do you anticipate any big changes? Are you considering changing jobs? Will you be getting married? Moving?

","

If you have a family, have you already started thinking about saving for your college education? If you have elderly parents, have you considered long-term care insurance in case one or both become incapacitated and need assistance? Evaluating these life changes may result in a shifting of your financial goals.

","

3. Adjust Your Savings Plan for Retirement

","

","

Saving for retirement requires its own section since it’s both a larger and longer-term goal than others. Whether or not you’ve already begun saving for retirement, you should evaluate what tax treatment is best for you as time passes.

","

Depending on your marginal tax rate, is a traditional or Roth retirement account appropriate for you?
Is now a good time to convert your traditional IRA to a Roth IRA?
If you have leftover 401(k) funds from a past employer, now is a good time to roll over those funds into your current 401(k) or a corresponding IRA.
Evaluate if you’ve maximized your contributions for the year and adjust your contributions accordingly.

","

4. Evaluate Your Investment Portfolio

","

In addition to checking your retirement accounts, you’ll also need to conduct your annual investment portfolio check. Financial experts recommend reviewing your portfolio asset allocation at least once a year, buying and selling assets to realign your portfolio with your desired allocation profile. If your financial situation and goals have changed, now is also the time to rebalance your portfolio and ensure your investments follow your desired diversification strategy.

","

One point to take into consideration is how your reallocation or rebalancing will affect your taxes. When you buy and sell assets, consider how employing tax strategies like tax-loss harvesting may help you reduce your tax burden and save more over the long term.

","

5. Review Your Insurance Coverage

","

Since you’re checking your finances, don’t forget to review your insurance coverages. Homeowner’s or renter’s insurance should be reevaluated yearly to make sure that the coverages will be enough to pay for any insured damage in the event you need it.

","

Make sure that you’re covered in case of an accident or disability, as these types of major changes can also heavily affect your future financial picture. Consider changing your health insurance or contributing to a health savings account so that you can rest assured that you’ll be able to cover medical costs if necessary.

","

6. Update Your Estate Plan and Associated Documents

","

Lastly, you’ll need to evaluate if you’ve prepared an estate plan in case of your passing. If you have, make sure it’s updated to reflect your intentions and consider signing a durable power of attorney as part of your estate plans.

","

If you haven’t, consider speaking with an expert to plan how to transition your estate. It may be beneficial to transfer some to your heirs ahead of time, both to ensure your intentions are properly realized and to benefit from certain tax strategies.

","

Bottom Line

","

Reviewing your financial plan annually is a valuable tool for ensuring you meet your goals. You’ll be able to measure yourself how much progress you’re making, which can help keep you moving forward. A financial plan can give you peace of mind about your finances in the future, so don’t wait–go through your financial planning checklist today.

","

Tips for Building Wealth

","$9a","

Photo credit: ©iStock.com/marchmeena29, ©iStock.com/marekuliasz, ©iStock.com/Eva-Katalin

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\n","featuredImage":{"id":"cG9zdDoxOTgzNjc=","databaseId":198367,"altText":"SmartAsset: When Should You Consider a Roth Conversion? Vanguard Has an Answer.","date":"2023-05-09T22:03:44","fileSize":28798,"mimeType":"image/jpeg","modified":"2023-05-09T22:03:44","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2022/06/words-ira-401k-roth-print-on-white-pieces-of-paper-money-dollars-and-picture-id1213559687-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2023-5-27","readable":"May 27, 2023","readableExtended":"May 27, 2023, 10:02pm ET"},"multipleBylinesByRole":{"editedBy":null,"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/retirement/when-should-you-consider-a-roth-conversion-vanguard-has-an-answer","metaDesc":"Deciding if you should do a Roth conversion can be challenging, but Vanguard has released a new way to determine if a conversion is right for you.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":5,"title":"When Should You Consider a Roth Conversion? Vanguard Has an Answer. - SmartAsset","__typename":"PostTypeSEO"},"slug":"when-should-you-consider-a-roth-conversion-vanguard-has-an-answer","status":"publish","title":"When Should You Consider a Roth Conversion? Vanguard Has an Answer","postType":"post","subtitle":null,"uri":"/retirement/when-should-you-consider-a-roth-conversion-vanguard-has-an-answer","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjoxMzA=","databaseId":130,"userId":130,"avatar":"$9c","description":null,"additionalMeta":"$9d","email":null,"firstName":"Christine","fullName":"Christine Williams","lastName":"Williams","name":"Christine Williams","postCount":"$9e","slug":"christine-williams","__typename":"User"},"editedBy":null,"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxOTQ3Ng==","children":"$a1","databaseId":19476,"categoryId":19476,"link":"https://smartasset.com/roth-and-traditional-iras/articles","name":"Roth & Traditional IRAs","postCount":153,"slug":"roth-and-traditional-iras","ancestors":"$a3","parent":"$a6","__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

Deciding between a traditional individual retirement account (IRA) and a Roth IRA can be difficult. Choosing when or if you should convert your IRA funds to a Roth account can be even more daunting. Experts commonly recommend that investors compare their current and future marginal tax rates to decide, but future tax rates can be highly uncertain and many investors are left wondering whether they made the right choice. Now, investment giant Vanguard has a more precise answer. Here’s how calculating your break-even point can pinpoint whether a Roth conversion makes sense for you.

","

A financial advisor could help you save for retirement and select investments that align with your financial goals. Find a qualified advisor today.

","

Vanguard Finds the Ideal Tipping Point for a Roth Conversion

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Typically the rule of thumb is that Roth IRAs are most beneficial if an investor expects to be in a higher tax bracket upon retirement, since Roth contributions are taxed at the current rate and distributions are tax free. As such, Vanguard experts say that “assessing the current tax rate and expected future tax rate is a good first step” in determining whether you should convert your retirement savings to a Roth account.

","

However, sometimes a Roth conversion can be beneficial even if your future tax rate declines instead of increasing. So rather than a straightforward tax rate comparison, the firm recommends conducting a dynamic Break-Even Tax Rate (BETR) analysis to determine if a conversion is right for you. Calculating a BETR offers investors an approach that simplifies the decision-making process.

","

“If your future tax rate is at the BETR, conversion wouldn’t make a difference,” Vanguard analysts explain. “Simply put, the BETR shows how far your tax rate would have to fall to make conversion undesirable.”

","

If an investor’s future tax rate is higher than a calculated BETR, generally a Roth conversion would make sense financially. Even if an investor’s future marginal tax rate is lower than it is currently, certain scenarios can lower a BETR and make a conversion far more attractive than it would otherwise seem in a straightforward rate comparison. This could potentially save an investor thousands of dollars.

","

For instance, if you’re able to pay Roth conversion taxes from a taxable account, such as your standard brokerage account, the full value of your IRA can move to the Roth account. By not paying the conversion taxes from the IRA but with other portfolio funds, you can lower your BETR substantially. Vanguard calculates that, if an investor pays a current 35% marginal tax rate and expects to pay the same in retirement, converting to a Roth and paying taxes from a tax-efficient portfolio could lower the BETR to 29.6%. If taxes were paid from a tax-inefficient portfolio, where the investor has to pay annual taxes on investment returns, the BETR falls even further to 23.5%. As a result, a Roth conversion suddenly becomes rather appealing.

","

Another scenario where a BETR analysis helps is when an investor’s traditional IRA includes a non-taxable basis. When traditional IRAs are converted to Roth IRAs, only the pre-tax balance is subject to income tax. Vanguard research indicates that the greater the non-taxable basis, the lower the BETR, and the more advantageous a Roth conversion becomes. Similarly, when an investor opens a backdoor Roth and intends to contribute more to it over time, the BETR drops and makes a conversion even more beneficial.

","

How Retirement Savers Can Take Advantage

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At its most basic, a BETR is the future tax rate at which the after-tax withdrawal value is equal in both a no-conversion and conversion scenario.

","

As an example, let’s say you’re currently a high-earner in the 35% marginal tax bracket and considering a $100,000 Roth conversion. You have 20 years left to retirement, at which point you expect to be in the 24% tax bracket.

","

First you calculate the no-conversion potential. You assume your $100,000 can triple over those 20 years if left in a traditional IRA, reaching $300,000. After subtracting 24% in taxes, the final after-tax withdrawal value of your funds will be $228,000.

","

Then you calculate the Roth conversion potential. Again, that same $100,000 can triple over 20 years. However, now you take the $35,000 that you pay in Roth conversion taxes (from your tax-inefficient portfolio) and estimate that, accounting for annual taxes on interest and capital gains, that $35,000 would have doubled over that same time period. As a result, the final after-tax withdrawal value after a Roth conversion would be $230,000.

","

Plugging those values into the Vanguard formula gives you a BETR of 23.3%: $300,000 * (1 – BETR) = $230,000.

