Fee-Only Advisor

Have you heard the term before? Perhaps you have and that is what brought you to this article. But perhaps it is a new term you came across in searching for your first financial advisor.

It is a phrase being used more frequently in the financial services industry as more advisors are making a transition to operate under the fee-only model. In my opinion this is great!

But to be an informed consumer you should understand the options available to you in order to determine what is most appropriate. There is no one size fits all solution and even among fee-only advisors there are several different service models.

What Exactly is a Fee-Only Advisor?

A fee-only financial advisor is compensated only by fees that the client directly pays to the advisor.

This may seem intuitive. You hire someone to do a job and they get paid by you. But this is not always the case. Alternative service models include:

1.Commission Based–All compensation to the advisor comes from commissions on products they sell.This can appear to cost you nothing, but don’t kid yourself, there are certainly fees behind the scenes.

2.Fee-Based–Different from fee-only! In a fee-based relationship, the client pays some sort of fee to the advisor, but the advisor is still allowed to earn commissions through the use of specific products.

With a fee-only advisor you also know that you are working with a true FIDUCIARY who must operate in your best interest.

Again, you would naturally think that your advisor is always operating in your best interest, but under other types of arrangements an advisor may only be required to offer recommendations that are SUITABLE.

Let me fill you in on a little secrete…there is a BIG difference between what is in your best interest and what is suitable.

This is not to say that anyone who operates under a different structure cannot be trusted, but you should know the ins and outs of the relationship you are entering.

What Are the Common Fee Structures of a Fee-Only Advisor?

The term fee-only applies to several different types of fee structures. What is important to remember is that under any of these structures, the only compensation being received by the advisor is the fee being paid directly by the client. Fee-only models include the following fee structures.

1.Asset Under Management (AUM)

1. Fee: Based on a percentage of AUM, with the median fee being around 1%. Fees are deducted directly from a clients account rather than paid out of cash flow.
2. Services: An ongoing relationship with investment management and possibly financial planning depending on the advisor’s service offerings.
3. Notes: Two advisors with the same percentage fee may have vastly different services. Do your research and determine the services provided and the value you will receive.

2.Retainer/Subscription1.Fee:

1. A set fee paid monthly or quarterly.
2. Services: An ongoing relationship with financial planning and typically investment management. Investment management may be limited to a certain level of assets.
3. Notes: A retainer fee removes the asset minimum barrier that some firms have under the AUM model.3.Hourly1.Fee: An hourly rate paid only for the amount of time needed.

3.Hourly

1. Fee: An hourly rate paid only for the amount of time needed.
2. Services: Not an ongoing relationship. The advisor will provide assistance on the topics that you request
3. Notes: The implementation of recommendations remains with the client. This type of arrangement is more reactive in nature rather than proactive.

4.Project Based

1. Fee: A flat fee determined at the beginning of the project. 50% of the fee is often paid at the start of the engagement with the remaining 50% upon completion.
2. Services: Not an ongoing relationship. The advisor will create a comprehensive plan, or a plan based on the limited scope needs of the client.
3. Notes: The implementation of recommendations remains with the client.

Each one of these structures is appropriate for different situations and you should understand the type of engagement you are looking for prior to hiring an advisor. Not all fee-only advisors operate under each structure. For example, Crest Wealth Advisors operates under an AUM or a retainer structure depending on the clients needs and situation.

Benefits of Working with a Fee-Only Advisor

Let me start by saying that no model is perfect. And no model is inherently wrong. What is important is that you go into the working relationship with a complete and transparent understanding of how the advisor’s compensation is earned.

The goal of a fee-only relationship is to limit conflicts of interest that are inherent in other models. Notice that I did not say “eliminate” the conflicts of interest. That is almost impossible within any model.

By removing a product-based commission, the client-advisor relationship becomes more about what is best for the client in achieving their goals. A fee-only advisor is not looking for ways to earn commissions, but rather is looking for solutions to the clients’ problems.

Are there any conflicts that exist in a fee-only relationship? Yes.

One of the most commonly talk ed about conflicts is that an advisor operating under an AUM model has an incentive to keep assets under the firm’s management rather than provide recommendations that may result in some of a client’s assets being used elsewhere, such as paying down a mortgage.

It is true that a firm operating under an AUM model has more incentive to keep assets “in-house”. And this is where trust becomes so important. If you trust the person you are working with then you should feel confident knowing that if a situation such as this arises, that your advisor will operate in your best interest by informing you of all relevant information and determining the best path forward for you.

Where Can I Find a Fee-Only Advisor?

You should first understand that anyone can call themselves an “advisor”. There is no requirement to use that title.

However, there are requirements for an advisor to call themselves “fee-only”, which results in reliable databases for where you can find a fee-only advisor in your area.

Some of the most reputable sources include:

1.NAPFA–National Association of Personal Financial Advisors
2.CFP Board
3.Fee-Only Network
4.XY Planning Network
5.Garrett Planning Network

Final Thoughts

As a fee-only firm in Annapolis, Maryland I may have a personal bias toward the fee-only model. But again, the correct model for you will depend on your specific needs. The next time you interview an advisor who you may work with ask them the tough questions. Make sure they are transparent in their answers and that you fully understand how the relationship will operate.

If you are interested in learning more about Crest Wealth Advisors services, then Schedule A Call!

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Jason Dall’ Acqua, and all rights are reserved.

