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.

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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.

The Art of Asset Allocation

Posted on October 16, 2024January 20, 2025 by Brian Colvert

In the world of financial planning, one term that often comes up is “asset allocation.” Asset allocation is the practice of dividing an investment portfolio across different asset classes to balance risk. Think a pie chart. It’s a foundational concept that plays a crucial role in designing investment portfolios. But while it may sound straightforward, the reality is far more nuanced. In fact, I’d argue that asset allocation is more of an art than a science.

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What is Asset Allocation?

At its core, asset allocation refers to how an investment portfolio is divided among different asset classes. These can include equities (stocks), fixed income (bonds), private equity, commodities, real estate, and even modern additions like cryptocurrencies such as Bitcoin. The goal is to find the right mix that balances risk and reward based on the investor’s goals, time horizon, and risk tolerance.

Often, the first step in determining asset allocation is through some sort of quiz or a conversation with a financial advisor. These quizzes typically ask questions designed to assess risk tolerance—how much market volatility an investor can stomach. They aim to gauge whether someone would prefer a conservative approach, leaning more towards fixed income and less risky investments, or a more aggressive strategy, favoring equities and other higher-risk assets.

Why Asset Allocation is an Art, Not a Science

Why do I call asset allocation an art rather than a science? The answer lies in the human element. For the many years I’ve been in this industry, I have yet to see a quiz that can’t be manipulated or one where people don’t try to put their best foot forward.

Investors often say they want all the upside and none of the downside. And why wouldn’t they? If we could guarantee such outcomes, everyone would be wealthy, and financial planning would be a breeze. But reality doesn’t work like that. There’s no perfect formula that offers maximum returns with zero risks. Even the best investors can’t avoid downturns entirely.

Most quizzes ask questions like, “Would you be willing to take a 50% loss for the chance of a 150% gain?” People tend to focus on the potential gains and say “yes” without fully understanding the emotional impact of actual losses. Here’s another issue: quizzes often frame things in percentages, but real-life losses are felt in dollars. For example, a 10% loss on a $2 million portfolio isn’t just 10%; it’s $200,000. When markets are down, people think about what those lost dollars could have bought—a new car, a home, years of living expenses. These losses are visceral and deeply personal.

Conversely, when the market is up, we often think in percentages rather than dollar gains. We may say, “My portfolio is up 20%,” without immediately converting that to actual dollar gains. This inconsistency in how we perceive gains versus losses underscores the complexity of human emotions in investing, making asset allocation an art that requires understanding psychology, not just spreadsheets.

The Role of Emotions in Investing

The emotional response to gains and losses can lead investors to make irrational decisions. Fear and greed are two powerful emotions that drive market behavior. During a market downturn, investors may panic, thinking, “This time is different; it’s going to zero. I need to get out now.” This reaction is called capitulation, and it’s the point at which investors sell off their investments to avoid further losses. But by selling when the market is low, they lock in their losses and miss the eventual recovery.

For instance, during the 2008 financial crisis, the markets fell over 50%. If you were heavily invested in equities and panicked, selling your investments to move into a more conservative portfolio, you would have locked in those losses. When the markets rebounded, as they historically have, those conservative investments wouldn’t have recovered as quickly as a diversified portfolio that stayed the course. This is why it’s essential to maintain a consistent risk tolerance. Selling low and buying high is a recipe for long-term underperformance.

Learning from the Great Investors

Even the most successful investors have faced significant downturns. Ray Dalio, known for his “All Weather” portfolio designed to perform well in any economic environment, still saw his strategy down by 20% in 2022. Warren Buffett, perhaps the most renowned investor of our time, saw his portfolio down by approximately 24% in 2022 and nearly 50% during the 2008 crisis. Yet, over the long term, these investors have achieved phenomenal returns. The key is their ability to stay invested through the tough times, not letting fear dictate their investment decisions.

Finding Your Comfort Zone

Working with a CERTIFIED FINANCIAL PLANNER™ can help tailor an asset allocation strategy that aligns with your comfort zone, goals, and life situation. A good advisor takes the time to understand your emotional triggers. They’ll know how to guide you through downturns without making knee-jerk reactions that could harm your financial future.

Risk tolerance isn’t static—it changes with life events, age, and personal circumstances. When you’re working and have a steady income, you might feel more comfortable taking on risk than when you’re retired and living off your investments. The birth of a child, the death of a parent, or even market news can shift your risk tolerance.