","

In a straightforward rate comparison, you would not do a Roth conversion, since your current marginal tax rate of 35% is higher than your future tax rate of 24%. However, the BETR method indicates that it may actually be a good idea since the future rate of 24% is still higher than the calculated BETR of 23.3%. Of course, if you paid your Roth conversion taxes with the IRA funds and not from a separate brokerage account, the BETR would change and, in that scenario, a conversion may no longer make sense.

","

Bottom Line

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Vanguard’s BETR analysis is a more precise method for determining whether an investor should consider a Roth conversion. Since it’s a dynamic number, affected by different financial decisions, calculating a BETR number allows investors to capture potential tax savings that a straightforward, traditional tax rate comparison might miss. Depending on the individual’s circumstances, it may be helpful to speak with an expert who can help you navigate the tax complexities of a Roth conversion, but tackling a BETR analysis yourself may be a solid place to start the process.

","

Retirement Planning Tips

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For important disclosures regarding SmartAsset, please click here.

","

Photo credit: ©iStock.com/Lusyaya, ©iStock.com/katleho Seisa, ©iStock.com/LaylaBird

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\n","featuredImage":{"id":"cG9zdDoxNTk2NjI=","databaseId":159662,"altText":"A couple meeting with an advice-only financial advisor.","date":"2022-04-08T10:37:14","fileSize":32615,"mimeType":"image/jpeg","modified":"2024-11-22T17:57:29","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2022/04/financial-advisor-with-couple-explaining-options-picture-id1334729682.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-11-22","readable":"November 22, 2024","readableExtended":"November 22, 2024, 5:58pm ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/ec94ef289aaaff921cceaadb51aba5e4ac1e9d0ca6d0ca8350c24e727726c750?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":{"expertise":"Financial Planning, Retirement Planning, Investment Planning, Tax Planning","__typename":"User_Additionalmeta"},"email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":38,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"aconde","__typename":"User"},"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/financial-advisor/advice-only-financial-advisor-services-and-fees","metaDesc":"Advice-only financial advisors provide financial planning advice but not investment management. Here are their services and fees.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":5,"title":"Advice-Only Financial Advisor: Services and Fees","__typename":"PostTypeSEO"},"slug":"advice-only-financial-advisor-services-and-fees","status":"publish","title":"Advice-Only Financial Advisor: Services and Fees","postType":"post","subtitle":null,"uri":"/financial-advisor/advice-only-financial-advisor-services-and-fees","tags":{"nodes":[{"name":"news-sitemap","__typename":"Tag"}],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjoxMzA=","databaseId":130,"userId":130,"avatar":"$aa","description":null,"additionalMeta":"$ab","email":null,"firstName":"Christine","fullName":"Christine Williams","lastName":"Williams","name":"Christine Williams","postCount":"$ac","slug":"christine-williams","__typename":"User"},"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":"$af","description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":"$b0","email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":"$b1","slug":"arturo-conde-cepf","__typename":"User"},"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxOTQ2Nw==","children":"$b4","databaseId":19467,"categoryId":19467,"link":"https://smartasset.com/advisor-fees-and-costs/articles","name":"Advisor Fees & Costs","postCount":41,"slug":"advisor-fees-and-costs","ancestors":"$b6","parent":"$b9","__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

Financial advisors are people and services that help you create a plan for meeting your financial goals and manage it along the way. With the help of a financial advisor, you could reduce your debt, save more and invest in ways that might not have been possible if you did it on your own. However, there are several types of financial advisors and they all offer differing levels of support. Here’s what an advice-only financial advisor can do and how much one may cost.

","

A financial advisor could help you plan for retirement and help you select investments that align with your financial goals. Find an advice-only advisor today.

","

What Is an Advice-Only Financial Advisor?

","

Financial advisors offer many levels of financial support to potential clients, and many times the degree of support is related to the manner in which they are paid. Advice-only advisors form 0.1% of financial advisors, and unlike other financial advisors, they do not receive commissions or manage your assets for you.

","

Other financial-advice models that financial advisors may follow include commission, commission and fee (often called fee-based), and fee-only models. Fee-only and advice-only advisors are strongly preferred since they are commonly certified fiduciaries, professionals who put the client’s financial best interests first.

","

An advice-only model is also known as fee-for-service financial planning. Advice-only advisors are similar to fee-only advisors, in that they aim to minimize potential conflicts of interest. Under a commission model, a financial advisor may seem like a sales agent, pushing products that could pay him or her a higher commission but may not be the best fit for a client’s objectives. Under a fee-only model, however, a financial advisor may prioritize asset management rather than advice, since fee-only advisors usually charge a set percentage of assets managed as their payment. Advice-only is just that–advice for a price.

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What Services Do Advice-Only Financial Advisors Provide?

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Advice-only financial advisors help everyday people plan their finances. Some financial advisors clients aren’t interested in having an investment advisor manage their assets but would like professional guidance on actions that they can implement on their own. That’s where advice-only advisors come in.

","

Because advice-only advisors are not incentivized to recommend products or services, this type of financial advisor is able to create a truly customized plan for their clients. They’re able to explain why a particular mix of products or services can help the client achieve his or her financial goals faster, and they can do so without bias.

","

Some advice-only advisors specialize in certain service sets, so be sure to ask if you speak to one. Common services and advice offered include:

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Budgeting/cash flow coaching
Creating financial routines
Salaried vs commissioned employees’ needs
Unique types of compensation, such as restricted stock units or options
Planning to buy a house, start a family, or pay for tuition
Defined benefit pensions and retirement plans
Divorce or separation
Low-cost investment planning
Tax and benefit planning
Different types of investing strategies
Dual citizens
Estate planning

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How Much Do Advice-Only Financial Advisors Cost?

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Advice-only financial advisors charge on a flat-fee basis. A 2018 Kitces Research study indicates that 27.5% of financial advisors charge flat fees, with the average hourly fee being $220. Most advice-only financial advisors charge a median standalone fee of $2,400 for a full financial plan but this ranges depending on the complexity of the client’s situation.

","

For a comparison, a 2023 survey from Advisory HQ says that flat-rate financial planner fees began at $7,500 for portfolios under $500,000 and went up to $55,000 for portfolios over $7.5 million. The average wealth management fee for a portfolio worth $50,000 was 1.18% of assets under management (AUM) or $590, while a portfolio worth $1 million had an average fee of 1.02% or $10,200.

","

Some advice-only advisors also offer a retainer contract, charging ongoing fees for an ongoing financial planning relationship rather than a one-time fee transaction. According to Advisory HQ, retainer fees for financial planners generally fell between $6,000 and $11,000 annually in 2023, based on the advisor, the location and the complexity of the financial service.

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Bottom Line

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Advice-only financial advisors are fee-for-service planners who help everyday people plan their finances for a financially-stronger future. As a result, they can charge by the hour for financial advice or by project. Depending on the degree of support you may need, your price may range accordingly. Always be sure to ask what services your potential advisor offers, since some advice-only financial advisors specialize in specific areas that may be more appropriate for your situation.

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Tips for Building Wealth

","$bb","

Photo credit: ©iStock.com/courtneyk, ©iStock.com/Cn0ra, ©iStock.com/South_agency

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Sometimes it feels like you’re spinning your wheels and every paycheck is gone before you’ve spent it. You might wonder why you try so hard to save but that number never seems to grow. The key to reaching financial security …

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Sometimes it feels like you’re spinning your wheels and every paycheck is gone before you’ve spent it. You might wonder why you try so hard to save but that number never seems to grow.

","

The key to reaching financial security is setting financial goals. Without working toward anything specific, you’re likely to spend more than you should without realizing. When it comes time to retire, you’ll wonder how in the world you’ll survive. Or maybe you’ll think you can’t ever actually retire. You might get stuck in a vicious cycle of debt upon debt, leaving you vulnerable to life’s unexpected moments.

","

Financial planning doesn’t have to be difficult. You can speak with a financial advisor, who is best equipped to help you on your way to financial success, or you can educate yourself, sit down and write up a list. Follow this guide and take the opportunity today to set yourself on firmer financial footing.

","

Step One: Break It Down

","

Don’t start off thinking of a far-off retirement and the tens of thousands you might need to buy a house. Break down your financial goals into smaller, manageable mini-steps. Setting shorter-term goals can help you gain confidence and internalize the foundational knowledge you’ll need to achieve your larger goals over time.

","

Think about what you want and how to achieve it. Attach a reason to your goal so you can remind yourself when it seems insurmountable. Do you want to build up savings in case you lose your job? Aim to set aside $500 or even $1,000 first. Do you want to pay off debt and save for your dream wedding? Start by aiming to pay off more than your minimum monthly payment.

","

Maybe you have many financial goals and you can’t determine which one has priority for you. That’s fine. Many people will want to pay off credit card debt and save for a house. Or maybe you want to buy a house and save for your child’s college education. If you have large goals, you still need to break them up into manageable milestones.

","

Step Two: Establish a Budget

","

Establishing a budget is a priority when it comes to setting and achieving your financial goals. Start by assessing your income, income tax situation, expenses and net worth.

