Retirement Archives - Financial Planning and Wealth Management

Roth Conversion: Turning Market Lows Into Tax-Free Growth

Posted on March 26, 2025March 18, 2025 by Brian Colvert

Market downturns can be nerve-wracking. When stocks dip, it’s easy to feel like you should hit pause on any big financial moves. But what if a downturn was actually an opportunity? If you’ve been considering a Roth conversion, now might be the best time to act.

Listen Now:

iTunes | Spotify | iHeartRadio | Amazon Music

—–

A Roth conversion allows you to move money from a tax-deferred retirement account (like a traditional IRA) into a Roth IRA. The trade-off? You’ll pay taxes now on the converted amount, but in return, your money grows tax-free and can be withdrawn tax-free in retirement. And when markets are down, this strategy becomes even more attractive.

In this post, we’ll break down why a downturn is an ideal time for a Roth conversion, how it works, and what you need to consider before making your move.

What Is a Roth Conversion?

A Roth conversion is the process of moving pre-tax retirement funds from a traditional IRA or 401(k) into a Roth IRA. Normally, traditional retirement accounts are tax-deferred, meaning you don’t pay taxes when you contribute, but you will when you withdraw in retirement.

With a Roth IRA, the opposite is true—you pay taxes upfront but enjoy tax-free withdrawals later. By converting funds now, you lock in today’s tax rates and eliminate the uncertainty of potentially higher tax rates in the future.

Why a Market Downturn Is a Smart Time for a Roth Conversion

A downturn in the stock market may seem like a time to retreat, but for savvy investors, it can be the perfect moment to make strategic financial moves. Here’s why:

1. You Get More Shares for Your Money

When stock prices drop, the value of your traditional IRA also declines. If you convert those assets to a Roth IRA during a downturn, you’re moving shares at a lower valuation, meaning you pay taxes on a lower dollar amount.

For example:

If your traditional IRA held $100,000 before a downturn and its value drops to $80,000, a Roth conversion would only trigger taxes on the $80,000 instead of $100,000.
When the market recovers, those assets will grow tax-free within your Roth IRA.

By converting at a discount, you position yourself for greater tax-free growth when the market rebounds.

2. You Can Pay Less in Taxes

Since the IRS taxes Roth conversions as ordinary income, the lower your conversion amount, the less you’ll owe in taxes. If a downturn reduces your taxable income (for example, if you have lower capital gains or fewer bonuses this year), you may land in a lower tax bracket—making a Roth conversion even more attractive.

3. No Required Minimum Distributions (RMDs)

Unlike traditional IRAs, Roth IRAs don’t require minimum distributions when you hit age 73. That means you can keep your money invested longer, allowing it to grow tax-free for as long as you want.

4. More Flexibility in Retirement

A Roth conversion now can provide greater flexibility later. By having both traditional and Roth funds, you can better control your taxable income in retirement, pulling from different accounts depending on your tax situation each year.

Breaking It Down: A Simple Roth Conversion Example

Let’s say you’re planning to convert $8,000 into a Roth IRA. Here’s how the numbers might play out in different market conditions:

When the market is high: The stock you want to buy is $100 per share. Your $8,000 buys 80 shares.
When the market is low: The same stock is now $80 per share. Your $8,000 buys 100 shares.

If the stock eventually rebounds to $100 per share, the account value in each scenario would be:

Market High Conversion: 80 shares × $100 = $8,000
Market Low Conversion: 100 shares × $100 = $10,000

That’s a 25% gain in your tax-free Roth account simply because you converted during a downturn.

How to Decide If a Roth Conversion Is Right for You

While a Roth conversion can be a smart move, it’s not a one-size-fits-all strategy. Consider these factors before moving forward:

1. Your Current vs. Future Tax Bracket

If you expect your tax rate to be higher in retirement, a Roth conversion now at a lower tax rate makes sense.
If you’re currently in a high tax bracket but expect it to drop later, waiting might be a better choice.

2. Your Ability to Pay the Taxes

Taxes on the conversion should ideally be paid from a non-retirement account.
Using IRA funds to pay taxes means you’ll be left with a smaller balance growing tax-free.

3. Your Retirement Timeline

If you plan to retire soon and need the money within five years, a Roth conversion might not be ideal. Withdrawals from converted funds within five years of conversion trigger a penalty.

4. Your Estate Planning Goals

If you want to pass on wealth tax-free to heirs, a Roth conversion is a great tool.
Unlike traditional IRAs, Roth IRAs don’t require heirs to pay taxes on withdrawals.

How to Execute a Roth Conversion in a Downturn

If you decide a Roth conversion makes sense, here’s how to get started:

Evaluate Your Portfolio – Identify which assets are best suited for conversion.
Estimate Taxes Owed – Work with a fiduciary financial advisor or CPA to calculate tax liability.
Choose a Conversion Amount – Decide how much you can afford to convert while staying in your tax bracket.
Initiate the Conversion – Work with your brokerage to move funds from your traditional IRA to a Roth IRA.
Pay the Taxes – Ensure you have cash on hand to cover the tax bill without tapping into retirement savings.

Common Roth Conversion Mistakes to Avoid

Before you jump in, avoid these pitfalls:

Converting Too Much at Once – Large conversions can push you into a higher tax bracket. Consider a multi-year conversion strategy.
Not Planning for the Tax Bill – Don’t forget you’ll owe taxes on the converted amount in the year of conversion.
Overlooking the Five-Year Rule – If you convert funds, you must wait five years before withdrawing them without penalty.

Final Thoughts: Should You Convert to a Roth During a Downturn?

A Roth conversion is one of the smartest moves you can make during a market downturn. By converting assets when their value is temporarily lower, you reduce your tax burden and set yourself up for greater tax-free growth in the future.

However, this strategy isn’t right for everyone. If you’re unsure whether a Roth conversion fits your financial plan, contact us today to discuss whether a Roth conversion is the right move for you.

Healthcare in Retirement: What You Need to Know to Plan Ahead

Posted on February 5, 2025February 3, 2025 by Brian Colvert

When people dream about retirement, they often picture traveling the world, spending more time with family, or picking up long-forgotten hobbies. What they don’t envision is the growing cost of healthcare and how it can quickly derail even the best-laid retirement plans. The reality is that Medicare doesn’t cover everything, and medical expenses tend to increase as we age. Without proper planning, these costs can become a major burden, potentially draining your savings and limiting your retirement lifestyle.

Today we’ll explore the key aspects of healthcare planning in retirement, including Medicare basics, long-term care, and smart strategies to manage medical expenses so you can enjoy your golden years with peace of mind.

Listen anywhere you stream Podcasts

iTunes | Spotify | iHeartRadio | Amazon Music

The Real Cost of Healthcare in Retirement

One of the biggest financial shocks retirees face is just how much they will spend on healthcare. A study from Fidelity estimates that a 65-year-old couple retiring today will need approximately $315,000 for healthcare costs throughout retirement. This number doesn’t even include long-term care expenses, which can be astronomical. Without a plan in place, these costs can quickly eat into your retirement savings, leaving you financially vulnerable.

Healthcare costs increase due to several factors:

Aging-related conditions – The older we get, the more medical care we need.
Rising healthcare inflation – Medical costs tend to increase faster than general inflation.
Gaps in Medicare coverage – Medicare is helpful but doesn’t cover everything, leaving retirees to cover additional costs out of pocket.

So, how can you prepare for these expenses? Let’s start with the foundation of retirement healthcare: Medicare.

Understanding Medicare: What It Covers and What It Doesn’t

Medicare is a federal health insurance program primarily for people aged 65 and older. While it provides essential coverage, it doesn’t pay for all healthcare expenses. Here’s a quick breakdown of the different parts of Medicare:

Medicare Part A (Hospital Insurance): Covers inpatient hospital stays, skilled nursing facility care, hospice care, and some home health care. Most people do not pay a premium for Part A.
Medicare Part B (Medical Insurance): Covers outpatient care, doctor visits, preventive services, and some home health care. There is a monthly premium for Part B.
Medicare Part D (Prescription Drug Coverage): Helps cover the cost of prescription drugs. Private insurance companies offer Part D plans.
Medicare Advantage (Part C): A private insurance alternative to traditional Medicare that often includes additional benefits like vision, dental, and hearing coverage.