Timing the Market vs. Time in the Market

One of the common misconceptions among investors is the idea of timing the market—getting out when things are bad and getting back in when things look good. While it sounds logical, it’s nearly impossible to do consistently. The market often moves without clear signals, and by the time you react, it’s usually too late. Instead, a more reliable strategy is to focus on “time in the market.” Staying invested over the long term allows you to ride out the volatility and benefit from compounding returns.

The Value of Diversification

Another crucial aspect of asset allocation is diversification—not putting all your eggs in one basket. By spreading investments across various asset classes, sectors, and geographies, you reduce the impact of a downturn in any single area on your overall portfolio. Diversification doesn’t eliminate risk, but it can mitigate it, providing a smoother ride during turbulent times.

The Science of Asset Allocation: Data and Analysis

While I’ve emphasized the art side, there’s no denying that science plays a role in asset allocation. Data analysis, historical performance, economic forecasts, and quantitative models all contribute to determining the optimal asset mix. However, these tools should be seen as guides rather than definitive answers. They provide valuable insights, but they can’t predict the future or account for every nuance of human behavior.

Making Asset Allocation Work for You

Creating a well-balanced portfolio that aligns with your risk tolerance and investment goals is the ultimate aim of asset allocation. It’s about managing the trade-off between risk and return, ensuring you’re neither too aggressive nor too conservative. A portfolio should reflect not just your financial goals but your emotional comfort zone. The peace of mind that comes from knowing you’re invested in a way that feels right for you is invaluable.

Final Thoughts

Navigating the complexities of asset allocation can be daunting. Partnering with a knowledgeable advisor can provide clarity and guidance, helping you avoid emotional pitfalls and stay focused on your long-term goals. An advisor serves as a steady hand, keeping you grounded during market turbulence and ensuring your portfolio evolves with your changing needs.

At Bonfire Financial, we specialize in helping clients find that balance and strategically slice up your investments. We listen to your goals, understand your risk tolerance, and craft a personalized asset allocation strategy and financial plan that aligns with your financial and emotional well-being. If you’re ready to take the next step in your financial journey, reach out to us.

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.

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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

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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.

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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.

Backdoor Roth: From Tax Burden to Tax-Free Growth

Posted on April 24, 2024January 19, 2025 by Brian Colvert

The name might sound exclusive or even clandestine, but a Backdoor Roth is simply a powerful financial tool, particularly for high-income individuals seeking tax-savvy savings strategies for retirement. In the most recent episode of The Field Guide Podcast, Brian Colvert, CFP® unpacks the intricacies of Backdoor Roth IRAs, an often-misunderstood approach to tax-efficient retirement saving. He covers everything from the basics of Roth IRAs to navigating the complexities of Backdoor conversions, offering actionable tips for maximizing wealth-building potential. Whether you’re a high-income earner or simply looking to optimize your retirement savings, this episode provides a comprehensive guide to leveraging a Backdoor Roth IRA.

Listen Now:

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Understanding Traditional and Roth IRAs

First, let’s establish a foundation by understanding traditional and Roth IRAs. Traditional IRAs allow pre-tax contributions, meaning you don’t pay taxes upfront on the invested amount. However, taxes are deferred until withdrawals in retirement, when they’re taxed as income. In contrast, Roth IRAs involve after-tax contributions; taxes are paid upfront, but growth and withdrawals are tax-free. This provides a significant advantage, especially in the long run.

The Power of Tax-Free Growth

The magic of a Roth IRA lies in its tax-free growth potential. Considering the extended time horizon of retirement planning, funds in a Roth IRA can compound significantly without the drag of taxes. This offers a valuable asset for your golden years. Additionally, the tax benefits extend beyond your lifetime. Roth assets can be passed on to heirs tax-free, providing a lasting financial legacy.

Income Limits and the Backdoor Solution

The IRS sets income limits for people who can directly contribute to a Roth IRA. These limits apply to your modified adjusted gross income (MAGI) which is basically your total income minus certain adjustments. If your MAGI exceeds the limit, you can’t contribute directly to a Roth IRA for that year.

This is where the Backdoor Roth IRA strategy comes in.

The Backdoor Roth IRA in Action

The Backdoor Roth strategy involves making after-tax contributions to a traditional IRA and then converting those funds into a Roth IRA. Unlike direct contributions, there are no income limits for Roth conversions, making it an attractive option for high earners to access tax-advantaged savings.