","

One popular budgeting method is the 50-30-20 approach, which means allocating 50% of your take-home pay towards necessities, 30% towards wants and 20% towards savings and paying off debt. You can also use a budgeting app or program that will combine information from all your accounts so you can label each expense by category.

","

You may discover that all those lattes really do add up to hundreds of dollars, or perhaps you spend far too much on clothes and shoes. Maybe, in fact, you’re a little guilty of buying too many snacks at the grocery store, and you could actually save by trimming down your food expenses by something as little as $50 a month. Every amount saved can be allocated instead to savings or debt reduction.

","

Step Three: Set Up an Emergency Fund

","$c4","

Financial experts recommend saving enough to cover three to six months’ worth of expenses. This might seem like a lot, but did you know that nearly 40% of Americans don’t have enough cash to cover a $400 unexpected expense? If you can aim for at least $500 in emergency savings, you’ll already be better prepared than most.

","

Step Four: Pay Off Debt

","

Since having an emergency fund is such a priority, you might think debt repayment isn’t a big deal. But paying just the minimum for credit card debt and school loans means your interest will keep accruing and your debt balance may never decrease.

","

Focus on paying down high-interest debt first, like credit card debt. Then you can move on to lower-rate debt like student loans and your mortgage. If you are trying to save and repay debt simultaneously, try to allocate 60% to savings and 40% to debt repayment.

","

Step Five: Set Aside Some Money for Retirement

","

Again, saving enough for unexpected expenses and paying off debt will likely seem more important than saving for a far-off retirement. However, the longer you have to accumulate retirement savings, the more you’ll gain in interest over time. As part of your budget, aim to take advantage of employer-sponsored retirement plans and enroll in a 401(k).

","

Experts generally recommend saving from 10-15% of your income for retirement. If that seems like too much out of your paycheck, you’re not alone. Employers will often match up to a certain percentage for 401(k) contributions though, so try to contribute at least that amount. This can range from 3% up to even 8%. So if you contribute 6% of your income, and your employer matches that amount dollar for dollar, you’ll actually be saving 12% for retirement. And half of that was essentially free!

","

Ask Yourself If Your Goals Are SMART

","

The key when setting financial goals is to be SMART: Specific, Measurable, Attainable, Relevant and Time-bound. You’ve narrowed down your big goals to smaller, manageable steps, and you’ve budgeted well for achieving those goals. Giving yourself a limited time in which to achieve those goals will help create a sense of urgency, bringing your financial goals to the top of your life priority list. That’s why breaking down large goals into smaller milestones is helpful.

","

Every time you cross off a shorter-term, small goal from your list, revisit your larger picture and continue setting mini goals for you to achieve. You’ll be able to see how you’re making progress, and you’ll be well on your way to better financial security.

","

Bottom Line

","$c5","

Tips for Building Wealth

","$c6","

","

For important disclosures regarding SmartAsset, please click here.

","

Photo credit: ©iStock.com/fizkes, ©iStock.com/designer491, ©iStock.com/damircudic

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After beginning the year at record levels, global events have caused market volatility to jump and equities to fall. The S&P 500 Index is experiencing its first major correction since 2020, so investors are understandably looking to safeguard their assets. Investment firm Charles Schwab says that increased diversification is the key to weathering such an investment climate. However, according to recent research, most self-directed retirement savers just aren’t protecting their hard-earned funds in the right ways. In fact, investors who engage a financial advisor have saved nearly twice as much for retirement as those who don’t. Here’s why.

","

A financial advisor could help you save for retirement and select investments that align with your financial goals. Find a qualified advisor today.

","

Schwab Research Demonstrates the Power of Financial Advice

","

Taking data from its Preferred Choice Retirement Accounts (PCRAs), a self-directed brokerage account offered within defined contribution retirement plans, Charles Schwab has found that, for the first quarter of 2022, plan participants who work with financial advisors had an average balance of $525,254–nearly twice as much as the $286,008 held by non-advised participants.

","

Broken down by age group, Schwab analysts found that, perhaps unsurprisingly, Baby Boomers (aged 58 to 75) held the largest balances of all the PCRAs, averaging $520,616. Gen X participants, aged 42-57, held an average of $299,520 and Millennials, aged 30-41, had $102,113.

","

Of the total PCRA participants, only 19.2% chose to work with a financial advisor, but of those, roughly half of the advised accounts belonged to the Gen X grouping. Baby Boomers held 32.5% of the advised accounts and Millennials held 14.9%.

","

Notably, working with a financial advisor meant more trades in the last quarter than not, averaging 19.7 trades vs. 12.3 for the non-advised. Furthermore, advised participants had a more diverse allocation of assets and a lower concentration of individual equities.

","

How Retirement Savers Can Take Advantage

","

Working with a financial advisor can help savers pinpoint a suitable strategy for their finances, relieving some of the stress associated with working towards a large financial goal like retirement. Given an investor’s risk tolerance, time horizon and other factors, not every investment strategy may prove suitable.

","

Schwab’s data provides some food for thought. First, advised accounts diversified their holdings, not putting more than 4.05% in any one exchange-traded fund (ETF). Although advised participants held similar equities to the non-advised–Apple stock coming in strong first for both groups–the percentage was slightly lower, 9.37% of advised equity assets in Apple vs. 12.59% for the non-advised.

","

Advised participants also held a lower percentage in cash, 5.70% vs. 15.71% for the non-advised. While that may protect assets from a dive in market value, timing the market is difficult and holding a greater percentage of funds in cash could reduce the long-term earning potential of an investor’s portfolio. At the same time, advisors seemed to favor a 17.57% mutual fund asset allocation, whereas non-advised participants held 20.10% in mutual funds. According to the data, advised participants appeared to increase fixed-income assets from Q4 2021.

","

Bottom Line

","

Recent data from Charles Schwab indicates that retirement plan participants who work with a financial advisor can nearly double the amount they save for retirement. Financial advisors seemed to favor a heartier diversification strategy, reducing exposure to individual assets and thereby reducing risk in this volatile market. While non-advised participants seemed to choose similar equities and funds for their investments, targeted financial advice may have resulted in improved portfolio outcomes.

","

Wealth-Building Tips

","$d4","

","

For important disclosures regarding SmartAsset, please click here.

","

Photo credit: ©iStock.com/marchmeena29, ©iStock.com/designer491, ©iStock.com/FG Trade

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When it comes time to buy a house, you need to have certain types of insurance in order to secure a mortgage. As part of the lending process, your mortgage provider may ask for proof of those insurance policies, such as homeowners insurance and flood insurance. But what if they ask for mortgage hazard insurance? Did you even know you needed that?

","

Don’t worry. Mortgage hazard insurance is a part of your homeowner’s policy–it’s a type of coverage, not a separate policy. A financial advisor could help you determine if your insurance protects you where you need it most, but here’s a quick rundown on how mortgage hazard insurance works.

","

What Is Mortgage Hazard Insurance?

","

Mortgage hazard insurance is a type of insurance coverage under your homeowner’s insurance policy. It’s the part of your policy that covers damage to the physical structure of your house from fire, vandalism and other losses.

","

Lenders often use the term “hazard insurance” separately, as they require minimum amounts of coverage prior to approving your loan. This can also be referred to as “dwelling coverage” and typically covers the amount required to rebuild your home from the floors up.

","

What Does Mortgage Hazard Insurance Cover?

","$e2","

Incidents covered can include:

","

Fire, hail and lightning damage
Vandalism and theft of house components
Fallen trees and power lines
Damage from a vehicle (or even an aircraft)
Explosions

","

It’s even more important to know what is not covered. Insurance policies vary from state to state, so always make sure you check what is included in your specific policy.

","

Generally, losses incurred from floods, earthquakes, sewer backups or damage caused by lack of maintenance are not covered. If you live in a flood or earthquake zone, it may be beneficial to purchase separate coverages. Many insurance providers also offer a sewage-backup add-on, which helps repair your house in case of unexpected issues.

","

If you experience a type of loss not covered under your dwelling or hazard coverage, it may be covered under a different part of your insurance policy coverage. For example, if a thief steals copper pipes from your house, that loss will be covered under hazard insurance. But if a thief steals your TV or laptop, that would actually fall under your personal property coverage. There are very specific differences that insurance providers use to determine which coverage applies to which loss, so if in doubt, always double-check the small print of your policy or ask an expert.

","

How to Get Hazard Insurance

","

Since mortgage hazard insurance is a part of your standard homeowner’s insurance policy, you will select a dwelling coverage amount when you contract your insurance. You can look for homeowner’s insurance quotes online or contact an independent insurance agent to help you find the best insurance coverages for your situation. Some insurance providers also offer discounts when you bundle more than one type of insurance policy with the same provider.

","

As of April 2022, the average cost for homeowner’s insurance is around $150 a month or a little under $2,000 per year, according to insurance provider Hippo. Dwelling coverages can be increased manually according to the value of your home’s physical structure and are often updated automatically at renewal to compensate for annual increases in material costs and inflation.