While Medicare provides significant coverage, there are gaps, such as:

No coverage for long-term care – Nursing home stays or in-home caregiving are not covered under Medicare.
High out-of-pocket costs – Deductibles, copays, and coinsurance can add up quickly.
Limited dental, vision, and hearing coverage – Medicare does not cover most dental work, eye exams for glasses, or hearing aids.

The Hidden Costs of Medicare

Many retirees are surprised to learn that Medicare costs aren’t one-size-fits-all. If you have a higher retirement income, you could end up paying more for your Medicare premiums. Medicare uses a two-year lookback period to determine your Income-Related Monthly Adjustment Amount (IRMAA), which increases premiums for those with higher incomes.

Additionally, Medicare does not cover everything. Some of the biggest out-of-pocket expenses for retirees include:

Medicare Part B and D premiums – These increase if your income is above a certain threshold.
Medicare supplement insurance (Medigap) – Helps cover out-of-pocket costs but comes at an additional monthly premium.
Long-term care costs – Not covered by Medicare and can be financially devastating.
Prescription drugs – Depending on your medication needs, costs can vary significantly.

How to Plan for Healthcare Costs in Retirement

To avoid healthcare expenses derailing your retirement, it’s crucial to plan ahead. Here are some strategies to ensure you’re financially prepared:

1. Estimate Your Future Healthcare Costs

Understanding what you might spend on healthcare can help you plan accordingly. Consider your current health, family medical history, and potential long-term care needs when estimating costs.

2. Take Advantage of a Health Savings Account (HSA)

If you’re still working and have access to a Health Savings Account (HSA), it’s one of the best tools for saving for healthcare expenses in retirement. HSAs offer triple tax advantages:

Contributions are tax-deductible.
Growth is tax-free.
Withdrawals for qualified medical expenses are tax-free.

HSAs can be a powerful way to accumulate tax-free savings to cover future healthcare costs.

3. Consider a Medicare Supplement Plan (Medigap)

Since Medicare doesn’t cover everything, many retirees opt for a Medigap policy to help cover additional expenses like copayments, deductibles, and coinsurance. There are multiple plan options, so working with a financial advisor to select the right coverage is key.

4. Plan for Long-Term Care

One of the most significant and often overlooked retirement expenses is long-term care. Whether it’s assisted living, home care, or a nursing home, these services are expensive and not covered by Medicare. Some ways to prepare include:

Long-term care insurance – Policies help cover extended care costs but can be expensive.
Hybrid life insurance policies – Some life insurance plans offer long-term care benefits if needed.
Self-funding – If you have significant assets, you may choose to set aside money specifically for long-term care.

5. Optimize Your Retirement Income to Manage Medicare Costs

Since Medicare premiums are income-based, being strategic about your retirement income can help reduce costs. Consider:

Using Roth IRAs or HSAs to withdraw tax-free income.
Strategizing Social Security withdrawals to avoid pushing your income into a higher premium bracket.
Working with a CERTIFIED FINANCIAL PLANNER™, like us, to minimize tax liability in retirement.

Get Your Free Social Security & Medicare Guide

Planning for healthcare in retirement can feel overwhelming, but you don’t have to navigate it alone. We’ve created a free, comprehensive Social Security & Medicare Guide which is updated annually to help you understand your benefits, avoid costly mistakes, and make informed decisions about your healthcare coverage.

Final Thoughts: A Proactive Approach Pays Off

Healthcare is one of the most significant financial considerations in retirement. Without a plan, it can quickly drain your savings and force difficult financial decisions. By understanding Medicare, estimating costs, and implementing strategies like HSAs and long-term care planning, you can protect your retirement savings and enjoy the retirement you’ve always envisioned.

The key takeaway? Plan for it, plan for it, plan for it. The best time to prepare for healthcare costs in retirement is before you need them. Don’t let medical expenses catch you off guard—take action today.

If you’re looking for personalized guidance on planning for healthcare costs in retirement, we are here and happy to help. Schedule a complimentary call with us today.

Zoom Out: Optimizing Retirement Accounts

Posted on November 20, 2024January 22, 2025 by Brian Colvert

Optimizing Retirement Accounts Tax Strategies

Managing and optimizing your retirement accounts and tax strategies is no small task. As you approach retirement, you may find yourself juggling a variety of accounts—401(k)s, IRAs, brokerage accounts, and even less common investments like private equity or cryptocurrency. This fragmented landscape can make it hard to see the full picture, let alone create a strategy that minimizes taxes and maximizes growth.

If this sounds familiar, it might be time to “zoom out” and look at your accounts as a cohesive portfolio. By shifting your focus from individual accounts to your overall financial landscape, you can create a tax-efficient strategy that works for your unique situation. In this post, we’ll walk you through the benefits of this approach and how to implement it.

Listen anywhere you stream Podcasts

iTunes | Spotify | iHeartRadio | Amazon Music

–

Why You Have So Many Accounts

It’s common for people to accumulate multiple accounts over the years. Perhaps you’ve switched jobs a few times, leaving behind 401(k)s with previous employers. Maybe you and your spouse have opened separate brokerage accounts or inherited an IRA. Add in tax-advantaged accounts like Roth IRAs and Health Savings Accounts (HSAs), and it’s no wonder your financial picture feels cluttered.

While having diverse accounts can offer flexibility, it can also lead to inefficiencies. If each account is managed in isolation, you may miss opportunities to optimize your retirement accounts and overall tax strategy or align your investments with your risk tolerance.

The Risks of Managing Accounts in Isolation

When managing retirement accounts individually, many people default to mirroring the same investment strategy across all of them. For example, they might allocate 60% to equities and 40% to bonds in every account. While this approach might feel consistent, it can lead to inefficiencies, particularly when it comes to taxes.

Each type of account—taxable, tax-deferred, and tax-free—has unique rules about how contributions, growth, and withdrawals are taxed. Ignoring these differences can result in unnecessary tax burdens, lower returns, and missed opportunities to grow your wealth.

The Solution: Viewing Your Portfolio as a Whole

The key to overcoming these inefficiencies and optimizing retirement accounts is to view your accounts as parts of a unified portfolio rather than standalone entities. This strategy, often referred to as asset location, involves placing investments in the accounts where they are most tax-efficient. By “zooming out” and considering your entire portfolio, you can optimize for both tax savings and growth.

Step 1: Understand Your Accounts

Before you can optimize your portfolio, it’s important to understand the tax implications of each account type:

Taxable Accounts (Brokerage Accounts):
Contributions are made with after-tax dollars, and you’ll owe taxes on dividends, interest, and capital gains each year.
- Best for: Investments with low tax burdens, such as municipal bonds or tax-efficient index funds.
Tax-Deferred Accounts (401(k)s, Traditional IRAs):
Contributions are often pre-tax, and you won’t pay taxes on growth until you withdraw funds in retirement.
- Best for: Growth-oriented investments, as taxes are deferred.
Tax-Free Accounts (Roth IRAs):
Contributions are made with after-tax dollars, but growth and withdrawals are tax-free.
- Best for: High-growth investments, as all gains are tax-free.

Step 2: Allocate Assets Strategically

Once you understand the tax implications of each account type, you can decide where to place your investments for maximum efficiency. Your asset allocation strategy is key.

Place Fixed-Income Investments in Taxable Accounts
Fixed-income investments like bonds generate interest, which is taxed as ordinary income in taxable accounts. However, municipal bonds (munis) offer a tax-efficient alternative, as their interest is generally exempt from federal taxes (and sometimes state taxes if issued in your state).
Put Growth-Oriented Investments in Tax-Deferred and Tax-Free Accounts
Stocks and other high-growth assets are better suited for tax-advantaged accounts like IRAs and Roth IRAs. In a traditional IRA, your investments grow tax-deferred, meaning you won’t pay taxes until you withdraw the money. In a Roth IRA, growth is entirely tax-free, making it an ideal home for aggressive investments.
Balance Across Accounts
For example, if you want a portfolio that’s 50% equities and 50% bonds, you might place all your equities in a Roth IRA and all your bonds in a taxable account. Together, your accounts maintain your desired allocation, but each investment is housed in the most tax-efficient location.