When saving for retirement, you have several options, but two of the most common are a Roth or traditional IRA/401K. Both help you save for retirement and have tax advantages, but a Roth offers tax advantages during retirement, while a traditional retirement account offers them now.There’s a big difference between the two; not strategizing your retirement plan could leave you with less money than anticipated.So, it’s important to understand how to choose between the two. In a perfect world, most people have both, but it’s important to understand the differences and how they affect your retirement income and taxes.

What is a Roth Retirement Account?

A Roth retirement account offers tax-free growth and withdrawals. You contribute funds after paying taxes on them, and the money you contribute and the earnings grow tax-free.When you withdraw the funds in retirement, you don’t pay taxes. This can make a tremendous difference in your retirement money, especially if you’re in a higher tax bracket. There is one downside. You can’t contribute to a Roth IRA account if you make too much money. In 2023, the income limits are $138,000 – $153,000 for single filers and $218,000 – $228,000 for married filing jointly couples. The contribution amount is phased out in that range. Roth 401k’s on the other hand do not have any income limitations, however not all employer retirement plans offer a Roth feature.

Other Benefits of Roth Accounts

• No Required Minimum Distributions
• You can contribute for as long as you want, as long as you have earned income
• Your beneficiaries will benefit from tax-free withdrawals from inherited Roth accounts

What is a Traditional Retirement Account?

A traditional retirement account allows you to contribute funds on a pre-tax basis. You get the tax break today, and your earnings and contributions grow tax-deferred. However, there’s a catch. When you withdraw traditional funds in retirement, you pay ordinary income tax rates on the amount withdrawn.This means you’ll have much less money in retirement than anticipated and may have to save more to reach your retirement goals. If you’re in a high tax bracket during retirement, it could foil your retirement plans, leaving you with much less money in retirement.

Benefits of Traditional Retirement Accounts

• You lower your tax liabilities today
• You can contribute to a traditional retirement account no matter your income

The Goal with Retirement and Taxes

The key when investing for retirement is to reduce your taxes over your lifetime, not just the year you contribute. Yes, that tax deduction can feel great at the moment, but it’s a one-time deduction. When you withdraw traditional funds during retirement, you’ll pay tax at your ordinary income tax bracket, which decreases the funds you receive for your daily cost of living. So not only will you have less money in hand, but you’ll also have a big future tax problem that could have been avoided if you strategized your retirement plan early on.

Why Tax-Free Income is Better

So why is tax-free income better? It’s simple.

You’ll need to take less money from your retirement accounts when you have a Roth account. This is because when you don’t have to account for taxes, you withdraw what you need. For example, if you have $1 million saved for retirement and need $40K per year to supplement your other retirement income, you’d withdraw $40K per year if you have a Roth account.However, the amount needed to be withdrawn from a traditional retirement account to generate $40k look much different. For example, let’s say you’re in the 22% federal and 5% state tax bracket. You’d need to withdraw $54,795 yearly to net $40K for living expenses. Suddenly, that $1 million retirement account won’t go as far, and you might need to find ways to supplement your retirement income to live comfortably.

Ways to Take Advantage of Both

In a perfect world, you’ll utilize a traditional and Roth retirement account to take advantage the current and future tax benefits that each account type offers. Here are a few ways to make it happen. Backdoor Roth Conversions If you didn’t qualify for a Roth IRA or wanted the tax deduction in the year you contributed, consider converting your traditional retirement accounts to Roth accounts in the future. This gives you the best of both worlds. You get the pre-tax contributions now and then pay the taxes in the future to convert the account before retirement. To get the largest benefit out of this strategy, you should plan your conversion in a year when you’re in a lower tax bracket and can save money on your tax liabilities while setting yourself up for a more financially stable retirement.

New Employer Roth Matching

Under the new SECURE Act 2.0, employers may permit employees to elect matching contributions to be made to Roth accounts. This is a drastic change from the old rule that only allowed matching to be made to traditional pre-tax accounts. Employer matching made to a Roth account is taxable to you in the year the matching contribution was made, but this will help boost your tax-free bucket of money for retirement when you won’t have to pay taxes on the amounts withdrawn.

Mandatory Roth Catch-up Contributions for High Earners

If you’re over 50, your catch-up contribution requirements will change. In 2024, if you are over the age of 50 earning more than $145,000 and make catch-up contributions, they must be in a Roth account, not a traditional retirement account. This means the catch-up contributions will be after-tax. While this doesn’t provide tax relief now, you’ll enjoy it during retirement when you can withdraw the funds tax-free as long as you’ve held the account for five years.

Final Thoughts

Choosing Roth or pre-tax savings retirement accounts is a big decision. Finding a way to maximize both accounts gives you the best of both worlds and increases your chances of having enough money in retirement.The last thing you want to spend time worrying about is if you’ll have enough money in retirement, so careful retirement planning now will increase your chances of success in retirement. Consider Roth and pre-tax accounts, taking into consideration the pros and cons of each, but maximizing your retirement funds that are tax-free, so you have more money in your pocket and less financial strain from tax liabilities.

Taxes and Your Investments

Do you truly enjoy paying taxes? I am going to assume that your answer is no. Most people that I know would rather keep more of their hard-earned money in their pocket.

So how can you attempt to control the amount of taxes you are paying on your investments? Fortunately, there are several strategies to assist!

What are the different ways that an investment incurs taxes?