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Bottom Line

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Mortgage Tips

","$e4","

Photo credit: ©iStock.com/barmixmaster, ©iStock.com/Hispanolistic, ©iStock.com/g-stockstudio

"],"experts":null,"link":"/mortgage/how-does-mortgage-hazard-insurance-work","modifiedIso":"2023-03-21T02:04:31.000Z","published":{"datetime":"2022-6-6","readable":"June 6, 2022","readableExtended":"June 6, 2022, 3:19pm ET"},"publishedIso":"2022-06-06T15:19:22.000Z","shareInfo":{"title":"How Does Mortgage Hazard Insurance Work?","origin":"/mortgage/how-does-mortgage-hazard-insurance-work"},"isNewsArticle":false},"includeReadMore":true}]]}],["$","section",null,{"className":"ArticleSummary_articleSummary__IeaXB undefined","children":[["$","figure",null,{"className":"ArticleSummary_image__nvUWg","children":["$","$L11",null,{"href":"/investing/how-to-spot-hidden-price-markups-on-your-bonds","children":["$","img",null,{"src":"https://smartasset.com/wp-content/uploads/sites/2/2022/06/man-examines-the-inscription-bonds-with-a-magnifying-glass-assessment-picture-id1304072871-1.jpg","alt":"SmartAsset: How to Spot Hidden Price Markups on Your Bonds"}]}]}],["$","div",null,{"className":"fonts_category__lXjI0","children":"How to Invest"}],["$","$L11",null,{"href":"/investing/how-to-spot-hidden-price-markups-on-your-bonds","children":["$","h4",null,{"className":"fonts_title__B8NZZ","children":"How to Spot Hidden Price Markups on Your Bonds"}]}],["$","time",null,{"dateTime":"2023-5-27","className":"fonts_date___Ofhz","children":"May 27, 2023"}],["$","$L1b",null,{"article":{"id":"cG9zdDoxNjM1NjU=","databaseId":163565,"postId":163565,"author":{"node":{"id":"dXNlcjoxMzA=","databaseId":130,"userId":130,"avatar":{"url":"https://secure.gravatar.com/avatar/771599ae84501813432048daec5516b2116ab42110505c13cc38faf81793ffdd?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":null,"additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Christine","fullName":"Christine Williams","lastName":"Williams","name":"Christine Williams","postCount":{"pageInfo":{"offsetPagination":{"total":58,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"cwilliams","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ5Mw==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19493,"categoryId":19493,"link":"https://smartasset.com/how-to-invest/articles","name":"How to Invest","postCount":{"pageInfo":{"offsetPagination":{"total":217,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"how-to-invest","ancestors":{"nodes":[{"name":"Investing","slug":"investing","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Investing","id":"dGVybTo1MzE4","slug":"investing","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$e5","date":"2022-06-03T11:46:14","excerpt":"

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Investors who buy and sell stocks and options usually know how much they pay their broker per trade, but many people don’t know that bond trades also carry broker fees. Commonly called “markups,” these bond commissions are often baked into the quoted bond prices and can substantially affect your yield-to-maturity depending on the amount. In fact, regulators require brokers to disclose their markups only on certain bonds–and only after the transaction is done.

","

Although it can be difficult to determine how much commission you’re paying on your bond trades, there are a couple methods to figure out the true cost and yield of your bond. Here’s how.

","

A financial advisor could help you rebalance your portfolio and select lower-risk investments that align with your financial goals. Find a qualified advisor today.

","

Fidelity Says All Bonds Are Not Priced Equally

","

Bond trades, just like stock trades, carry a broker fee. Unlike with stocks, though, brokers often do not reveal these fees until after your purchase has been completed. As such, many bond investors may have no idea that they are paying a commission in addition to the price of the bond.

","

The bond market is highly opaque, with only a small fraction of the 1.2 million available bonds traded on public exchanges. Most bonds are traded “over the counter,” between brokerage firms and firms and their clients. Much of the pricing action goes on behind the scenes, and at the end, potential investors see a bond’s yield and quoted price.

","

Investment firm Fidelity Investments likens the process to buying wholesale and retail. Most bonds are bought and sold at “wholesale” prices, while investors see the “retail” pricing when they go to shop.

","

However, the firm cautions that not all bonds are priced equally. Bond markups theoretically help brokers cover buying and selling expenses, as well as costs related to custody and recordkeeping, but there is no rule that limits how much brokers can charge. These commissions can and do contribute to broker profits.

","

What Bond Investors Need to Know

","

Bond markups can vary widely between brokers, and this added cost has the potential to significantly impact an investor’s portfolio. The more you pay for a bond, after all, the lower the actual yield on your investment.

","

For example, if you buy a single $1,000 bond with a 3% coupon maturing June 1, 2032, priced at its par value of $100, a $15 per bond markup means your actual yield-to-maturity falls to 2.83%. Fidelity research calculates that buying an average purchase size of 22 bonds and paying $15 per bond in commission will result in over $300 in expenses alone.

","

It’s important, therefore, to ascertain how much a potential bond purchase will truly cost you. First, you can ask your broker how much it charges as a bond markup. Given the costs associated with bond trading, there is almost never no commission charged on bond sales.

","

Another good way to verify bond commissions is to comparison-shop. Although not all brokerage firms offer the same bonds, if you have accounts with different brokers, you can potentially check what prices each broker offers for the same bond and the difference between the two is often the difference in markup.

","

Lastly, you can review historical trade reporting data from the Municipal Securities Rulemaking Board (MSRB) and Trade Reporting and Compliance Engine (TRACE). While bond prices and yields change from day to day, you can also use this data to compare customer prices with dealer-to-dealer prices for trades executed at the same time.

","

Bottom Line

","

The bond market is still rather opaque, and many investors may not realize that they are paying commissions for every bond trade. Markups can vary widely depending on the broker, and these brokers are not required to disclose their commission until after the transaction has been done. However, markups can significantly reduce a bond’s real yield-to-maturity, which means that a bond’s yield could actually be lower than it appears. As such, it’s important to research beforehand how much an investor may be paying to conduct a bond trade.

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Wealth-Building Tips

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For important disclosures regarding SmartAsset, please click here.

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Photo credit: ©iStock.com/Andrii Yalanskyi, ©iStock.com/Torsten Asmus, ©iStock.com/Kriangsak Koopattanakij

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With market volatility running high, even seasoned investors may feel the need to reduce their equity exposure in favor of less-risky investments. Some may have already moved their assets into money market funds or cash. However, experts say that acting on emotion – fear, in this case – and trying to time the market can heavily compromise a portfolio’s long-term value and potentially put your entire retirement in jeopardy. Investment giant T. Rowe Price says, in general, you should stay invested. But here’s what you should do if you’re worried about retiring during these volatile times.

","

A financial advisor could help you plan for retirement and select investments that align with your financial goals. Speak to a qualified advisor today.

","

Experts Say Stay Invested Despite Market Volatility

","

Experts acknowledge that retirement planning during times of market uncertainty often leads to real concerns about retirement viability. But staying the course is generally more beneficial for your portfolio than pulling your investments from stocks in a down market.

","

“Investors with a healthy dose of equities in their portfolio are likely to benefit from the long-term growth potential of stocks since, over time, the magnitude of market gains has been significantly greater than that of losses,” write Judith Ward and Roger Young, Thought Leadership Directors at T. Rowe Price.

","

Despite the negative returns during major market downturns and corrections, rolling 15-year average returns hover reliably around 10%. It’s undeniably difficult to time the market, withdrawing funds right before a sudden crash and putting that money back into equities before the market rises again. If anything, that might be the worst move you can make. Instead, experts recommend sticking to a long-term strategy, allocating assets appropriately for each investor’s time horizon and risk tolerance – no matter how anxious you might feel.

","

What You Need to Know If You’re Nearing Retirement

","

When it comes to a closely approaching retirement, however, there are a couple key considerations you should evaluate given such a volatile market. First, for those near or already in retirement, you should ensure you have enough cash reserves. Some retirees may not have the cash to be able to weather several years of negative returns, which may lead to selling assets when stock values are down. So keeping cash reserves to cover one to two years’ worth of expenses helps protect your assets for the long term. If you’re concerned about building up your cash on hand, instead of selling assets you can change how you contribute instead. Direct new contributions to cash or money market accounts, and revisit your asset allocation when the market improves.

","

Another concern to address is how much money you may be losing as the stock market falls. After the longest bull run in history, you may have allowed your portfolio to have more equity exposure than your target allocation. In this case, you can maintain or modestly increase your allocation to bonds, which can reduce your portfolio risk.

","

If, on the other hand, you panicked and moved your equity assets into a money market investment, now would be a good time to slowly begin purchasing stocks again.

","

“The best advice we can give is to not wait too long,” said Young. “There will be no all-clear signal to let investors know that markets have bottomed.”