Step 3: Optimize Withdrawals

As you approach retirement, the order in which you withdraw funds from your accounts can also impact your tax burden. A common strategy is to withdraw from taxable accounts first, allowing tax-deferred and tax-free accounts to continue growing. However, this depends on your specific situation, including your income needs and tax bracket.

Benefits of a Unified Approach

By treating your accounts as a whole, you can unlock several benefits:

Tax Savings:
Minimizing taxes on dividends, interest, and capital gains allows you to keep more of your money.
Higher Growth Potential:
Placing growth-oriented investments in tax-advantaged accounts lets them compound more effectively.
Simplified Portfolio Management:
Instead of managing each account individually, you can focus on your overall allocation and strategy.

Common Misconceptions

It’s easy to fall into the trap of thinking every account should have the same allocation. While consistency feels safe, it often leads to inefficiencies. Another misconception is that asset location only matters for high-net-worth individuals. In reality, anyone with multiple accounts can benefit from this strategy.

How to Get Started Optimizing Your Retirement Accounts

Review Your Accounts:
Take stock of all your accounts, including their balances, investment types, and tax statuses.
Consult a Financial Advisor:
Asset location can get complex, especially if you have a mix of account types. A CERTIFIED FINANCIAL PLANNER™ (like us, wink, wink) can help you create a strategy tailored to your needs.
Monitor and Adjust:
Life changes, market conditions, and tax laws can all impact your strategy. Regularly review your portfolio to ensure it remains aligned with your goals.

Final Thoughts

Managing and optimizing multiple retirement accounts doesn’t have to be overwhelming. By zooming out and viewing your portfolio as a whole, you can create a tax-efficient strategy that maximizes growth and minimizes headaches. Whether you’re just starting to think about retirement or already have a mix of accounts, it’s never too late to take a smarter approach.

At Bonfire Financial, we specialize in helping clients make sense of their financial landscape. If you’d like help evaluating your accounts and creating a strategy, reach out to us today.

Are You Making These 3 Common Retirement Mistakes?

Posted on October 30, 2024October 11, 2024 by Brian Colvert

Retirement marks a significant life transition, one that requires careful planning and a realistic understanding of what lies ahead. Despite all the guidance and information available, there are still many common retirement mistakes that many pre-retirees make, often without realizing the potential consequences. Avoiding these pitfalls can help ensure a comfortable and worry-free retirement. Let’s take a closer look at these three overlooked areas.

Listen anywhere you stream Podcasts

iTunes | Spotify | iHeartRadio | Amazon Music

Retirement Mistake #1 – Underestimating Healthcare and Medical Expenses

One of the most significant challenges that retirees face is handling healthcare costs. Many assume that Medicare will cover all their needs once they turn 65, but that’s far from the truth. While Medicare offers some assistance, it doesn’t cover everything. Parts of it, like Medicare Part B and Part D come with premiums based on your income.

According to recent studies, the average retired couple may need over $300,000 to cover medical expenses during retirement. And that number could rise as healthcare costs continue to increase. So, if you’re approaching retirement without a solid plan for medical expenses, you could be facing a serious shortfall.

Medicare Part A, which covers hospital stays, has its limits. It doesn’t provide full coverage for all medical costs, especially when it comes to long-term care like nursing homes or in-home care for chronic illnesses. You may find yourself needing additional Medicare Advantage plans or Medigap policies, both of which come with their own costs.

Long-term care is another often-overlooked area. No one wants to imagine themselves needing assistance due to age-related ailments. However, the reality is that many people will require some form of long-term care. Consider investing in long-term care insurance, especially if there’s a family history of illnesses like Alzheimer’s or Parkinson’s. Waiting too long to secure this type of insurance can result in significantly higher premiums or even disqualification based on pre-existing conditions.

Retirement mistakes are common. Preparing for healthcare costs in retirement is essential to avoid the unexpected financial strain, as Medicare alone won’t cover all expenses. By planning ahead and considering options like Medigap and long-term care insurance, you can better protect your financial future and ensure access to necessary care.

Retirement Mistake #2 – Ignoring Car Replacement and Maintenance Costs

While healthcare is a commonly discussed retirement expense, many people overlook the cost of maintaining and replacing their vehicles. Most retirees own a car and rely on it for day-to-day activities, whether it’s visiting family, going to the grocery store, or driving to leisure activities.

Cars don’t last forever, and depending on when you retire, you may need to replace your vehicle a few times. Cars come with maintenance costs, which only increase as the car ages. Routine expenses like oil changes, new tires, and brake repairs can add up, and unexpected repairs can come as a nasty surprise to anyone living on a fixed income. Beyond this, the price of new vehicles has been rising steadily, with even modestly priced cars costing tens of thousands of dollars. If you’re accustomed to driving luxury cars, that expense can easily double or even triple.

So, as you budget for retirement, make sure to factor in the potential costs of replacing your vehicle every 8-10 years. You’ll also want to consider rising costs due to inflation, especially if you’re hoping to drive a newer or more luxurious model. By setting aside funds specifically for car replacement and maintenance, you’ll be better equipped to handle these expenses without impacting other areas of your retirement budget.

Overlooking vehicle replacement and maintenance costs is another one of the common retirement mistakes that can lead to unexpected financial burden. By planning for these expenses, you can avoid costly surprises and keep your retirement budget on track.

Retirement Mistake #3 – Failing to Adjust Lifestyle Expectations to Fit Retirement Income

If you’re a high-income earner, you may be accustomed to a certain lifestyle—maybe it’s regular vacations, fine dining, or even memberships to clubs or organizations. Unfortunately, a luxurious lifestyle can be tough to maintain on a retirement budget.

The first step is to ensure that your savings can support your lifestyle. A general rule of thumb is to aim for about 70-80% of your pre-retirement income to maintain your standard of living. This can vary widely depending on your specific circumstances. For those accustomed to high incomes, this percentage can still leave a substantial gap if your expenses are disproportionately high.

Beyond savings, it’s essential to evaluate your current lifestyle and determine where adjustments might be necessary. You may need to make trade-offs to align your retirement spending with your income. For example, if luxury travel is a high priority, you might need to scale back in other areas, such as dining out or leisure activities. Conversely, if you have a passion for fine dining, you might consider fewer vacations or shorter trips to balance costs.

Take time to analyze your current spending and decide which elements are most important to you. If frequent travel is a priority, perhaps you can scale back in other areas to accommodate this passion. If you enjoy dining out, consider how often you’ll want to do so during retirement and factor that into your budget. It might mean fewer trips to five-star restaurants, but with thoughtful planning, you can still enjoy occasional indulgences.

You may also need to make some lifestyle adjustments to ensure your retirement savings last. This could involve downsizing your home, traveling less frequently, or taking a more conservative approach to discretionary spending. A financial advisor can help you analyze your spending and create a budget that balances your priorities with your resources.

Neglecting to adjust your lifestyle to match retirement income is a common mistake that can strain your finances. By recognizing these retirement mistakes early and planning accordingly, you can avoid financial stress and achieve a more sustainable retirement.

In Conclusion

The key to avoiding these common retirement mistakes is to start planning early. Work with a CERTIFIED FINANCIAL PLANNER™ to build a comprehensive financial plan that addresses healthcare costs, vehicle expenses, and lifestyle adjustments. By taking these steps now, you’ll be better prepared to enjoy a comfortable retirement free from financial stress. To recap:

Healthcare: Make sure to consider all aspects, from Medicare premiums to long-term care insurance.

Vehicles: Create a fund for car replacement and maintenance. Remember that you may need to replace your car multiple times during retirement.

Lifestyle: Be realistic about what your savings can support, and prioritize the areas that matter most to you.

Incorporating these three considerations into your retirement plan will ensure that you’re prepared for the reality of retirement, allowing you to focus on what truly matters—enjoying this new chapter of your life.