It is important to keep in mind that we are discussing the way stock and bond investments incur taxes in taxable (non-retirement) accounts. Retirement accounts, such as IRA’s and 401k’s are an entirely different story.

Investments can incur taxes in 3 ways:

1.Capital gain upon sale–Occurs when the sale price of the investment is higher than the purchase price. Capital gains can either be short-term or long-term. Short-term investments are owned for less than 1-year; long-term investments for more than 1-year.

2.Capital gain distributions–If you invest in a mutual fund or ETF (Exchange Traded Fund) then the fundmay pay out capital gain distributions, typically at year-end.

3.Dividends & interest–Paid monthly, quarterly or annually from fixed income (bond) investments and dividend paying stocks and stock funds.

Each of these taxable events can be taxed at different rates. This is where things can get confusing.

1.If an investment is held for less than 1-year and sold at a profit, then it is a short-term capital gain(STCG). The gain will be taxed at your marginal ordinary income tax rate.

2.If an investment is held for more than 1-year and sold at a profit, then it is a long-term capital gain(LTCG). The gain is taxed at a preferential lower rate, which is based on your ordinarytax bracket. These rates range from 0 –20% depending on your income level1.

3.Capital gain distributions from mutual funds operate similarly, where the distribution from the fund will be classified as either a STCG or a LTCG. Without getting into the mechanics of how a mutual fund works, these capital gain distributions are generally outside of your control.

4.Interest income from fixed income investments is generally taxed as ordinary income. There are exceptions to this, which we will discuss later on.

5.Dividends may be taxed at either preferential LTCG rates or as ordinary income. It depends on whether the dividend is qualified or non-qualified.

Source: Nerd Wallet

Are there ways to minimize investment taxes?

Short answer…YES. It is important to note that in some cases, foregoing taxes in the short-term may mean larger tax consequences in the long-term. Tax planning is a balancing act and requires frequent review. One of the simplest ways to reduce your tax burden is to hold an investment for longer than 1-year. In doing so, your capital gain tax rate is reduced to lower preferential rates. For long-term investors this should be no problem.Alternatively, certain types of investments have tax advantages. This includes:

1.Municipal bonds–Bonds issued by state and local governments of the state in which you reside. These bonds are federal and state tax exempt if purchasing a bond issued from your state of residence. Contrast this to corporate bonds, which are taxable at both levels, and US government bonds, which are taxable at the federal level. Municipal bonds may pay lower interest rates due to this tax benefit. Therefore the tax benefit will likely depend on your income level and marginal tax bracket.

2.Exchange Traded Funds (ETF’s)–The first US ETF was launched in 1993 making this a newer investment vehicle than mutual funds. ETF’s offer the benefits of a diversified basket of stocks, while largely avoiding capital gain distributions. ETF’s still incur capital gains if the investment is sold at a profit.

Additionally, a loss on the sale of an investment can be used to offset the gains from the sale of other investments.

For example, if you have $10,000 in gains from the sale of investments and $4,000 in losses from sales, then your total taxable gain is only $6,000 ($10,000 -$4,000). In fact, you are allowed to offset all of your capital gains, plus an additional $3,000 per year in ordinary income by taking losses! Any additional losses will need to “carry forward” to future years.

Does the type of account an investment is held in impact taxation?
Absolutely.

Up to this point we have been discussing the tax implications of investments held in taxable accounts.

Retirement accounts are an entirely different story. Interest income, capital gain distributions and capital gains from sales or not taxable in the year they areincurred. Retirement accounts grow on a “tax-deferred” or “tax-free” basis depending on what type of retirement account it is. You may owe ordinary income tax once you start taking distributions from these accounts, but that will be dependent on what typeof retirement account it is. More on this in another article.

A well-planned investment strategy should take taxes into consideration. It is not the only consideration in an investment plan, but it is an important one. As you can see there are a lot of moving parts. Be sure to consult with your financial advisor or tax professional when determining your tax consequences.

If you are looking for a financial advisor who can provide a tax-efficient investment strategy, then schedule a call today!

Disclaimer: This article is provided for general information and illustration purposes only.Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourageyou to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Jason Dall’Acqua, and all rights are reserved.

If you’re lucky enough to get a tax refund, how you use it is important. While it might feel like ‘free money,’ it’s money you gave up throughout the year and overpaid to the IRS. So using the funds appropriately after receiving your tax refund is important to help you reach your financial goals.Ideally, your taxes will come out as close to neutral as possible – you will not owe or receive much – to maximize your monthly cash flow. If the amount owed or due is greatly off then you should review your tax withholding to determine what may have cause this issue. If you did receive a tax refund for 2022, here are five ways to make your tax refund work for you.

Pay Down High-Interest Debt

If you have high-interest consumer debt, one of the best uses of your tax refund is to pay it down or off completely, if possible. Debts with an APR of 10% or higher exceeds any annual returns you’d likely receive on investments, based on historical average returns. While it might feel like you aren’t reaching your financial goals by using your tax refund to pay off debt, you are actually giving yourself a larger return on your money. If you let high-interest debt remain unpaid, you’ll spend more on interest while the debt is outstanding. If you want to use only a part of your tax refund for high-interest debt, take inventory of your outstanding debts, focusing on those with the highest interest rates first to generate the biggest cost savings.