","

In fact, the people most affected by the 2008 financial crisis were those investors who jumped out of stocks and never got back in. T. Rowe Price research shows that buying into stocks during a downturn historically improved results over the following year, even if that adjustment was made a few months before or after the official market bottom.

","

Bottom Line

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Investors who are nearing retirement have cause to worry about their retirement plans. High volatility in the stock market affects all investors – especially those on a fixed income. But T. Rowe Price experts say not to panic and keep your investments in a suitable mix for your risk tolerance and time horizon. Instead, focus on building your cash reserves by contributing to money market accounts and rebalancing your investment portfolio by buying bonds to reduce your risk exposure or buying more stocks if you liquidated early. Eventually the market will recover and setting yourself to take advantage of the rebound will help you guard your retirement assets for the long term.

","

Retirement Planning Tips

","$109","

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Photo credit: ©iStock.com/PeopleImages, ©iStock.com/ChristianChan, ©iStock.com/Chattrawutt

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With bonds and stocks selling off side by side, retirees may have a reason to fear their well-diversified portfolios may not prove enough for retirement. Fixed-income investments are experiencing one of the worst years in decades, and stocks have fallen roughly 17% year to date. According to investment research firm Morningstar, the 60/40 portfolio is performing the worst in 90 years. However, history indicates that recent retirees need not panic. Taking steps to protect your assets during a market downturn can relieve some of the pressure and keep your nest egg a little more secure. Here’s what you can do.

","

A financial advisor could help you plan for retirement and select investments that align with your financial goals. Speak to a qualified advisor today.

","

Historically Speaking, You Shouldn’t Panic When the Market Crashes

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Research firm Morningstar says that all retirement savers should be aware of sequence of returns risk, because it can wreak havoc on your retirement plans. Sequence risk is the danger that retirement withdrawal timing will have a negative impact on the overall rate of a portfolio’s return.

","

When you have a long time horizon for investing, such as when you’re contributing to a retirement portfolio, what ultimately determines your portfolio’s results are the long-term average returns. But when you approach and enter retirement, starting to make portfolio withdrawals, the value of your portfolio reflects market performance plus cash outflows. Combining an extended market crash with withdrawals can very negatively affect the outlook of a retirement portfolio.

","

Nevertheless, history says that most well-diversified portfolios can and do recover over time. Morningstar data indicates that during the 1929 market crash – the worst in history – retirees with a stalwart 60/40 portfolio didn’t recover their values until 1945. The initial market crash affected those portfolios less than their equity-heavy counterparts since bond performance helped shore up returns. The worst happened in 1931, when the Federal Reserve hiked interest rates, and by 1932, an investor with $100,000 in a 60/40 portfolio would have seen the value drop by nearly half.

","

Other historic market crashes also demonstrate the power of sequence risk, or years of heavily negative returns. In the bear market of 1973, 60/40 investors would have seen the value of their portfolios drop an eye-popping 30% by the end of 1974. Yet despite the ongoing high inflation rate, reaching 12.3% in 1974, portfolio values would eventually recover by 1982.

","

Another long recovery came after the crash in 2000 when the dot com bubble burst. Not only did the stock market fall over three consecutive years, but shortly after, the 2008 financial crisis furthered the devastation. As a result, portfolios didn’t recover until 2013.

","

What Retirement Savers Can Do

","

Even though the situation may seem dire given the long time horizon to recovery, there are multiple ways to guard against asset depletion. For example, investors can avoid selling off assets in a down market by holding one to two years’ worth of planned withdrawals in cash. Worldwide, high-net-worth individuals often keep 21-28% of their assets in cash or cash equivalents, with the percentage leaning towards the higher end of the range during times of market crisis. This also opens an opportunity for better buys when the market eventually improves.

","

Being flexible with withdrawal rates is also key to mitigating sequence risk. Morningstar analysts recommend: withdrawing a fixed percentage of your portfolio’s value every year, not adjusting your withdrawal rate for inflation (i.e. not increasing your withdrawal percentage when inflation is high) or using a so-called guardrail approach where you reduce your withdrawal rate if it surpasses a set threshold.

","

Bottom Line

","

Investment research firm Morningstar warns against the power of sequence risk, which can significantly affect retirees and their long-term retirement outlook. Historical records indicate that major stock market crashes wiped double-digit values from investment portfolios and recovery took roughly 10 years. However, 60/40 retirement savers can protect their investments from such risk by keeping a certain amount of assets in cash and adjusting withdrawal rates as necessary.

","

Retirement Planning Tips

","$121","

Photo credit: ©iStock.com/Keith Lance, ©iStock.com/Carlos Pascual, ©iStock.com/Cecilie_Arcurs

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High inflation has pinched many wallets this year, but perhaps none so much as retirees’. Not only do rising healthcare costs rank as one of the most pressing concerns for Americans on a fixed income, jumping prices have put even more strain on those budgets. In 2020, life events affected retirement timing for nearly half […]

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","

A financial advisor could help you plan your retirement and select investments that align with your financial goals. Speak to a qualified advisor today.

","

The Senior Citizens League Estimates a Huge Drop in Buying Power

","

An ongoing study conducted by The Senior Citizens League (TSCL) indicates that high inflation has caused Social Security benefits to lose 40% of their buying power since 2000. Social Security purchasing power plummeted 10 percentage points alone from March 2021 to March 2022 – the largest drop recorded to date.

","

Comparing the Social Security Cost of Living Adjustment (COLA) with price increases in a basket of goods typically purchased by retirees, TSCL found that prices rose across the board, with a steep 14.5% increase in Medicare Part B premiums alone. For a quarter of survey respondents, after deducting their total health and drug plan premiums, the 2022 COLA only increased their available Social Security benefit by less than $25 a month.

","

Since 2000, typical retiree expenditures have risen a whopping 130% while Social Security benefits have grown 64% with adjustments. Basically, “for every $100 a retired household spent on groceries in 2000, that household can only buy about $60 worth today,” the study authors wrote.

","

Because costs are rising so much faster than COLA, the researchers concluded that an average Social Security payment would need $539.80 more per month in order to maintain the same level of buying power as in 2000. As a result, based on Consumer Price Index data through April, the 2023 COLA may reach 8.6%, the highest since 1981.

","

The chart below, based on Bureau of Labor Statistics data, gives a sampling of how inflation has cut into retiree spending power.

","

Fastest Growing Costs of Older Americans, March 2021-March 2022

","

Item	Cost in March 2021	Cost in March 2022	Percent increase since March 2021
Home heating oil, per gal	$2.86	$5.13	79%
Gasoline (all grades), per gal	$2.86	$4.33	51%
Propane, per gal	$2.33	$2.98	30%
Eggs, per dozen	$1.63	$2.05	26%
Bacon, per lb	$5.85	$7.20	23%
Oranges, per lb	$1.27	$1.48	16.5%
Coffee, per lb	$4.67	$5.41	16%
Medicare Part B premium, monthly	$148.50	$150.10	14.5%
Ground chuck, per lb	$4.31	$4.87	13%

","

Congress Introduces Senior Citizens Inflation Relief Act

","

House Rep. Bill Posey (R-IL) recently introduced a bill proposing a temporary solution for dealing with inflation. Called the Senior Citizens Inflation Relief Act, the bill aims to increase the amount of money an individual can earn while still receiving Social Security benefits.

","

Currently, the law allows retired individuals under full retirement age to continue to earn income subject to Social Security’s Earning Restrictions rules. Upon reaching the age of full retirement – age 67 for those born after 1960 – retirees are no longer limited by those restrictions. In 2022, that amounts to earning $19,560 a year or $1,630 per month.

","

To help seniors battling increased costs due to current inflation levels, Posey has proposed increasing those income limits in 2022 and 2023 to $2,046.67, or $24,560 a year. This equates to $416.67 more a month that seniors can earn to compensate for higher costs.

","

While not as much as the $539.80 the TSCL estimates retirees would need in order to maintain full buying power, “[it] could certainly make a big difference over two years. That could cover a rental increase, a car payment, several weeks’ worth of groceries, without penalizing this group of younger Social Security recipients for working and trying to make ends meet,” said Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League.

","

Bottom Line

","

The Senior Citizens League has recently released results from its ongoing COLA study, indicating that Social Security benefits have lost 40% of their buying power since 2000. The organization estimates that 2023 COLA could jump by as much as 8.6% to compensate for higher inflation and costs. At the same time, House Rep. Bill Posey has introduced a new bill proposing to allow younger retirees to earn roughly $400 more per month without reducing their Social Security benefits.

","

Retirement Planning Tips

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Cash serves a valuable purpose in many investment portfolios, but when the stock market dives, many investors turn to cash in a knee-jerk reaction to avoid losses. However, depending on the reason, moving all your investments from equities to cash may turn out to be a significant mistake. Even during a bear market, holding a cash-heavy portfolio may lose you more money than you realize. Instead, consider cash uses and allocate only a portion of your funds to this asset class.

","

A financial advisor could help you rebalance your portfolio and select investments that align with your financial goals. Find a qualified advisor today.