Next steps:

If you’re looking to avoid these retirement mistakes and plan confidently for the future, let’s chat. Schedule a call with us today to start building a retirement plan that works for you!

401k Do’s and Don’ts: Smart Strategies as You Near Retirement

Posted on October 23, 2024January 20, 2025 by Brian Colvert

As retirement approaches, the way you manage your 401k becomes more critical than ever. With the right strategies, you can protect your hard-earned savings, minimize risks, and set yourself up for a comfortable retirement. In this Podcast, we’ll explore essential do’s and don’ts for managing your 401k as you near retirement, helping you make informed decisions about your financial future.

Listen anywhere you stream Podcasts

iTunes | Spotify | iHeartRadio | Amazon Music

1. Understand How Your Risk Tolerance Changes Near Retirement

Don’t assume your risk tolerance remains the same as you age. When you’re younger, it’s easier to take on higher risk for the potential of higher returns, as you have more time to recover from any downturns. However, as you approach retirement, you should reevaluate your tolerance for risk.

Do consider shifting towards a more conservative investment strategy. This could involve reallocating your assets to include more bonds or other fixed-income securities, which tend to be less volatile than stocks. Target-date funds, which automatically adjust your investment mix as you age, can be a convenient way to ensure your portfolio becomes more conservative over time.

2. Avoid Overly Aggressive Investments

It can be tempting to chase high returns, especially if you’re trying to catch up on retirement savings. However, overly aggressive investments can expose you to significant losses, especially if there’s an economic downturn close to your retirement date.

Don’t let short-term market trends drive your decisions. Avoid investing heavily in high-risk stocks based on recent performance. The market’s past performance doesn’t guarantee future results, and downturns can occur suddenly.

Do seek a balanced portfolio that aligns with your updated risk tolerance. Consider consulting a CERTIFIED FINANCIAL PLANNER™ to review your portfolio and ensure it aligns with your long-term goals and timeline. This can help protect you from the emotional impulse to sell during market dips or take unnecessary risks.

3. Keep Contributing to Your 401k

Many people assume they should stop contributing to their 401k once they hit a certain age, but there are often advantages to continuing to save. The closer you get to retirement, the more crucial these contributions become.

Do take advantage of catch-up contributions if you’re over 50. These allow you to contribute additional funds beyond the standard annual limit, giving you a boost in retirement savings. Make the most of your employer’s match as well, as this is essentially free money going into your retirement fund.

Don’t assume that just because retirement is near, saving becomes less important. Every contribution counts, as it not only grows through investment returns but also helps keep you on track with your financial goals.

4. Regularly Rebalance Your Portfolio

Over time, certain investments in your portfolio may grow faster than others, leading to an unintended imbalance in your asset allocation. This can increase your risk exposure if, for instance, stocks outperform bonds, making equities a larger portion of your portfolio than originally intended.

Do rebalance your portfolio at least once a year to ensure it aligns with your target asset allocation. As you approach retirement, your target asset allocation will likely lean more toward stability and income generation rather than growth. By rebalancing, you can reduce your risk and bring your portfolio back in line with your retirement goals.

Don’t ignore market fluctuations. By rebalancing, you’re essentially selling high and buying low, which can be a disciplined approach to investing. If you’re unsure how to rebalance your portfolio, a financial advisor can help you assess and adjust your asset allocation as needed.

5. Be Cautious with Annuities

Annuities can be an attractive option because they offer guaranteed income. However, they are not a one-size-fits-all solution and can come with high fees and complex terms.

Don’t buy an annuity without fully understanding how it works and whether it’s appropriate for your situation. Some advisors may push annuities due to the commissions they receive, but that doesn’t mean it’s the right choice for everyone. Annuities can limit your liquidity and may have penalties for early withdrawal.

Do consider an annuity if it aligns with your overall retirement plan and you’re looking for a stable income source. Work with an advisor who will explain the pros and cons without a bias toward selling you a specific product. Annuities might be suitable in situations where you need a guaranteed income stream, but it’s essential to weigh the costs and benefits carefully.

6. Make Tax-Efficient Withdrawals

When you start withdrawing from your 401k in retirement, you’ll need to pay income taxes on the distributions. Depending on your total retirement income, these withdrawals could push you into a higher tax bracket. See what tax bracket you are in here.

Do plan your withdrawals strategically to minimize your tax burden. If you have other retirement accounts, such as a Roth IRA, consider taking distributions from them in a way that helps you manage your tax liability. For example, withdrawing from a traditional 401k and a Roth IRA in the same year can help you stay within a lower tax bracket.

Don’t withdraw large sums from your 401k in a single year unless necessary. Large withdrawals can trigger higher taxes and potentially Medicare surcharges. By managing your withdrawals thoughtfully, you can stretch your savings further and avoid paying more tax than necessary.

7. Consider the Role of Social Security

For many retirees, Social Security forms a crucial part of their retirement income. However, when and how you claim these benefits can significantly impact the amount you receive over your lifetime.

Do research the optimal age to start claiming Social Security based on your situation. While you can start as early as age 62, waiting until full retirement age (or even age 70) increases your monthly benefit. If you’re married, coordinating benefits with your spouse can also maximize your household income.

Don’t overlook Social Security as a part of your retirement plan. It’s essential to understand how your 401k distributions and Social Security benefits work together. A well-planned approach to claiming Social Security can help ensure you get the most out of your retirement income sources.

8. Review Beneficiary Designations

Life changes, such as marriage, divorce, or the birth of a child, may impact whom you want to inherit your 401k savings. Your retirement accounts don’t pass through your will but are instead directed by the beneficiary designations on the account.

Do periodically review and update your beneficiary designations to ensure they reflect your current wishes. This is a simple task but can prevent potential disputes or complications for your heirs. Make sure your beneficiaries are aware of their status, so they know what to expect.

Don’t assume that your will covers your 401k. Many people make this mistake and inadvertently leave their retirement savings to the wrong person. By keeping your beneficiary designations up to date, you can avoid this oversight.

9. Work with CERTIFIED FINANCIAL PLANNER™ (CFP)

As you get closer to retirement, your financial decisions become more complex. It can be challenging to navigate investment choices, tax implications, and withdrawal strategies without professional guidance.

Do consider consulting a CERTIFIED FINANCIAL PLANNER™ (CFP) who specializes in retirement planning. A CFP can provide personalized advice that considers your entire financial picture and helps you create a tailored strategy for your 401k and other retirement assets.

Don’t go it alone, especially if you feel uncertain about any aspect of your retirement planning. The insights and guidance of a professional can be invaluable, particularly as you make significant decisions that will impact your future financial security.

10. Stay Informed and Flexible

The financial landscape is always changing, with new laws, products, and strategies emerging regularly. As a retiree or soon-to-be retiree, staying informed can help you make better decisions and adapt to changing circumstances.

Do continue educating yourself on retirement topics, whether through podcasts, articles, or books. Financial literacy can help you feel more in control and make informed choices.

Don’t assume that your plan is set in stone. Flexibility is essential as you move through different stages of retirement. Regularly reviewing your plan and making adjustments as needed can help you stay on track.

In Conclusion

Planning for retirement involves more than simply building a nest egg. By paying attention to these 401k do’s and don’ts in retirement, you can make smarter choices about your savings, protect your assets, and set yourself up for a more secure retirement. Remember, retirement planning is an ongoing process, and the strategies that work for you today may need adjustment in the future. By staying proactive and seeking guidance when necessary, you’ll be well-equipped to make the most of your retirement years.

Next Steps:

Ready to take control of your retirement planning? Schedule a call with us today to discuss your 401k strategy and make sure you’re on the right path for a secure and comfortable retirement. Contact us at today.

Why the FIRE Movement is BS

Posted on October 9, 2024January 20, 2025 by Brian Colvert

The FIRE movement (Financial Independence, Retire Early) gained popularity in recent years, especially among millennials and Gen Z. With promises of retiring in your 30s or 40s, the concept seems appealing. Who wouldn’t want to escape the daily grind and achieve financial freedom early in life? However, as alluring as the idea may sound, the reality of the FIRE movement isn’t as straightforward or as fulfilling as many think. In this post, we’ll dive into why the FIRE movement might not be the best path to true financial freedom and offer a balanced approach to achieving financial independence while still enjoying life now.