Increase your Emergency Fund

Everyone needs an emergency fund with three to six months of expenses. This is foundational to prudent financial planning. An emergency fund is there to help you in times of ‘emergency.’ This may look different for everyone, but a few common reasons to use an emergency fund include:

• Job loss
• Injury or illness
• House crises (broken water heater, HVAC systems, water damage, etc.)
• Car issues (mechanical issues, accidents, etc.)

If you have an emergency fund created, consider adding to it, even if you have a fund set aside. If the pandemic, and more recently the mass layoffs are some of the largest companies, have taught us anything it’s that we should be prepared for the unexpected, so the more money you have, the better.

Increase your Investment Savings

Assuming your debts and emergency fund are in great shape, another great use of your tax refund is to increase your investment portfolios. There are many ways to do this and the best option is dependent on your situation and financial needs. If you have enough, you can split your funds between your various investments or choose one area to focus on.

Here are the top areas to consider:

Retirement

It’s always a good idea to invest more money for your retirement. If you don’t have an IRA yet, this is a great time to open one. As a bonus, you may get a tax deduction for your contribution depending on the type of account you save in. Each year there are limits to how much you can contribute. For example, in 2023, the limit is $6,500 if you’re under 50 and $7,500 if you’re over 50. The more money you have saved for retirement, the better. Keep in mind that inflation will affect your buying power during retirement, so not only is saving important, but also having your money working for you by being invested.

Taxable Investments

You can also use some of your tax refund to invest in your brokerage accounts. These accounts don’t have limits and also don’t have the same withdrawal requirements, meaning you can use the funds however you want.

Taxable investments include assets such as:

• Stocks
• Bonds
• ETFs
• Mutual funds
• Real estate
• Commodities

529 College Savings Plan

529 plans are tax-advantaged college savings plans. Some states offer plans that offer tax deductions in the year you contribute. Even if your plan doesn’t offer tax deductions, the money you contribute grows tax-free. In addition, if you use the funds for eligible educational expenses, the withdrawals of the contributions and earnings are also tax-free. If savings for your child’s education is important then consider a 529 college savings plan.

HSA – Health Savings Account

HSA or Health Savings Accounts are triple tax-advantaged accounts to use for medical expenses. You can use HSA funds the year you contribute or roll them over for future use. Many people use the funds to save for medical expenses during retirement. The maximum contribution for individuals in 2023 is $3,850; for families, it’s $7,750. An added benefit is that any unused funds can be used for whatever you want without penalty after age 65. Meaning HSA’s can act not only as a medical savings vehicle, but also boost your retirement savings.

Save for Short-Term Goals

If you have short-term goals you need more funds for, your tax refund can be a great way to reach your financial goals. Short-term goals are those you want to achieve in around the next five years. Some common examples include the following:

House

Saving for a down payment on a house is a great use of your tax refund. Not only does the money help you buy a house to live in, but it puts the money into an asset that will also ideally appreciate over time. Putting down 20% or more on a home purchase will eliminate the added costs of PMI – Private Mortgage Insurance, but many loan programs allow you to put down as little as 3% – 5%.

Car

Buying a car isn’t an investment in your net worth, but everyone needs one. The best case scenario is paying cash for a car, avoiding any interest costs, as this keeps your costs down. If you can’t pay cash for the entire car, the more you put down on it, the better terms you’ll get on a car loan, saving you more money.

Spoil Yourself

While improving your financial situation and investing for your future is important, it is also important to enjoy today…within reason. There is nothing wrong with spending some of your refund on yourself – you did work for the money after all. Just limit the amount you spend to no more than 25% of your refund. This offers the best of both worlds; you can use some money for yourself, and invest the rest, investing in your future and growing your net worth.

Final Thoughts

How you use your tax refund can have significant financial implications. Spending some money on yourself is okay, but be sure to apply the remaining funds to important financial goals, starting with your high-interest consumer debt. If you don’t have debt, or it’s minimized, consider investing in other areas of your life, including retirement, your brokerage accounts, real estate, and using the money to fund short-term needs. The key is to make the funds grow for you, helping you reach your financial goals faster than you thought possible. Don’t forget that if you received a large refund that means you are overpaying in taxes throughout the year and need to evaluate what adjustments should be made to your withholding.

Planning for a nearing retirement during market volatility is unsettling.Whether you are on the cusp or have already made the leap, a market downturn’s impact on your savings will be felt now and potentially for years to come. How do you keep your plan on track and your desired lifestyle in place?It all comes down to managing income, expenses and taxes appropriately.
There are strategies that you can implement today that can help to improve your retirement outlook and ensure you are able to live the life you desired in retirement. Keep in mind that the use of some of the strategies will be even more powerful if you start planning for them well before retirement.

Set A Realistic Budget & Stick to It

Lifestyle creep can impact us all. No matter how carefully you budget, the numbers on the spreadsheet can look much different from reality when faced with fun events, delicious food, seeing family, a quick weekend trip, or anything else. You get the idea.Couple that with a volatile market and you may find yourself having to sell investments in a down market. This not only cements the loss, but it also increases the amount of shares you may need to sell to cover your expenses, further hindering the ability for your portfolio to recover.Reviewing your budget to ensure you keep your spending at a level that is commensurate with your income is critical. This may require some difficult decisions about cutting back when markets are down, but it can also mean that you can afford to spend more when markets are good.