","

Three Reasons Why Cash Could Be a Losing Proposition

","

In a situation where high inflation and increasing interest rates are the new norm, the value of your dollar decreases every day. That loss of purchasing power can add up significantly over time, and by not investing in defensive stocks or high-yield bonds, investors lose out on the opportunity to earn interest.

","

According to investment firm Charles Schwab, a standard 3% rate of inflation would erode $100,000 in real purchasing power by 14% over five years. Over 10 years that purchasing power would fall 26% and over 20 years, $100,000 held in cash would only equal the power of $55,368. In this case, a portfolio consisting entirely of cash still loses value over time, even though the dollar amount appears to stay constant.

","

Further undercutting an investor’s earning potential are the current low interest rates for short-term investments. If an investor moves all funds into a regular savings account or a money market fund, going for cash and short-term bonds, the incoming higher bond yields will suppress the value of those less-volatile investments. Even then, short-term bonds often return more than just holding cash.

","

As a result of market tumult, some investors may decide that pulling funds from riskier, growth assets and putting it all into cash can safeguard their money. But in doing so, these investors are surrendering potential opportunities for capital appreciation.

","

How Much Cash Should You Hold Then?

","

","

Even in its most conservative model portfolio, Charles Schwab only allocates 30% to cash investments. The remainder goes to 50% fixed-income securities and 20% still in stocks.

","

In the 2021 World Wealth Report, Capgemini reports that the world’s high-net-worth individuals allocated between 21-28% of their assets to cash in crisis years during the past two decades. 20-30% was allocated to fixed income, with another 20-30% held in stocks. If or when the economy heats up again, these cash reserves will help investors buy cheap homes, stocks and other assets.

","

Famed billionaire investor Warren Buffett also believes that cash is vital for emergencies, and his company Berkshire Hathaway holds $144 billion in cash or cash equivalents even now. In his annual letter to shareholders, Buffett noted that he “always keeps 80% of his assets in equities,” and at the moment, he and his partner have not found any “exciting” deals for buying publicly traded shares.

","

He says, while they “have endured similar cash-heavy positions from time to time in the past, these positions…are never permanent.”

","

Indeed, Schwab research indicates that the average bear market lasts 15 months with a cumulative loss of 38.4%. On the other hand, the average bull run lasts 6 years, delivering returns of over 200%. Given that bear market recoveries are often front loaded, perhaps ensuring you have enough cash to take advantage of those opportunities might be the best solution after all.

","

Bottom Line

","

Cash reserves are an important part of an investor’s portfolio, but pivoting to holding all cash during a market downturn can prove to be a significant mistake. Inflation erodes the value of cash’s purchasing power over time, and holding funds in cash often results in missing out on opportunities that could earn more as time goes on. Instead, retail investors could follow the lead of many other wealthy individuals and maintain a healthy cash reserve while still keeping some of their funds allocated to stocks. An average 20-30% of funds allocated to cash can allow investors to protect their investments from hefty market falls and have the cushion left over to buy when the economy rises in the future.

","

Wealth-Building Tips

","$13d","

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Retirement is a big milestone for many, and planning for retirement can constitute a large financial goal that takes years to reach. In fact, data from the Federal Reserve indicates that the majority of Americans only have a median of $87,000 saved for retirement, which is far less than most experts recommend. Investment giant T. […]

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Investment giant T. Rowe Price has released an updated guide for retirement savers based on income level. Another well-known investment firm Fidelity Investments also has its own retirement savings guide, only with different numbers. So what do you do when the advice conflicts? Which benchmark guide should you follow?

","

A financial advisor could help you plan for retirement and select investments that align with your financial goals. Speak to a qualified advisor today.

","

T. Rowe Price Estimates Retirement Savings By Income Group

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Planning for retirement can be intimidating, whether you’ve just begun working or you’re already approaching retirement. Given the power of compounding interest, saving as much as possible early on allows you to save even more over time. Yet with so many competing priorities in the present, sometimes retirement saving becomes less important and you may find yourself wondering if you’ve fallen behind.

","

T. Rowe Price calculates that the amount of money needed by age 65 depends heavily on your income. Thought Leadership Director Roger Young says that “higher earners will get a smaller portion of their income in retirement from Social Security, [so] they generally need more assets in relation to their income.”

","

As a result, most people looking to retire around age 65 should aim to save between seven and 13.5 times their pre-retirement gross income. The chart below shows how that breaks down by age group:

","

","

However, the range widens significantly as savers approach retirement. A married couple with two earners making $100,000 gross a year should have approximately five and a half times their income saved for retirement by age 55, whereas a couple making $250,000 a year should save six and a half times their income by the same age. According to T. Rowe Price, this multiple factors in estimated government benefits that varies depending on income.

","

On the other hand, Fidelity recommends saving more at a younger age and catching up less as savers age. At age 30, the company advises earners to have one times their salary saved, two times by age 35, four times by 45 and reach seven times their salary by age 55. Fidelity assumes a relatively low real wage growth, at only 1.5% per year, so front-loading retirement savings would allow retirement savers to earn more through compounding returns.

","

How Retirement Savers Can Take Advantage

","

For the average American, T. Rowe Price recommends saving between four and a half and eight times your salary by age 55, whereas Fidelity says you should save seven times. Both rely on different assumptions that impact their retirement savings calculations.

","

T. Rowe Price assumes that, early on in a career, younger earners tend to save 6% of their paychecks for retirement, ramping up by 1% per year until they reach 15%. Fidelity assumes you’ll save 15% right from the start. The appropriate amount for you will depend on your level of disposable income and how much you can reasonably expect to save.

","

In fact, Federal Reserve data indicates that the average individual in the age 55-64 cohort has saved approximately $537,560 for retirement. However, the median savings for that age group is only $185,000. So while retirement savings goals are important for the future, some workers simply can’t afford to put away so much of their income.

","

If you’ve begun saving late or you’ve had to tap your retirement savings for unexpected expenses, it might even seem like seven times your salary is an unattainable goal. The 2020 Economic Well-Being of U.S. Households Survey found that 42% of non-retirees laid off in 2019 had no self-directed retirement savings, but it’s never too late to work on your financial goals.

","

Both T. Rowe Price and Fidelity find that 15% of income per year (including any employer contribution matches) is an ideal savings level for many people. Higher earners who will likely receive less in Social Security benefits should aim beyond 15%. A financial advisor could help you formulate a plan to reach your retirement goals faster if you need help.

","

Bottom Line

","

Investment firms T. Rowe Price and Fidelity Investments have released updated retirement savings benchmarks by income level. While both companies estimate that the average American should save seven times the annual salary by age 55, the actual amount saved will depend heavily on income and savings patterns. In general, experts recommend that retirement savers aim to save 15% of income per year over their working years in order to save enough for a comfortable retirement.

","

Retirement Planning Tips

","$14b","

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When you’re in the market to buy a home, there is a good chance you’ll need to finance your purchase with a home mortgage loan. From start to finish, you’ll likely speak to many people before finally closing on your new house. Find out below what a mortgage lender is and what role it plays in your home-buying process.

","

A financial advisor could help you determine which financing options benefit you the most and how mortgage debt may be leveraged to your advantage. Find a qualified advisor today.

","

What Is a Mortgage Lender?

","

A mortgage lender is a financial institution or bank that provides and underwrites home loans to borrowers. Lenders set the terms, interest rate and schedule of your mortgage, weighing your loan application against your ability to repay the loan.

","

When you shop around for different mortgage products, you’ll likely come across various banks and institutions that all offer varying terms and rates. You can compare them individually, online or in person, or you can speak with a mortgage broker.

","

A mortgage broker is not a mortgage lender. Rather, a licensed mortgage broker is an intermediary between you and potential lenders. Mortgage brokers can collect your mortgage application and advise you on how to improve your creditworthiness, and since they often work for independent mortgage companies, they are able to shop around and find the best possible mortgage deal and terms for your situation. Brokers are paid by commission–usually on top of the mortgage lender fee you’ll pay for your home loan.

","

Different Types of Mortgage Lenders

","

$\"what$ Just as there are various types of mortgages, there are multiple types of mortgage lenders. The best lenders offer a variety of interest rates and incentives so a mortgage deal can be tailored to your individual situation.

","$159","

It’s important to note that there are many licensed mortgage lenders, but you should strongly consider how reputable and stable the company is prior to applying for a loan with them. Some lenders provide mortgages directly to consumers, originating their own loans, and others don’t, working instead with other lenders to fund mortgages behind the scenes. Sometimes, you’ll apply for a mortgage with one lender and then you’ll pay your mortgage to another company, the mortgage servicer. You should always ask your potential lender what help they provide and if they’ll be servicing your loan after closing.

","

Bottom Line

","$15a","

Consider speaking with a mortgage broker for credit-improvement advice and to compare the mortgage options available to you. You can also speak with a financial expert to explore how to leverage your home purchase for its greatest tax advantage.