Listen anywhere you stream Podcasts

iTunes | Spotify | iHeartRadio | Amazon Music

What is the FIRE Movement

The roots of the FIRE movement can be traced back to Vicki Robin and Joe Dominguez, who wrote the book Your Money or Your Life in 1992. Robin and Dominguez. While the idea originated in the early ’90s, it took more than two decades to catch on with people looking for alternatives to the traditional retirement timeline.

At its core, the FIRE movement revolves around living a life of extreme frugality, saving a large portion of your income—often 50% or more—and investing wisely so that you can retire decades earlier than the traditional retirement age. The goal is to accumulate enough assets that the income generated from those assets covers your living expenses indefinitely. This concept, while well-intentioned, has a few glaring issues.

The Five Levels of Financial Independence

Before diving into the criticisms of the FIRE movement, it’s essential to understand the different levels of financial independence:

Basic Needs Coverage: This is the first level, where your income and assets are sufficient to cover your basic needs, such as housing, food, and utilities. You also have a buffer in case of emergencies, allowing you to survive without income for three to six months.
Needs and Wants Coverage: At this level, your income and assets cover both your basic needs and your desires, such as traveling, hobbies, and occasional luxuries.
Abundance: Here, your income and assets provide more than what you need or want, allowing for substantial savings and investments. There’s a sense of financial comfort, knowing you have more than enough.
Asset-Based Security: This level means that your assets alone, without needing a job, can cover your basic needs. You might not have all your desires met, but you’re financially secure.
Complete Financial Freedom: The pinnacle of financial independence, where your assets are more than enough to cover all your needs and wants. At this stage, work becomes a choice rather than a necessity.

The Problem with the FIRE Movement:

Living for Tomorrow at the Cost of Today

While the idea of reaching the highest levels of financial independence early is appealing, the way the FIRE movement advocates achieving this can be problematic. Here are some of the critical concerns:

Extreme Frugality Isn’t Sustainable or Enjoyable: Many FIRE movement advocates emphasize a lifestyle of extreme frugality. This often includes measures like living on a shoestring budget, renting out rooms in your house, avoiding travel, or even subsisting on inexpensive, unhealthy, cheap food options. While these sacrifices might help you save money, they come at the cost of enjoying your life in the present. The constant focus on penny-pinching can make life feel restrictive and joyless.
Postponing Life’s Pleasures: The FIRE movement philosophy often entails putting off enjoyable experiences until after retirement. Whether it’s traveling, dining out, or pursuing hobbies, the movement suggests delaying these pleasures to save more money now. But what if tomorrow never comes? Life is unpredictable, and postponing happiness for a future that isn’t guaranteed can lead to regrets.
You’re Still Working, Just in a Different Form: Many FIRE followers don’t truly retire. Instead, they often turn to side gigs, freelancing, or becoming influencers to maintain their financial independence. In essence, they shift from traditional employment to other forms of work, which raises the question: are they genuinely retired, or just working in a different capacity?
Potential Regrets and Missed Opportunities: As financial planners, we’ve seen clients who regret not taking vacations, not spending quality time with loved ones, or not pursuing passions because they were too focused on saving every penny. These missed opportunities for joy and connection can lead to dissatisfaction and regret later in life.

A Balanced Approach to Financial Independence

Financial independence is a worthy goal, but it shouldn’t come at the expense of your present happiness. Here’s how you can work towards financial freedom while still living a fulfilling life:

Find the Right Balance: Instead of aiming to save 50% or more of your income, find a savings rate that allows you to progress toward your financial goals while still enjoying life now. A more moderate savings rate can still lead to substantial growth over time, especially with consistent, wise investing.
Prioritize Experiences That Matter to You: Spend money on what brings you genuine joy and value. If you love traveling, set aside money for it. If fine dining is your passion, indulge occasionally. The key is to know what truly makes you happy and allocate resources accordingly. It’s not about living lavishly but living meaningfully.
Save with Purpose, Not Deprivation: Financial independence doesn’t mean living in deprivation. It’s about making conscious choices. Adopt the mindset of saving for the things that matter most to you, not just for the sake of saving. This perspective shifts your financial strategy from one of sacrifice to one of purpose.
Invest in Experiences, Not Just Assets: While building your asset base is crucial, don’t forget to invest in experiences that enrich your life. Whether it’s spending time with loved ones, exploring new places, or learning new skills, these experiences create memories and personal growth that money alone can’t buy.
Remember the Importance of Flexibility: Life is full of changes and uncertainties. Your financial plan should be adaptable. If an opportunity arises that excites you—like a spontaneous trip or a new hobby—don’t feel guilty about seizing it. Flexibility allows you to enjoy life’s moments without derailing your long-term goals.
Work Should Be Enjoyable, Not Just a Means to an End: If you find yourself in a job you hate just to save for early retirement, consider finding work that you enjoy. Financial independence shouldn’t be about escaping a miserable job; it should be about having the freedom to pursue work that you find fulfilling.

The Role of a Financial Planner

Navigating the path to financial independence can be complex, and having a guide can make a significant difference. A CERTIFIED FINANCIAL PLANNER™ can help you:

Create a Personalized Plan: A good financial planner will consider your unique circumstances, goals, and values, helping you develop a financial plan that balances saving with living.
Adjust as Life Changes: As your life evolves, so should your financial plan. A planner can help you adjust your strategy to accommodate new goals, opportunities, or challenges.
Avoid Common Pitfalls: Financial planners can provide guidance that helps you avoid the common mistakes of extreme frugality or overspending, ensuring a balanced approach to your financial independence journey.

Conclusion: Financial Independence Without Sacrifice

The FIRE movement has undoubtedly brought valuable conversations about financial independence to the forefront. However, the notion that you must sacrifice your present happiness for a future that isn’t guaranteed is flawed. True financial freedom comes from balancing smart saving and investing with living a life full of joy, experiences, and meaning.

You don’t need to live off ramen or delay your dreams to achieve financial independence. Instead, you can craft a financial plan that lets you enjoy today while still preparing for tomorrow. After all, life is too short not to be lived to its fullest.

Next Steps

If you’re ready to find a balanced approach to financial independence that suits your lifestyle and goals, we’re here to help. Contact us at today to start your journey toward a fulfilling and financially secure future.

Mastering Monthly Expenses in Retirement

Posted on October 2, 2024January 20, 2025 by Brian Colvert

Mastering Monthly Expenses in Retirement

Listen anywhere you stream Podcasts

iTunes | Spotify | iHeartRadio | Amazon Music

Transitioning from a regular paycheck to living off your savings in retirement can be a daunting experience, regardless of how much wealth you’ve accumulated over the years. Whether you’re trying to live off one million dollars or ten million, the challenge remains the same: maintaining the lifestyle you’ve become accustomed to without the comfort of a steady paycheck. One effective way to navigate this transition is by focusing on monthly expenses rather than looking at your finances annually. This approach not only aligns more closely with your pre-retirement habits but also provides a clearer picture of your financial health, making retirement planning more manageable and less stressful.

Why Focus on Monthly Expenses in Retirement?

Most people receive their income on a weekly, bi-weekly, or monthly basis during their working years. It’s rare for anyone to think about their income solely on an annual basis, except perhaps when filing taxes. So why do many financial plans for retirement suddenly shift to an annual focus? This change can create anxiety and confusion, making it harder to relate to your new financial reality. By focusing on monthly expenses in retirement, you replicate the income flow you’ve been accustomed to for years, making the transition from working to retirement feel less like a leap into the unknown and more like a familiar routine.

Simulating Your Paycheck: The Power of Familiarity

One effective strategy to make the transition from a paycheck to retirement income smoother is to simulate a paycheck. This involves setting up automatic transfers from your retirement accounts to your checking account on a regular basis, mimicking the way you used to receive your salary. By doing this, you maintain a sense of normalcy and structure in your financial life, which can significantly reduce anxiety.