Create An Asset Allocation Aligned with Your Financial Needs

Different types of investments have different risk and volatility characteristics associated with them.For example, small company stocks are a lot riskier and will move up and down in price much more than US Treasury Bonds, which have much smaller price fluctuations.That’s why it is important that your portfolio is invested in a manner that suits your financial needs when approaching or living in retirement.That may mean keeping near term income needs in safer investments such as cash or short-term bonds, more intermediate term income needs in risker bonds and long-term income needs invested in stocks to provide growth potential.Having these different “buckets” also means that you won’t have to sell your risker stock investments when the market is down and can allow for their price to recover.

Take a Proactive Approach to Taxes

Planning strategically for taxes can help you keep more of your income.
Investing in a tax efficient manner, understanding what accounts to draw from and when and knowing what investments to sell will all impact the after-tax value of your money. And the less you pay in taxes, the more that stays in your pocket to fund your retirement.
So, what are a few actionable ways to help manage taxes?
• Hold tax efficient investments in taxable accounts and income producing assets in tax-deferred accounts.
• Take advantage of long-term capital gains by holding investments in a taxable account for more than 1-year.
• Use tax loss harvesting to your benefit.
• Create income flexibility by having accounts with different tax characteristics – more on this below.

Maximize Tax-Free Social Security Income

A significant percentage of people claim social security at age 62, the earliest allowable age to claim. And while there is no one size fits all recommendation when it comes to social security, claiming at 62 can have significant long-term disadvantages.
Here is something you may not have known…part of your social security benefits may be taxed as ordinary income. But they also have a tax-free component of at least 15%. Whether you pay taxes on the other 85% depends on your overall income level, but you can increase your tax-free income by maximizing your benefits.
Waiting until age 70 to claim increases your annual benefit by 8% for every year from age 62, the earliest point you can claim social security. If you are married, it may make sense for the spouse with the highest income level to wait until age 70, while the lower-income spouse claims at early or full retirement.

Utilize an Asset Location Strategy – Start Planning for This Early!

Asset location refers to the types of accounts where you hold investments. They are tax-deferred such as pre-tax 401(k)s and IRAs, taxable brokerage accounts and tax-free accounts.
The goal is to utilize a combination of these accounts to create the highest after-tax value of your money. The general principle is to match the asset up to the account’s tax treatment. Stocks receive tax-favorable treatment on qualified dividends and long-term capital gains, so one option is to put them in a taxable account. If you hold municipal bonds, they also go into a taxable account. Higher yielding corporate bonds would be held in a tax-deferred account, as the lower growth rate compared to equities will help reduce required minimum distributions, which are based on the account value.
Using the Roth IRA account as a flexible source of funds can help keep you in lower tax brackets. In years when taxable income is higher, using funds from the Roth account for living expenses can reduce income taxes and help you avoid the IRMAA Medicare Part B and Part D premium surcharge.

Take Advantage of Lower Asset Values with a Roth Conversion

The drop in value of 401(k) and IRA accounts is painful – but it also means that you can convert those assets to a tax-free Roth account with a lower tax liability. This can set you up for a more effective asset location strategy and can help you control future income and taxes by eliminating RMDs on the assets that are converted.

Final Thoughts

Retiring in a volatile market adds a layer of complexity to all the choices you need to make. It means emphasizing controlling your expenses, whether lifestyle or the taxes on the income you draw from retirement accounts. The critical thing to remember is that you do have options, and you can control several important levers that can help you keep your retirement plans intact.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation. This work is powered by Seven Group under the Terms of Service and may be a derivative of the original.

Summer is officially here!

And while your days may be busy with work, kids, BBQ’s and summer travels it can also be a good idea to take stock of your financial picture and make updates where necessary. Especially given the first 6-months that we have experienced this year.Below are a few things you should consider to keep your plan in shape. We cover areas that impact different stages in life as well as some timely topics to keep you on track in 2022 given the continued market volatility and persistent inflation.

Cash Flow Management

Inflation is impacting each and every one of us. From prices at the pump to the cost of groceries, almost everything has ticked up in cost.Which is why it is more important than ever to get a solid understanding of what is coming in – your gross & net income – and what is going out – your fixed and variable expenses.If you have never taken the time to analyze your cash flow or create a budget, then the results may shock you. But it is better to be informed so that you can make any necessary adjustments rather than to ignore the situation and let inflation erode your cash and eat into your savings.While you are at it, think about what lies ahead for the rest of the year, such as holiday shopping, which costs the average American nearly $1,000! Start setting money aside now to avoid racking up high interest debt this holiday season.

College Savings Plans

If you plan to contribute to your child’s college expenses and haven’t started saving yet then I suggest you start sooner than later to let compounding work for you.You can fund a 529 plan with up to $16,000 per year and still qualify for the annual gift tax exclusion (2022). However, you can also make a one-time contribution of 5-times the annual limit, $80,000, to catch up for lost time. If you have a 529 plan set up, it’s a good idea to revisit your allocation as your child gets closer to college age, to make sure you’re not taking too much risk.

Risk Management

Life insurance is critical to keeping your family’s lifestyle and goals on track. For most people, a term life policy offers the ability to cost-effectively replace your salary during your prime earning years. The rule of thumb is the policy should be 5-10 times your annual pre-tax income.
It may also be time to think about an umbrella liability policy to protect your assets over and above your existing liability coverage in your auto and property insurance.