","

Mortgage Tips

","$15b","

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U.S. savings bonds are a low-risk investment product backed by the U.S. government. Used by generations of Americans to generate a stable return on cash savings, savings bonds are purchased through the U.S. Department of Treasury and earn interest over time. Today, you can buy only two types of savings bonds–Series EE and Series I […]

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","

Today, you can buy only two types of savings bonds–Series EE and Series I bonds–which take 30 years to mature fully. Depending on the available interest rates when purchased, these savings bonds may actually provide a better yield than simply keeping cash in your bank savings account.

","

There are, however, certain bonds that are no longer issued but are still earning interest or accruing value. If your savings bond is past its maturity date, it should be redeemed for cash.

","

The process for redeeming your savings bonds is easy, but you should make sure you understand the type of bond you own, how that type of bond accrues interest and when the ideal time is to redeem it.

","

A financial advisor could help you best determine if savings bonds are an appropriate investment for you. Find a qualified advisor today.

","

What Are Savings Bonds?

","

Savings bonds were created in the 1930s as a result of legislation passed by President Franklin D. Roosevelt. They were created to help Americans save money and support the government during the World War. By buying a U.S. savings bond, you are essentially lending money to the U.S. government at a set interest rate.

","

Types of Savings Bonds

","

Currently there are only two types of savings bonds sold by the U.S. Treasury: Series EE and Series I savings bonds. Older series of bonds, such as the Series E and Series HH bonds, may still be accruing interest or may be redeemable at face value.

","

Series EE

","

Series EE savings bonds are sold electronically via TreasuryDirect and earn a fixed interest rate–0.1% annually as of Mar 2022. Typically EE bonds mature after 30 years, after which they stop accruing interest, but regardless of your rate, an EE bond will be worth double its face value after 20 years. If held that long, the U.S. Treasury guarantees a one-time adjustment to honor this.

","

Series EE savings bonds bought from May 1997 to April 2005, however, earn a variable rate that changes every six months. To determine their value now, you can input your information in the Treasury’s savings bond calculator.

","

You can legally cash your EE savings bond after one year. But if you cash it before five years, you lose the last three months’ interest. That is to say, if you cash an EE bond after 18 months, you will only receive the first 15 months’ worth of interest in addition to the principal.

","

","

Series I

","

Series I savings bonds are also sold electronically through TreasuryDirect, but you can purchase some of them in paper form using your IRS tax refund. The interest rate for Series I savings bonds is a composite rate: a fixed interest rate set at the time of purchase, plus an inflation rate that is recalculated twice a year. The composite rate for I bonds purchased between Nov 2021 and Apr 2022 is 7.12%, and interest is compounded semi-annually.

","

When it comes time to redeeming Series I bonds, the same rules apply. Maturity takes 30 years, and you can cash it in after one year. Cashing before five years leads to a 3-months’-interest penalty.

","

Many savers use Series I bonds as hedges against inflation, but the Treasury does limit the amount you can buy–up to $10,000 electronically and another $5,000 in paper bonds per year.

","

Other Bond Series

","

There are also older types of bonds that are no longer being issued but are still valid. The Series E bond was the precursor to the Series EE bond and stopped paying interest in 2010. If you own or inherited a Series E bond, you may be able to redeem it for cash.

","

Additionally, you may hold a Series HH savings bond, which were issued between 1980 and 2004. These bonds had a maturity date of 20 years and some may still be earning interest. There are also Gulf Coast Recovery bonds, issued through 2007 to help fund relief efforts after the Gulf Coast hurricanes, and Patriot Bonds, issued through 2011 to help finance antiterrorism after 9/11. These are no longer sold by the U.S. Treasury but may still be earning interest.

","

How Do You Redeem Savings Bonds?

","

The process for redeeming your savings bonds is relatively simple. If you have an electronic bond, you can log in to TreasuryDirect and use the link for cashing securities in ManageDirect. If you have paper bonds, you have two options: you can bring paper bonds to your local bank and ask if they will cash them for you, or you can send them to Treasury Retail Securities Services with a FS Form 1522. Savings bonds do not expire, so even far beyond their maturity dates you can still cash them.

","

Electronic bonds can be redeemed at partial value with a minimum of $25. Paper bonds must be cashed in full. Please note that the interest on savings bonds is subject to federal income tax, though if you are using these bonds to pay for education you may be able to apply for an education tax exclusion.

","

You must be the owner or co-owner of the savings bond in order to redeem it. If you inherited a bond, the bond will form part of the last surviving owner’s estate and can be redeemed at banks that pay savings bonds. If you inherited a Series HH savings bond, these cannot be redeemed at financial institutions; instead, you will need to mail in the FS Form 1522 and the bond will be paid through direct deposit. If you have lost or had your savings bond stolen, you can request that the U.S. Treasury reissue it through a FS Form 1048.

","

The Bottom Line

","$169","

Tips for Building Wealth

","$16a","

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In an effort to streamline the regulation that governs how retirement accounts can be used, the IRS has proposed a change for 403(b) plans — a type of workplace retirement plan used mostly by public and non-profit employees. Employer-sponsored plans are powerful retirement tools and boast specific requirements regarding required minimum distributions and tax treatment that vary depending on the type of account. But soon your 403(b) may resemble the more-common 401(k). If you have a 403(b) retirement plan, you might need to change how you’ve planned for retirement and how your plan beneficiaries will receive their funds. Here’s what you need to know.

","

A financial advisor could help you plan for retirement and select investments that align with your financial goals. Speak to a qualified advisor today.

","

IRS Proposes 403(b) RMD Changes

","

In accordance with the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, the IRS is proposing updates to the existing retirement plan code that governs required minimum distributions (RMDs).

","$178","

If the account owner passes away before the funds are fully distributed, the beneficiary must take all the funds within 10 years of the owner’s passing.

","

What Retirement Savers Need to Know

","

To align 403(b) plans with other employer-sponsored and individual retirement plans, the IRS is proposing changes to rules governing RMDs. Going forward, any non-profit sponsoring a 403(b) plan for their employees must take RMDs or risk employees paying a hefty tax penalty on the balance not withdrawn.

","

The National Law Review notes that the proposed changes appear to pose both administrative and legal challenges. 403(b) plans can be invested in a variety of funds, including both group and individual annuity contracts, and so the requirement to take RMDs could create contractual issues.

","

For example, employers are not involved in the administration of individual 403(b) contracts, and so their ability to take RMDs would be substantially limited, potentially violating the new rule from the very beginning. Even more unclear, in order to partake in safe harbor exemptions, regulation limits employer involvement in retirement plans to specific activities. If the proposed IRS rule goes into effect and employers must then actively negotiate with providers to administer RMDs for participants, this could be a violation of those requirements and inadvertently subject employers to regulation and reporting from which they were previously exempt.

","

As a result, employees may not know if or when they may be required to take distributions from their 403(b) plans. The IRS directs plan sponsors to administer RMDs, but ultimately it is the participant’s responsibility to ensure accurate and timely withdrawals. If the participants do not take distributions as required, they may end up owing as much as 50% of their calculated RMD in taxes.

","

The IRS is reviewing the proposed rule and has asked for feedback. Interested parties may submit comments through the Federal Register portal before May 25, 2022, and a hearing on the regulation will be conducted on June 15.

","

Bottom Line

","

The IRS is proposing a new rule to require 403(b) plan participants to take RMDs. The proposed changes may cause administrative and legal difficulties, especially with regard to ERISA-exempt regulations. Penalties for failing to take RMDs can be harsh, so understanding what rules apply to you as a 403(b) plan participant is important. Comments regarding the proposed rule can be submitted through May 25, 2022.

","

Retirement Planning Tips

","$179","

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Healthcare ranks as one of the most pressing concerns for retirees, and with medical expenses rising every year, two out of three Americans worry about high healthcare costs in retirement. Models estimate that a retired couple at age 65 will need roughly $200,000 saved for healthcare alone–exceeding the average American’s total savings. As part of […]

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","

As part of its annual inflation adjustments, the IRS has recently released new contribution limits for health savings accounts, giving retirement savers more power to save for these increasing medical costs. HSAs are generally viewed as a way to save for health expenses, but they can also serve as powerful tools for retirement. Now you can save even more.

","

A financial advisor could help you plan for retirement and determine how an HSA could help with your financial goals. Speak to a qualified advisor today.

","

IRS Increases HSA Contribution Limits for 2023

","

High inflation and rising healthcare costs combine to create an ever-increasing burden on retirees. As part of its annual adjustments, the IRS has released its 2023 inflation-adjusted contribution limits for health savings accounts (HSAs). Starting next year, individuals with a high-deductible self-only health plan can contribute an extra $200 to their HSA. The new limit will increase from $3,650 to $3,850.

","

High-deductible health plans are health plans with an annual deductible that exceeds $1,500 for self-only coverage, or $3,000 for families. These are often paired with an HSA, which allows you to use pre-tax dollars to pay for qualified medical expenses.