The regularity of a monthly “paycheck” brings consistency. For many retirees, the predictability of seeing funds arrive in their bank account just like it did during their working years provides comfort and confidence. This consistency ensures that you can continue to cover your ongoing living expenses and plan for discretionary spending without the constant worry of outliving your savings.

Income Sources and Asset Management

Retirement income typically comes from various sources, including Social Security, pensions, investments, and savings. The key to managing your monthly expenses in retirement is to align these income sources with your budget. This may involve creating a withdrawal strategy from your retirement accounts that balances your need for monthly income with the desire to let your investments grow.

1. Social Security and Pensions: These are often the cornerstone of retirement income for many individuals. Understanding the timing and amount of these benefits can help establish a reliable baseline of income. For example, knowing when to take Social Security can significantly impact the amount you receive each month.

2. Investment Income: Interest from bonds, dividends from stocks, and returns from real estate investments can provide a steady stream of income. Managing your portfolio to ensure a consistent yield, even if market conditions fluctuate, is crucial for financial stability in retirement.

3. Withdrawals from Retirement Accounts: Drawing from 401(k)s, IRAs, or other retirement accounts can supplement other income sources. A strategic withdrawal plan—such as the 4% rule or a dynamic withdrawal method that adjusts based on market performance—can help ensure that your savings last throughout your retirement.

Flexibility for Life’s Ebb and Flow

While it’s important to have a consistent income strategy, retirement isn’t static. Life will bring changes, whether it’s a desire to travel more, unexpected health expenses, or new hobbies. Understanding that some months will naturally cost more than others allows you to maintain flexibility without feeling constrained by a rigid budget.

For example, you might find yourself spending more in the summer months if you enjoy traveling or hosting family gatherings. Conversely, your expenses might be lower in other months, creating a natural balance over the course of the year. Embracing this ebb-and-flow approach allows you to enjoy your retirement without the stress of constantly sticking to a strict budget.

Creating a Safety Net: Planning for the Unexpected

Life is unpredictable, and having a safety net is crucial. Emergencies such as home repairs, medical needs, or sudden travel can disrupt even the best-laid plans. Establishing an emergency fund specifically for retirement ensures that you have quick access to cash without needing to liquidate investments at inopportune times.

Building this fund before retirement can give you peace of mind, knowing that unexpected expenses won’t derail your financial stability. A good rule of thumb is to have three to six months’ worth of living expenses set aside in a liquid, easily accessible account.

The Psychological Benefits of Monthly Planning

Focusing on monthly expenses in retirement rather than annual figures can have psychological benefits. Seeing regular income hit your bank account can create a sense of security and stability. It replicates the regularity of a paycheck, reducing the anxiety that can come with managing large sums of money over long periods.

This approach also makes it easier to set short-term financial goals and monitor your progress. By breaking down your financial plan into manageable, monthly segments, you create a more straightforward and actionable framework that’s easier to stick with. This not only promotes better financial management but also helps maintain your peace of mind in retirement.

Adapting to Inflation and Long-Term Changes

Inflation is a reality that can erode your purchasing power over time. As you plan your monthly budget, it’s crucial to consider how inflation might impact your expenses. Even a modest inflation rate can significantly increase the cost of living over a long retirement. To counter this, your investment strategy should include growth assets that can potentially outpace inflation. Regularly reviewing your budget to account for inflation ensures that you maintain your lifestyle without depleting your savings too quickly.

Planning for the Later Years

Retirement is not static; it evolves over time. In the earlier years, you might be more active, traveling, and enjoying various recreational activities. As you age, your spending might shift towards healthcare and home maintenance. Understanding this shift can help you plan more effectively for the different stages of retirement. For example, while you may budget more for travel and entertainment early on, you might allocate more for healthcare costs as you move into your later years.

Regular Reviews: A Key to Staying on Track

Just like in your working years, regular financial check-ups are important. Annual or semi-annual reviews of your retirement plan can help you adjust your strategy as needed. These reviews should consider changes in your lifestyle, health, and financial markets, ensuring that your plan remains aligned with your goals and needs.

Adjusting your withdrawal rates, rebalancing your investment portfolio, and updating your monthly income targets based on these reviews can help keep your retirement plan on track. Staying proactive rather than reactive will allow you to make informed decisions rather than being forced to make changes under stress.

Conclusion

Transitioning into retirement is a significant life change, but by focusing on monthly expenses, you can make this shift with confidence and peace of mind. Understanding your spending habits, creating a realistic budget, simulating a paycheck, and maintaining flexibility for life’s surprises are key steps to mastering your finances in retirement. Remember, the goal is to maintain the lifestyle you’ve worked so hard to achieve, without the stress and worry that can come from financial uncertainty. By taking a monthly approach to your retirement planning, you’re not only managing your money effectively but also ensuring that you can enjoy your retirement years to the fullest.

Mastering monthly expenses is not just about numbers; it’s about maintaining the quality of life you desire, feeling secure in your financial decisions, and having the freedom to enjoy the fruits of your labor without constant financial stress.

Next Steps:

If you are wondering when you can retire, or if you’re ready to take control of your retirement planning and want to ensure a smooth transition into this next chapter of life, we’re here to help. Schedule a free consultation call with us today, and let’s create a personalized plan tailored to your unique needs and goals. At Bonfire Financial, our team of CERTIFIED FINANCIAL PLANNER™ professionals are dedicated to helping you enjoy a financially secure and stress-free retirement. Reach out today!

Rethinking Home Equity in Your Retirement Strategy

Posted on September 11, 2024January 19, 2025 by Brian Colvert

Homeownership has long been a cornerstone of the American Dream, symbolizing stability, success, and financial security. For many, their home is the most significant asset they’ll ever own. As they approach retirement, the home equity they’ve built over the years can seem like a comforting safety net for retirement. However, relying on home equity as a primary component of your retirement strategy may not be as foolproof as it appears. Today we are exploring why it’s essential to rethink the role of home equity in your retirement planning and consider more reliable alternatives to ensure financial security in your golden years.

Listen anywhere you stream Podcasts:

iTunes | Spotify | iHeartRadio | Amazon Music

——

The Illusion of Home Equity as a Retirement Asset

At first glance, home equity seems like a robust financial resource. After all, if your home is fully paid off, you have a substantial amount of value tied up in that property. But this value is often more theoretical than practical when it comes to funding your retirement. Here’s why:

Home Equity is Not Liquid: Unlike investments in stocks, bonds, or even cash, home equity is not readily accessible. To tap into it, you need to either sell your home or borrow against it. Both options come with significant drawbacks that can impact your financial security and quality of life during retirement.
The High Cost of Downsizing: Many retirees consider downsizing as a way to unlock home equity. However, downsizing doesn’t always lead to a financial windfall. Housing markets fluctuate, and the costs associated with selling a home, purchasing a new one, and moving can eat into the equity you hoped to free up. Additionally, many retirees find that when they downsize in square footage, they end up upsizing in quality. Opting for newer or more luxurious homes may not save them much money after all.
Borrowing Against Your Home: Home equity loans or lines of credit allow you to borrow against your home’s value, but this approach comes with risks. You’re essentially taking on debt at a stage in life when your income may be fixed or decreasing. Rising interest rates can make these loans more expensive, and if you’re unable to keep up with payments, you risk losing your home.
The Psychological Value of Homeownership: There’s a strong emotional and psychological attachment to homeownership, especially in retirement. The idea of selling your home or taking on debt against it can feel unsettling for many people. Owning a home outright provides peace of mind. The thought of losing that security can be a significant barrier to making decisions that involve leveraging home equity.

Understanding the Role of Home Equity in Retirement Planning

While home equity may not be the financial windfall many expect in retirement, it does play a role in your overall financial picture. The key is to understand its place within a broader, diversified retirement strategy.