Retirement Savings

Volatility in the markets has increased and is likely to remain elevated.
If you are decades away from retirement, then you can likely afford to take risk and weather this period of volatility.
However, if you’re within ten years from retirement, you may want to revisit your asset allocation and potentially dial back the risk. You don’t want your entire retirement nest egg at risk in the stock market when you are nearing the time that you will need to rely on it.

Additionally, if you turned fifty during the last six months, you are now eligible to make the additional “Catch Up Contribution” to your IRA in the amount of $1,000 or 401(k) of $6,500. This not only adds significantly to your retirement savings, but it’s also a good way to lower your tax bill in the year you make the contribution.

Charitable Giving

If you haven’t yet sorted your plan for charitable giving for 2022, the slower pace of summer can be an excellent time to think about what is meaningful to yourself and your family and where you would like to see your contributions go to make a difference. Come up with a plan now, so you aren’t up against year-end deadlines during the busy holiday season.
Setting up a donor-advised fund allows you to contribute now, but you can postpone the decision of what charities you want to give to. A qualified charitable distribution from a tax-deferred retirement account can allow you to donate and meet your required minimum distribution (RMD) for the year, which can be an advantage in keeping income at low enough levels to avoid the Medicare IRMAA surcharge.

The Bottom Line

Thinking about your financial picture holistically and keeping all the different pieces tuned up is important to make sure you and your family are achieving your goals and staying protected. Taking the time to check in with some of the bigger items before you turn to the lazy, hazy days of summer will have you in great shape when Fall rolls around.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

Should we prioritize paying down debt or investing?

This is one of the most common questions I receive from people of all levels of income or wealth.As with many financial decisions, there is no one size fits all answer. The correct decision will vary from one situation to the next, as not all debts are created equal. But there are some general guidelines to assist in making the best decision.And remember, this does not have to be an either-or decision.You can, and likely should, do both at the same time. But you will need to find the proper balance and create an intentional strategy for both.

Factors that impact your decision

Interest rate and debt balance

It is important to first get a clear understanding of your debts. What is the balance of each debt, the interest rate and the current payment strategy?Are they “good” debts such as a mortgage, or are they “bad” debts such as credit card balances, personal loans, auto loans, etc.Do you currently have a payment strategy or are you paying different amounts here or thereoFor example, a mortgage has a fixed payment schedule that pays off the loan in its entirety over a predefined time frame.By knowing what your entire debt picture looks like, you can then get a better understanding of what the strategy on each debt will be.A mortgage with a low interest rate is likely to be treated differently than a large credit card balance with an extremely high interest rate.

Mortgage rates are extremely low and offer tax benefits while high interest rate consumer debt should be avoided at all cost, as they can get you into extreme financial trouble over the long run.If you have multiple high interest rate debts then look into the “snowball” and “avalanche” repayment strategies to start chipping away at the debt strategically.

Compare the cost of the debt to your potential investment return

Let’s dive deeper into an example of how credit card debt and a mortgage might be treated differently in the question of whether to invest or pay down debt.

Let us assume that you have credit card debt of $10,000 with an interest rate of 19%. If you make monthly payments of $250 then it will take you 64 months to payoff the debt and you will pay nearly $6,000 in interest alone! That is a huge cost.

If you compare a 19% interest rate with a hypothetical long-term investment return of 8% annually, then clearly the cost of your debt is much higher than what your money would earn you via investing.

Paying off the credit card debt is the equivalent to locking in a 19% rate ofreturn…and you aren’t likely to find a guaranteed return like that with any investment!Once the high interest rate debt is paid off as quick as possible, you can direct that money toward your investments.

Now consider your mortgage. Let’s assume that yourecently refinanced your home and have a low interest rate of 3%. If we again compare the cost of your mortgage at 3% to your projected annual investment return at 8% then it is likely more beneficial to put extra money toward investing rather than payingoff the mortgage sooner. The reason being that the money you invest is aimed at returning significantly more than the cost of your debt.

Consider your refinancing options

Refinancing can save you significant interest costs and allow you to pursue both paying down debt and investing.

Are you eligible for a new credit card with a 0% interest promotional rate? If so, it might be worthwhile to open a new card, transfer the balance and create a strategy to payoff the debt before the promotional period expires.

Word of caution –Do NOT open a new credit card if you are likely to build back up a balance on your old card.

Have you looked into refinancing your mortgage or student loans? With interest rates near historic lows, it is possible that you could benefit from refinancing the loan.

If you are considering refinancing your student loans then you first need to consider your current repayment strategy. For example, if you are on Public Student Loan Forgiveness then you should NOT refinance your loans as this will impact forgiveness eligibility.

What to do with large inflows of cash

Did you recently receive a year-end bonus or inherit money?

Consider using this extra chunk of cash to speed up both goals of paying down debt and investing.

Figure out how much feels comfortable to put toward your high interest rate debt versus investing. Again, don’t forget to compare the cost of your debt to your potential investment return. It may not be wise to put any of this money toward your mortgage, as your money is likely to work harder for you being invested in the market.

Investing may come with added benefits

Consider the benefits of where your savings are going.

Are you saving your 401k? Then you are not only targeting a certain rate of return on your investments, but you are likely receiving a tax deduction for your contribution, possibly a matching employer contribution and your investments grow tax-deferred

This enhances the benefit of directing money toward investing.

If you are years off until retirement, then you have the power of compound interest on your side. Compound interest is when your earnings are reinvested and have the opportunity to also earn you more money. This is an extremely powerful concept over long periods of time.