The Pro-Rata Rule: A Potential Hurdle

This is where things get a bit more nuanced. There’s an important caveat – the pro-rata rule. When converting funds from a traditional IRA to a Roth IRA, any pre-tax amounts in existing IRAs are factored into the conversion. If a significant portion of your IRA holdings is pre-tax, the conversion will trigger taxes on a proportional basis.

Here’s a simplified example:

Let’s say you have a $10,000 pre-tax balance in an existing traditional IRA and make a $5,000 non-deductible contribution for a Backdoor Roth.
The total balance in your traditional IRA before conversion is now $15,000.
When you convert the entire $15,000 to a Roth IRA, the pro-rata rule kicks in because you have both pre-tax and non-deductible contributions.
In this scenario, the non-deductible contribution makes up one-third ($5,000) of the total balance ($15,000). So, one-third of the conversion (or $5,000) would be considered tax-free from your non-deductible contribution.
The remaining two-thirds ($10,000) of the conversion would be considered a taxable distribution from your pre-tax contributions. However, since you already paid taxes on this money when you initially contributed it, you wouldn’t owe additional income tax, but you would owe taxes on any earnings those pre-tax contributions generated within the IRA.

Minimizing Tax Implications

For individuals with substantial traditional IRA balances, exploring options to mitigate tax implications, such as rolling over funds into an employer-sponsored 401(k), might be advisable. However, for those without existing IRA balances, the Backdoor Roth presents a compelling opportunity for tax-efficient retirement savings.

Don’t Underestimate Tax-Free Growth

Despite the contribution limits on Roth IRAs, the benefits of tax-free growth shouldn’t be downplayed. Even if contributions are capped, every dollar invested in a Roth IRA has the potential to grow tax-free, providing a valuable asset for retirement. Prioritizing tax-efficient investment vehicles like the Roth IRA can significantly enhance your financial security in retirement.

Seeking Professional Guidance

Navigating the complexities of retirement planning and tax optimization can be overwhelming. Talking to a CERTIFIED FINANCIAL PLANNER™ ( CFP®) about a Backdoor Roth IRA can be really beneficial:

Eligibility and Tax Implications: A CFP® can confirm your eligibility for a Backdoor Roth IRA. There are income limits for directly contributing to a Roth IRA, and the Backdoor method is a work-around. A CFP® can ensure it makes sense for your income level and tax situation.

Pro-Rata Rule: This rule gets tricky. If you already have pre-tax money in a traditional IRA, converting to a Roth triggers taxes on some of it. A CFP® can help you calculate the tax impact and navigate the pro-rata rule to minimize any tax burden.

Optimizing your plan: The Backdoor Roth might not be the only option. A CFP® can look at your entire retirement picture and suggest the best strategy for your goals. This might include maximizing contributions to other accounts like a 401(k) before considering a Backdoor Roth.

Avoiding Errors: The Backdoor Roth IRA process involves specific steps. A CFP® can ensure you complete them correctly to avoid issues with the IRS. While you can research the Backdoor Roth IRA yourself, a CFP® brings their expertise and experience to personalize the strategy for you. They can ensure it fits your specific financial situation and helps you reach your retirement goals.

Next Steps

At Bonfire Financial, we specialize in guiding individuals through the intricacies of financial planning. We help you chart a course from your current financial position to your desired retirement lifestyle. Whether you’re exploring the Backdoor Roth or seeking comprehensive financial advice, we’re here to assist you every step of the way.

Let’s schedule a call to discuss your specific situation! Book here now!

The Power of Catch-Up Contributions

Posted on April 3, 2024January 19, 2025 by Brian Colvert

The benefit of aging: Catch-Up Contributions

In the most recent episode of The Field Guide Podcast, Brian Colvert, CFP®, takes a fresh look at aging – not as a decline, but as a time brimming with opportunities, especially when it comes to building a secure retirement. Brian dives into the often-underutilized benefits of increasing contributions to retirement accounts as you get older, demonstrating how these seemingly small tweaks can significantly impact your financial future.

Listen Now:

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Leveraging Catch-Up Contributions: A Detailed Look:

One of the perks of aging is the ability to contribute more to retirement accounts like IRAs, 401(k)s, and HSAs. Let’s break down the specifics and explore why maximizing these contributions is crucial.