Shelter as a Basic Need: At its core, home equity represents the value of the shelter it provides. Maslow’s hierarchy of needs places shelter as one of the most fundamental human necessities, alongside food and water. In retirement, having a paid-off home can significantly reduce your living expenses. You are no longer have a mortgage to pay. This stability is invaluable, but it’s important to recognize that the equity in your home is primarily tied to your ability to live there, rather than as a liquid asset you can easily access for other needs.
Net Worth vs. Cash Flow: It’s important to distinguish between net worth and cash flow. Home equity contributes to your net worth, which looks great on paper, but it doesn’t directly contribute to your cash flow—the money you have available to spend on daily living expenses. In retirement, cash flow is critical. Having a high net worth due to home equity won’t help you pay for groceries, medical expenses, or travel..
Strategic Use of Home Equity: For some retirees, there are strategic ways to use home equity that don’t jeopardize their financial security. For example, a reverse mortgage might be an option for those who need to access cash but have no intention of passing the home on to heirs. However, reverse mortgages are complex and can be risky. They typically involve selling the home’s equity to a lender in exchange for regular payments. It’s crucial to fully understand the implications before considering this option.
Emergency Reserve: Instead of viewing home equity as a primary retirement asset, consider it as an emergency reserve. If unexpected expenses arise, or if your other retirement savings fall short, having the option to tap into home equity can provide a safety net. However, this should be a last resort rather than a cornerstone of your retirement plan.

Building a Comprehensive Retirement Strategy

Given the limitations of relying on home equity, it’s essential to build a comprehensive retirement strategy that incorporates multiple sources of income and assets. Here’s how to approach it:

Diversified Investments: A well-diversified investment portfolio that includes a mix of stocks, bonds, and other assets can provide the cash flow you need in retirement. Unlike home equity, these assets can be more easily converted into cash and are designed to generate income over time.
Retirement Accounts: Maximize contributions to retirement accounts such as 401(k)s, IRAs, and Roth IRAs. These accounts offer tax advantages and are specifically designed to provide income in retirement. The earlier you start contributing, the more time your investments have to grow.
Pension and Social Security: If you’re eligible for a pension or Social Security benefits, these can serve as reliable sources of income in retirement. It’s important to understand how these benefits work and how they fit into your overall plan. For example, delaying Social Security benefits can result in higher monthly payments
Regular Financial Check-Ups: Retirement planning isn’t a one-time event. It’s important to regularly review and adjust your financial plan. You need to ccount for changes in the market, your health, and your lifestyle. Working with a financial planner can help you stay on track and make informed decisions.

Conclusion: Home Equity as Part of a Balanced Retirement Plan

Home equity can be a valuable component of your retirement plan. However, it’s crucial to understand its limitations and not rely on it as your primary source of income. By viewing home equity as a piece of the larger puzzle—rather than the entire solution—you can build a more secure and flexible retirement strategy that provides the cash flow and peace of mind you need.

If you’re unsure how to integrate home equity into your retirement plan or want to explore other options for securing your financial future, we’d love to have a conversation with you. We specialize in helping clients navigate the complexities of retirement planning, ensuring that all aspects of your financial life are aligned with your goals.

Ready to rethink your retirement strategy? Contact us today to start your personalized financial field guide and take the next step toward a secure and fulfilling retirement.

Retirement Planning for Self-Employed Business Owners and 1099 Employees

Posted on August 14, 2024January 19, 2025 by Brian Colvert

Retirement Planning for Self-Employed & 1099 Employees – Listen to the full episode on the Podcast!

iTunes | Spotify | iHeartRadio | Amazon Music | Castbox

Today we are addressing a critical topic for self-employed business owners, Independent Contractors and 1099 employees: retirement planning without a company-sponsored plan. In the absence of traditional employer benefits, it’s essential to take proactive steps. We’ll explore various retirement strategies tailored for those who must self-manage their retirement savings, including Solo 401(k)s, SEP IRAs, and other investment options.

Understanding the Challenge of Retriemtn for the Self-Employed

For business owners and 1099 employees, the lack of a company-sponsored retirement plan means taking full responsibility for your financial future. While this can seem daunting, it also offers unparalleled control over how you save and invest your money. You decide the best ways to grow your wealth and ensure a comfortable retirement.

Why Retirement Planning is Crucial

Retirement planning is about more than just setting aside money for the future; it’s about creating a stable financial foundation that allows you to maintain your lifestyle and achieve your goals without relying on income from your business or contract work. Effective retirement planning involves assessing your current financial situation, setting realistic goals, and implementing strategies to achieve those goals.

The Power of Solo 401(k)s

One of the most powerful retirement planning tools for self-employed business owners and 1099 employees is the Solo 401(k). This plan is designed for self-employed individuals and independent contractor and offers several benefits:

High Contribution Limits: Solo 401(k)s allow for significant contributions, combining employee deferrals and employer contributions. In 2024, the contribution limit is $23,000 for employees under 50, with an additional $6,500 catch-up contribution for those 50 and over. Employer contributions can bring the total to $69,000 or $76,500 for those 50 and over.
Roth Option: Many Solo 401(k) plans offer a Roth option, allowing after-tax contributions that grow tax-free. This can be particularly advantageous for high-income earners looking to minimize future tax liabilities.
Loan Provision: Solo 401(k)s often include a loan provision, enabling you to borrow from your retirement savings if needed. This feature can provide liquidity without triggering taxes or penalties, as long as the loan is repaid according to the plan’s terms.

>> Click here for this year’s current contribution limits <<

Exploring SEP IRAs and SIMPLE IRAs

SEP IRAs and SIMPLE IRAs are other viable options for self-employed individuals. Both plans have their unique advantages:

SEP IRA (Simplified Employee Pension):
- Contribution Limits: SEP IRAs allow contributions up to 25% of your net earnings from self-employment, with a maximum limit of $66,000 in 2024.
- Ease of Administration: SEP IRAs are relatively simple to set up and maintain, making them a popular choice for small business owners.
- Flexibility: Contributions are flexible and can vary from year to year, which is beneficial for businesses with fluctuating income.
SIMPLE IRA (Savings Incentive Match Plan for Employees):
- Employee and Employer Contributions: SIMPLE IRAs allow both employee deferrals and employer contributions. In 2024, employees can defer up to $15,500, with an additional $3,500 catch-up contribution for those 50 and over.
- Mandatory Employer Contributions: Employers must either match employee contributions up to 3% of compensation or make a fixed contribution of 2% of compensation for all eligible employees.
- Lower Administrative Costs: SIMPLE IRAs have lower administrative costs compared to 401(k) plans, making them an attractive option for small businesses.

Diversifying Your Investments

Beyond retirement accounts, diversifying your investments is crucial for financial stability. Diversification spreads risk and increases the potential for returns across different asset classes. Here are some ways to diversify:

Stocks and Bonds: Investing in a mix of stocks and bonds can provide growth and income. Stocks offer the potential for capital appreciation, while bonds provide steady income and lower volatility.
Real Estate: Real estate investments can provide rental income and long-term appreciation. Consider investing in residential, commercial, or industrial properties based on your risk tolerance and investment goals.
Private Placements: For those with the expertise and risk tolerance, private placements can offer high returns. Investing in startups or private companies can be lucrative, but it’s essential to conduct thorough due diligence.
Cryptocurrency: While more volatile, cryptocurrencies like Bitcoin can be part of a diversified portfolio. It’s essential to approach this asset class with caution and only invest what you can afford to lose.

Creating a Safety Net

Building a financial safety net is critical for self-employed business owners and 1099 employees. Here are some strategies to ensure you have a cushion for unexpected events:

Emergency Fund: Maintain an emergency fund with 3-6 months’ worth of living expenses. This fund should be easily accessible and kept in a liquid, low-risk account.
Insurance: Protect your income and assets with appropriate insurance coverage. Consider disability insurance, life insurance, and business insurance to safeguard against unforeseen circumstances.
Regular Withdrawals: Establish a routine for withdrawing funds from your business or investment accounts. This ensures you are continually building your safety net and not solely reinvesting all profits back into the business.