Put extra cash to use

You are likely aware that it is wise to have an emergency fund –generally 3-6 months’ worth of expenses at minimum, but sometimes more depending on your specific situation.

However, there can be a cost to holding too much cash. That is because money in a bank –even a high yield savings account –is earning very little interest and losing value to inflation over time.

If you are holding more cash than you need then consider how to best put that money to work –paying down debts or investing. Either one is likely to bea better financial decision than holding too much cash.

Final Thoughts

Determining whether to pay down debt or invest is a common question and one that involves both financial and emotional considerations. As you can see, it is a decision that is best considered within the larger financial strategy.

Take a look at what your interest costs are and compare that to what your investments might earn you. It is almost always better to pay off high interest rate debt as soon as possible, before the interest slowly erodes your financial situation.

Seek out guidance if you need assistance in making these financial decisions. A financial advisor can help you work through a situation like this, both from a financial standpoint and an accountability standpoint.

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Jason Dall’Acqua, and all rights are reserved.

Nearing retirement, your thoughts may start to drift farther and farther away from the job at hand and closer to what you’ll be able to do in all that free time -catch up on some reading, enjoy an afternoonon the back nine or travel the world with your husband or wife. And who doesn’t want to have total control of how they spend their time!

But if you have yet to start planning for when you can retire and what that phase of life will look like financially then you may be feeling more overwhelm than excitement.Retirement planning is one of the most important steps an individual or couple can take, as there is a lot on the line.

Retirement Planning Mistake #1: Neglecting To Create a Retirement Plan

According to a 2019 retirement confidence survey, 8 in 10 retirees said they were feeling confident that they’ll have enough to live a comfortable retirement, yet only42% (or 4 in 10) have actually attempted to calculate how much money they’ll need in retirement.

The first (and one of the biggest) money mistakes any pre-retiree can make is not heading into retirement with a plan. And there is so much at stake that why wouldn’t you plan! Understanding how much you really need to retire before you reach retirement can give you time to adjust your savings strategies, portfolio allocations or insurance products. Additionally, it can help you and your spouse understand if your retirement expectations are going to be realistic or not.

Simply put, if you don’t understand how much you should have to retire comfortably, you won’t know if you’re on track.

There are a lot of moving parts that need to be coordinate with retirement,such as ensuring you won’t outlive your money, social security planning, account withdrawals, taxes and enjoying your retirement years, just to name a few. A financial advisor can assist you in creating your retirement plan and recommending any necessary adjustments to put you on track.

Retirement Planning Mistake #2: Lack of Sufficient Savings

Once you’ve created your retirement plan and discovered how much you and your spouse need for retirement, it may become more clear as to why you shouldn’t delay the savings process.

And while putting away a couple thousand now might feel hard to do, it’s important to remember that due to the principle of compound interest, your couple thousand now could potentially turn into tens of thousands in retirement (depending how the markets perform, what you invest your money in, and how many years away you are from retirement).
The best way to make this happen? Time. Give your money the years (or decades) it needs to collect interest and grow into what you’ll need in retirement. And don’t forget, your invest time horizon is not simply now until your retirement date, but rather is the remainder of your life. Than can be a long investment time frame to let compounding work!

Follow these tips to either increase your savings or reduce the amount of savings needed (by lowering expenses!)

• If you supported your children financially until recently and they are now self-sufficient (congratulations!) then redirect those funds to your savings goals.
• Make sure you are maxing out your employer retirement account. For individuals over age 50, you are eligible to contribute an additional $6,500 per year, on top of the normal limit of $19,500 per year, for a total annual employee contribution of $26,000 in 2021, per IRS limits.
• Lower your cost of living, if possible. Downsize your home, cut back on dining out, reduce the number of cars you own. As previously stated, a big part of retirement planning is understanding your expenses. Once you know where your money is going you can determine areas that you may be able to cut back on to ensure a successful retirement.

Retirement Planning Mistake #3: Under-Utilizing Tax-Advantaged Accounts

Never underestimate the impact taxes can have on your income now and through retirement. Both traditional and Roth IRA and 401(k) options can provide tax-advantaged opportunities that can make a difference in your retirement savings.Traditional retirement accounts reduce the amount of taxable income for the year they are created.

For example, if your income is $100,000 but you put $19,500 into a 401(k), your taxable income for the year drops to $80,500. And don’t forget about the tip mentioned above. For persons over the age of 50, you can contribute an additional $6,500 per year into your 401(k), resulting in more savings and a larger reduction in taxable income.

Roth IRA and 401(k) contributions are still taxed as part of your income for the year they’re added into the account, but then they are withdrawn from the account tax-free during retirement.

Be sure to stay up to date on the annual contribution limits each year going forward, as the limits are generally increased every few years. That allows you to save more and potentially receive more tax benefit.

Retirement Planning Mistake #4: Not Aligning Your Investment Portfolio To Your Situation

Now that you are at a later stage in your career, it is likely that you have changed employers over the years. But have you kept up with those old employer accounts?

All to often, people forget about their old retirement accounts when changing jobs. This could lead to stagnant investments and lost opportunity.

You will likely need to rely on your investments to assist in funding your retirement. Therefore it is of utmost importance to ensure that your portfolio is being properly managed and that your investment strategy is aligned with your risk tolerance and your financial goals.