","

How Retirement Savers Can Take Advantage

","

Many people primarily consider HSAs as a way to save for health expenses, similar to using a flexible spending account (FSA) for lower-deductible plans. However, HSAs are often a powerful yet underutilized savings tool that extends tax benefits far into retirement.

","

HSA contributions are not subject to federal income taxes, so deducting your contributions from your salary can reduce your annual tax burden. You can continue to contribute until you enroll in Medicare.

","

Furthermore, HSA contributions earn interest free of taxes. Those funds can be invested, as well, and just like with an employer-sponsored retirement plan, your investments grow tax free. As such, unlike an FSA, the funds do not expire at the end of the year; the balance rolls over from year to year and the balance is always yours to spend, save or invest.

","

Lastly, at age 65, you have free access to your HSA funds for any purpose. There are no required minimum distributions and money taken out for eligible health expenses is not subject to federal income tax. If you do choose to withdraw funds in retirement, you will pay income taxes just like you would with other retirement plans.

","

Bottom Line

","

The IRS recently released updated HSA contribution limits for 2023, adjusting annually for inflation. Starting next year, individuals can contribute up to $3,850 a year in tax-deferred dollars. HSAs are powerful retirement tools that are often underutilized, despite their tax advantages and growing concern for rising healthcare costs. You can qualify for an HSA so long as you are enrolled in a high-deductible health plan, and you may port your account if you change jobs because the account always belongs to you, not your employer. HSAs are best suited for retirement investment savings, but this may mean that you will pay out-of-pocket for medical expenses while contributing to one. If in doubt, an expert can help you determine if an HSA is a good choice for you.

","

Retirement Planning Tips

","$190","

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Roughly 80 million U.S. investors own or have invested in digital currencies, and with a growing appetite for such alternative investments, retirement savers can now benefit from yet another way to invest. Financial firm Fidelity Investments has announced an expansion of its cryptocurrency platform, unveiling a first-of-its-kind Bitcoin offering for the company’s 401(k) investment lineup. Here’s how it works.

","

A financial advisor could help you plan for retirement and determine if investing in cryptocurrencies aligns with your financial goals. Find a qualified advisor today.

","

Fidelity Launches Digital Asset Accounts For 401(k) Plans

","

According to the Fidelity 2021 Institutional Investor Digital Assets Survey, seven out of 10 institutional investors expect to buy or invest in digital assets in the future. Of those, more than 90% expect their institutions’ and clients’ portfolios to allocate funds to those investments.

","

“Increasingly, we are seeing interest from leading employers to add digital assets to their 401(k) plan,” said Executive Vice President Chris Call of Newfront Retirement Services, in a statement. “As companies consider alternative investment options in their plan design, we believe digital assets are worthy of consideration.”

","

Earlier this year, the Department of Labor (DOL) issued a strict compliance warning about including cryptocurrencies in defined contribution plans like your 401(k), as multiple sources reported heightened interest in the subject. Indeed, more than half of institutions surveyed by Fidelity reported current investments in digital assets, with participation rates jumping more than 10% in Europe and the U.S. compared to 2020.

","

As a result of increasing demand, Fidelity has announced a first-of-its-kind ability to invest in Bitcoin through your retirement account, allowing retirement savers to benefit from tax-leveraged accounts while further diversifying long-term holdings.

","

“We are thrilled to be the first to offer employers exposure to bitcoin for the core lineup of 401(k)s,” said Dave Gray, Head of Workplace Retirement Offerings and Platforms at Fidelity Investments. “[The new Digital Asset Accounts reflect] our belief in the promise of blockchain technology for the financial industry’s future.”

","

How Retirement Savers Can Take Advantage

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Fidelity has partnered with business intelligence giant MicroStrategy to offer its first Digital Asset Accounts (DAAs) through the company’s 401(k) program. Broad availability will roll out to employers mid-year.

","

The new offering will allow retirement savers comfortable with cryptocurrency volatility to invest in Bitcoin through a Digital Asset Account within a 401(k). The DAA is a custom plan that will hold Bitcoin in an institutional-grade, offline vault, as well as short-term money market investments for liquidity. Employers will be able to establish contribution and exchange limits for the account.

","

Enrolled employees will receive Bitcoin units in their account, bought at the market rate at the time of contribution. This allows savers to benefit from dollar-cost averaging and smooth out some of the price fluctuations for which cryptocurrencies are infamous. Fidelity will also offer a trove of educational materials so that interested investors can learn more, even as it expands use cases beyond Bitcoin in the coming months.

","

However, it pays to remain cautious when investing retirement funds in such a volatile asset. In the small print, Fidelity notes that digital assets are speculative and highly volatile, can become illiquid and are slated for investors with high-risk tolerance. Investors could lose the entire value of their investment at any time.

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Bottom Line

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Investment firm Fidelity has announced a new way to invest in Bitcoin with tax-leveraged dollars. Starting with MicroStrategy and rolling out to all employers soon, retirement savers will be able to buy and hold digital assets through their 401(k) plans, allowing them to benefit from the increasing demand for alternative investments. Bitcoin is a highly volatile asset and may not be an appropriate choice for all investors, but with this new offering, Fidelity has made it easier for you to add crypto to your retirement mix.

","

Retirement Planning Tips

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When you first opened your account, you hopefully thought long and hard about how to allocate your money, putting a certain percentage towards riskier stocks and other money towards safer investments like bonds. But have you thought about rebalancing since …

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As you’ve continued contributing to your retirement account and the market has fluctuated, your portfolio may no longer be as diversified as it once was. That’s where rebalancing comes in. Below, we’ll cover the basics of rebalancing. A financial advisor can also help assess your retirement plan’s performance and guide you in selecting investments that align with your financial goals.

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What Is Rebalancing?

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Technically speaking, rebalancing your 401(k) is the process of realigning the weights of assets in your portfolio. This is done by periodically buying and selling assets, or investments, in order to maintain the original percentages of your asset-allocation profile.

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Experts recommend rebalancing at least annually, with a maximum of four times a year. Since investing can sometimes prove emotional – especially during volatile periods – it’s best to rebalance on a set schedule in order to keep your decisions as unaffected by emotion as possible.

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Why Should You Rebalance Your 401(k)?

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Most of the time, when you enroll in a 401(k) or similar defined contribution plan, you decide on a target asset allocation depending on your risk tolerance profile. This may change as you earn more money and approach retirement, so it’s important to review your portfolio at least once a year.

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Let’s assume that when you were in your early 30s, you set your 401(k) up with an 80% stocks, 20% bonds allocation. One year later, suppose you’ve saved $10,000 – $8,000 went towards stocks and $2,000 went towards bonds.

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By the end of the second year, suppose you have $23,933 – $19,733 in stocks and $4,200 in bonds. At this point, your asset allocation percentage has shifted to 82.5% stocks and 17.5% bonds.

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If the years pass, and you don’t rebalance your 401(k) every year, your asset allocation could further slide. Say it reaches 92% stocks and 8% bonds, at which point, the market suddenly falls, like it did during the COVID-19 pandemic.

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In such a situation, with such a high weighting towards stocks, you would potentially suffer losses to which you didn’t even know you’d been exposed. To rebalance, you’d need to sell some stocks and buy bonds to return to the desired 80/20 asset allocation target.

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Note that rebalancing your portfolio is not the same as reallocation. Reallocation is the term for changing the percentage of invested assets depending on how much risk you want to take. Rebalancing is selling and buying assets to remain in the same percentage ranges. If your allocation percentages are off target by 5% or more, it’s a good idea to consider rebalancing. Allocation targets should also be evaluated annually to make sure that your investments continue to align with your risk tolerance.

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The Cost of Rebalancing Your 401(k)

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In general, rebalancing your 401(k) doesn’t cost you anything. You are selling your own assets and buying new ones, and most investment options included in your 401(k) do not incur a transaction fee.

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Trades that do incur fees are usually listed in an obvious manner. If you choose to buy such assets, make sure you account for the added costs of buying and selling them. Just keep in mind that some plan managers may not allow you to trade assets too frequently.

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Since a 401(k) is a tax-advantaged retirement account, you won’t need to worry about paying taxes on the amounts you earn when you rebalance your portfolio. You’ll only pay income taxes on your 401(k) money when it comes time to withdraw during retirement.

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If you have a target-date retirement fund, you may not even need to manually rebalance. Many plan administrators have rolled out accounts that automatically rebalance in order to stay within your desired asset allocation range. Target-date funds not only rebalance, they also reallocate as you age.

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Bottom Line

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Financial experts suggest rebalancing your 401(k) at least once a year to keep your asset allocation in line with your risk tolerance and financial goals. Regular rebalancing helps maintain your desired investment mix, ensuring your portfolio stays on track. In most cases, rebalancing your 401(k) comes at little to no cost, especially if you invest in no-fee funds. If you have a target-date retirement fund, rebalancing may happen automatically, eliminating the need for manual adjustments.

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Retirement Planning Tips

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