Tax Efficiency and Planning

Effective tax planning is essential for maximizing your retirement savings when you are self-employed. Here are some strategies to consider:

Deferring Income: Take advantage of retirement accounts that offer tax-deferred growth, such as traditional IRAs and Solo 401(k)s. Contributions to these accounts reduce your taxable income in the year they are made.
Roth Conversions: Consider converting traditional retirement accounts to Roth accounts during years when your income is lower. This strategy can result in significant tax savings over time. You can further this strategy with a Backdoor Roth.
Tax-Loss Harvesting: Offset capital gains with capital losses through tax-loss harvesting. This strategy involves selling losing investments to reduce your taxable gains.
Consult a Tax Professional: Work with a tax professional to develop a comprehensive tax strategy tailored to your unique situation. They can help you navigate the complexities of tax laws and identify opportunities for savings.

Setting Realistic Goals

Setting realistic retirement goals is essential for creating a workable plan. Here are steps to help you define and achieve your retirement objectives:

Assess Your Current Financial Situation: Take stock of your assets, liabilities, income, and expenses. Understanding your financial position is the first step in planning for the future.
Define Your Retirement Lifestyle: Consider the lifestyle you want in retirement. Factor in travel, hobbies, healthcare, and living expenses to determine how much you need to save.
Estimate Retirement Expenses: Calculate your expected expenses in retirement, accounting for inflation and potential changes in your lifestyle. This estimate will guide your savings goals.
Develop a Savings Plan: Create a plan to reach your retirement goals. Determine how much you need to save each year and choose the appropriate retirement accounts and investment strategies to achieve your objectives.
Monitor and Adjust: Regularly review your retirement plan and make adjustments as needed. Life changes, market conditions, and new financial goals may require you to update your strategy.

Conclusion

Retirement planning for self-employed business owners, independent contractors and 1099 employees may lack the convenience of a company-sponsored plan, but it offers the advantage of complete control over your financial future. By leveraging tools like Solo 401(k)s, SEP IRAs, and SIMPLE IRAs, diversifying your investments, creating a safety net, and planning for tax efficiency, you can build a robust retirement strategy. Set realistic goals, stay disciplined, and regularly review your plan to ensure a secure and comfortable retirement. Taking these proactive steps will help you achieve financial peace of mind, knowing you have a well-thought-out financial plan for your future.

Next Steps:

Ready to set up your plan or have questions? Schedule a call with us today!

Understanding the SWAPA Market-Based Cash Balance Plan

Posted on August 9, 2024January 24, 2025 by Nick Coleman

If you’re a Southwest pilot, you recently received many needed changes to your benefits package through the Contract 2020. The introduction of the SWAPA Market-Based Cash Balance Plan (MBCBP) has piqued the interest of many Southwest pilots. As a CERTIFIED FINANCIAL PLANNER™, I’ve had the privilege of working with over 50+ pilots, just like you, helping them get on the right track to a successful financial life and retirement as their Fiduciary advisor. My specialization in Southwest pilot benefits helps me to guide you in maximizing your career earnings, benefits, and wealth.

HOW THE SWAPA MARKET-BASED CASH BALANCE PLAN WORKS WITH YOUR CURRENT PLAN

The Market-Based Cash Balance Plan allows you to increase your retirement savings without increasing your current taxes. Once you maximize your 401(k), the 17% contribution from Southwest will then spillover into the MBCBP, on top of contributing 1% of your salary into the MBCBP, and then 2% of your salary starting in 2026 if you spillover or not.

Many pilots are running into the issue of maximizing their 401(k) and wanting other ways to save for retirement. The MBCBP is the benefit that will solve this issue. The MBCBP allows Southwest’s 17% “spillover” contributions to go into a pre-tax retirement account rather than be given to you via taxable check. The spillover occurs when you reach either the 415(c) Limit or the 401(a) Limit.

The 415(c) Limit sets the total cap on contributions to your 401(k) from both your employee and employer contributions. For individuals under 50, this limit stands at $69,000, while those 50 or older have a total limit of $73,500. Meeting this limit can occur when maximizing your employee 401(k) contributions, which are:

$23,000 for individuals under 50
$30,500 for those aged 50 or older

This means that you can contribute the $23,000 or $30,500 (50 years+) to your 401(k) and Southwest will contribute 17% of your salary up to the total limit including your contribution of $69,000 or $73,500 if 50 years +.

The 401(a) Limit limits the amount of salary that can be considered that Southwest can contribute their 17% to. In 2024, this limit is set at $345,000. Southwest can only contribute 17% of your salary up to $345,000. If your salary exceeds this amount, Southwest’s 17% contribution will spill over to you (or the MBCBP). For example, if your salary reaches $445,000—$100,000 over the limit—this excess 17% translates to $17,000 as spillover into the MBCBP.

>> These are 2024 numbers- Click here for this year’s current numbers <<<

BENEFIT OF THE SWAPA MARKET-BASED CASH BALANCE PLAN

So, what exactly is a Cash Balance Plan? It serves as a retirement account, much like your 401(k). However, it has the capacity to hold a more significant sum for retirement than traditional retirement accounts. While a 401(k) is constrained by an annual limit—$69,000 or $73,500 if 50+ in 2024, for instance—a Cash Balance Plan can theoretically accommodate contributions of up to $300,000 annually. This account operates differently from a 401(k). It follows a “Defined Benefit” model, allowing for higher contributions to support specific benefits, such as an annual pension.

The Market-Based Cash Balance Plan is a deferred plan, meaning you don’t pay taxes on company contributions or growth within the account. Instead, taxes are paid when you withdraw funds during retirement, aligning with your income tax level at that time. This structure can be advantageous, as it doesn’t increase your taxes while working, potentially leading to lower lifetime taxes.

Regarding investment management, SWAPA Cash Balance Plans prioritize a “reasonable return” within strict ERISA and IRS guidelines to safeguard the defined benefit. As such, investments in the MBCBP aren’t subject to individual choices but rather managed collectively by a committee. Upon retirement, you have the flexibility to roll over the MBCBP into an IRA. This will grant you greater control over investment decisions. You also have the option to take a pension from the account. The pension amount is based on the value of the MBCBP, when you take your benefit, and if you elect to have survivor benefits as a feature to your pension. Determining if taking the pension or the lump-sum transfer into an IRA can be a decision that can have a major impact on your retirement. Discuss with a CERTIFIED FINANCIAL PLANNER on which option might be best for your retirement strategy.

A limitation with the Southwest Cash Balance Plan is that you as an employee cannot contribute to the account. It is only funded by the employer via the 1% contribution (2% in 2026) and any spillover above the 415(c) or 401(a) limits.

IS A MARKET-BASED CASH BALANCE PLAN RIGHT FOR YOU?

Should you consider using the SWAPA Cash Balance Plan? If you want to save more for retirement, especially as retirement draws nearer, it could be a valuable tool. Are you worried about paying too much in taxes and do not need the extra cash? This could be an advantageous option for you. If you want to increase your current income to pay for current bills and goals, you may want to continue using the cash spillover.

OTHER OPTIONS TO MAXIMIZE YOUR RETIREMENT STRATEGY

Additionally, you can maximize your 401(k) contributions further by taking full advantage of your personal contribution limit:

$23,000 for individuals under 50
$30,500 for those aged 50 or older

By doing so, you not only bolster your retirement savings but also may enjoy significant tax benefits. Contributions are tax-deductible, potentially leading to substantial tax savings.

Furthermore, you may consider diversifying your retirement savings by exploring Tax-Free retirement options like the Backdoor Roth IRA Conversion. This strategy can help you build tax-free retirement income while avoiding Required Minimum Distributions (RMDs).

NEXT STEPS

To ensure you’re making the most of your 401(k) and SWAPA benefits, consider discussing your retirement goals with a CERTIFIED FINANCIAL PLANNER who specializes in helping pilots plan for retirement. I’ve worked closely with many pilots, helping them get on the right track to a successful retirement and financial life, and I’m here to help you achieve your financial goals and maximize your benefits and wealth.

Let’s have a conversation about your financial goals and explore the strategies that can help set you on the path to financial freedom and a prosperous retirement. Set up a free consultation call today to learn more about how we can help you!

Looking for information about the United Pilots Cash Balance Plan? Read more on that here!