For many, the thought of managing their investments causes anxiety and leads to inaction. If that is you then seek financial assistance from a professional to assist you with your portfolio management. Do not just avoid the situation!

Do Not Delay Your Retirement Planning

Preparing for retirement can bring about a mix of emotions -excitement to leave the workforce and anxiety about affording your ideal standard of living, just to name a few.

Putting the time and effort into your retirement planning can be the difference between a successful retirement and needing to rely on others for assistance. Don’t delay any further and take action today. It is never too late to start planning.

Crest Wealth Advisors provides unbiased, objective advice to assist pre-retirees in planning for their retirement. If you would like to learn more or schedule a free consultation today then schedule a meeting today.

My guess is you have heard the word lately from the news, your neighbor or even your barber. And if you haven’t then you have certainly been experiencing it every time you fill up your car with gas or visit the grocery store.Inflation is top of mind for so many across the country. Just check out the increase in Google searches on the word, which have been spiking in recent months: Google Trend for Inflation

But what is inflation, why is it occurring, how does it impact you and what can you do to combat it? We will briefly explore each of these areas. Don’t worry, I will keep this simple.

What is Inflation?

Simply put, “Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year.”   There are many different measures of inflation. One of the most common that you may have heard is CPI or the Consumer Price Index. The most recent CPI reading for March was 8.5% higher than this time a year ago. That was the largest year-over-year increase since 1981.That means what cost $100 a year ago costs $108.5 today (on average – it does not apply uniformly to all goods and services) That is a significant jump! You may be thinking that inflation seems like a new phenomenon and depending on your age you may be right…in a way.

https://www.investopedia.com/terms/i/inflation.asp

A Brief History of Inflation

First, it is important to understand that modest inflation is expected and healthy. It means that the economy is in an expansionary mode. But inflation running too hot for too long can lead to a recessionary period. Key word CAN.The Federal Reserve – you have likely heard of them – has several jobs, one of which is to manage inflation. The Fed sets its target rate of inflation at 2%. As you can tell, we are well above that level which is not ideal.

Inflation comes and goes in the economy and the reason why the current situation is new to so many is because for the most part, inflation has been modest for nearly 40-years.Sure, there have been periods of slightly higher inflation over that time, but nothing too serious.The last time that the U.S. experienced an extreme inflationary period was from the early 1970’s – early 1980’s. During this time inflation ran in the high single digits, even seeing double digit gains in 1974, 1979 and 1980. Before then you had to go back to the late 1940’s and early 1950’s to again see high levels of inflation.

As you can see, extreme levels of inflation are rare, but not knowing how extreme it will go or how long it will last is what causes major concerns

So Why is Inflation Occurring? 

There are numerous factors causing inflation to rise.

• Years of government stimulus pumping money into the economy
• Record low interest rates fueling increased borrowing
• Supply chain issues first seen from Covid and further exacerbated by the Russia/Ukraine war
• Supply and demand imbalance on certain good and workers
• Rising wages

There is no one specific factor that is driving inflationary pressures. It is a culmination of many things occurring simultaneously.

How Does Inflation Impact You?

Inflation impacts us in many ways, from the prices we pay, stock market returns, bond prices, interest rate adjustments, real estate prices and more. So, lets break these down a bit.

Spending:

We already discussed the way that inflation impacts our consumption. The goods and services that we buy cost more, reducing the purchasing power of our income.

A recent study found that average consumers can expect to spend nearly $296 more per month! That is a big increase in expenses if you don’t adjust accordingly.

Stock Market:

Inflation tends to make the stock market more volatile, as investors are on edge about the economy.A stocks price reflects future expectations of that company. Therefore, there are certain parts of the market that perform better during inflationary periods as their businesses benefit from rising inflation (and subsequent higher interest rates). There are other parts that fare worse due to lower consumer spending, higher cost of goods sold and higher cost of debt servicing.

Still, stocks provide the opportunity to outpace inflation as opposed to money in the bank which is losing value to inflation since it earns little to no interest.

Interest Rates and Bond Prices:

As I previously mentioned, one of The Fed’s jobs is to try maintaining an inflation rate around 2%.

One way that they attempt to achieve that target is by raising interest rates. As interest rates rise, bond prices decline.

Therefore, if you own bonds in your investment portfolio, you may be seeing their value decline recently which might be quite shocking as you likely thought bonds were safe. Bonds still carry risk and can move up and down in value.

What Can You Do?

1. Be flexible in your spending patterns. To absorb the increased cost of certain necessities, you may need to forego some discretionary spending such as eating out.
2. Increase your income. There are many ways that you can bring in extra income to offset the increase in expenses.
3. Diversify your investments. Timing the market and timing inflation are not going to work well. Investments react differently during various economic periods. Diversifying can help you avoid large losses while benefiting from other parts of the market that perform better during inflationary periods.
4. Eliminate variable rate debt. With rising inflation comes rising interest rates, which can ultimately increase the interest rate on any variable rate debt such as credit cards. Fixed rate loans are safe.

Final Thoughts

It remains to be seen whether inflation will remain with us for some time or whether it will start to fade. There are “experts” with predictions on both sides. What is known is that it is something that you should take into consideration with your financial plan and investment strategy. You don’t want to be unprepared if it does stick around for longer than expected. Reach out today to learn how Crest Wealth Advisors can assist you in your financial planning, taking inflation and so many other factors into consideration.