IRAs and Roth IRAs: The standard contribution limit for both Traditional and Roth IRAs for 2024 sits at $7,000. >> Click here to see this year’s limits << However, individuals aged 50 and above are eligible for Catch-up contributions, allowing them to add an extra $1,000, bringing their total contribution to a substantial $8,000. Don’t let high income discourage you; strategies like the Backdoor Roth conversion can help you take advantage of these benefits, even if your income exceeds the Roth IRA contribution limits. Here’s a deeper dive into the backdoor Roth conversion:

Backdoor Roth Conversion: A Backdoor Roth is a strategy that involves contributing to a traditional IRA and then converting those funds to a Roth IRA. There are tax implications associated with this conversion, but for those who wouldn’t qualify for a direct Roth IRA contribution due to income restrictions, it can be a valuable way to access the tax-free growth benefits of a Roth IRA in retirement.

Company Plans: Similar benefits exist for company-sponsored plans like SIMPLE IRAs and 401(k)s. Catch-up contributions are available for those over 50, allowing them to significantly increase their contributions and accelerate retirement savings. Let’s explore some additional considerations for company plans:

Employer Matching: Many employers offer matching contributions on employee contributions to retirement plans. This essentially translates to free money for your retirement. Be sure to contribute at least enough to capture your employer’s full match. It’s like leaving free money on the table if you don’t!

Investment Options: Company plans often offer a variety of investment options within the plan. Understanding your risk tolerance and investment time horizon is crucial when choosing how to allocate your contributions within the plan. We recommend seeking guidance from a CERTIFIED FINANCIAL PLANNER™ regarding your best investment options.

The Power of Compounding Interest with Your Catch-Up Contributions

Here’s where the magic truly happens: compounding interest. Even seemingly small additional contributions can snowball into a significant sum over time. Consider this: a $1,000 extra contribution to an IRA each year, consistently invested for 15 years with a moderate 6% rate of return, could grow into over $23,000. This is the magic of compounding interest working in your favor. Let’s delve a little deeper into the concept of compounding interest:

Exponential Growth: Compound interest allows your money to grow exponentially over time. Your earnings not only come from your initial contributions but also from the interest earned on those contributions. This creates a snowball effect, accelerating the growth of your retirement savings.

Time is Your Ally: The longer your money is invested, the greater the impact of compounding interest. Starting to contribute to retirement savings early and taking advantage of catch-up contributions later allows you to maximize the power of compounding interest.

HSA: A Tax-Advantaged Powerhouse – Unveiling the Benefits

The benefits extend beyond traditional retirement accounts. HSAs (Health Savings Accounts), often overlooked in retirement planning, offer additional avenues for saving. Individuals aged 55 and above can contribute an extra $1,000 on top of the standard limits as of 2024.

>> Click here to see this year’s limits <<

Let’s explore the unique advantages of HSAs:

Triple Tax Advantage: HSAs boast a unique “triple tax advantage.” Contributions are tax-deductible, investment earnings grow tax-free, and qualified medical withdrawals are tax-free. This makes HSAs a powerful tool for saving for future medical expenses while minimizing your tax burden.
Portability: HSAs are portable, meaning the funds belong to you, not your employer. You can retain your HSA even if you change jobs, providing long-term financial security for healthcare costs.

Embrace the Silver Lining:

Growing older comes with its challenges, but it also unlocks valuable opportunities to solidify your financial future. By maximizing catch-up contributions and strategically utilizing retirement accounts, you can pave the way for a secure and comfortable retirement. Remember, you’re not alone in this journey. If you have any questions or need guidance on your retirement planning path, don’t hesitate to reach out.

Taking Action:

Catch-Up Contributions are just the start. Here are some actionable steps you can take today:

Schedule a consultation with a CERTIFIED FINANCIAL PLANNER™: Discuss your retirement goals and explore personalized strategies to maximize catch-up contributions and retirement savings.
Research retirement account options: Understand the contribution limits, tax implications, and investment options for IRAs, Roth IRAs, 401(k)s, and HSAs.
Review your current contributions: Analyze your current contributions to retirement accounts and consider increasing them to take advantage of catch-up provisions.
Automate your contributions: Setting up automatic contributions ensures you’re consistently saving towards your retirement goals.

By taking these steps and embracing the opportunities that come with age, you can transform your retirement from a distant dream into a fulfilling reality.

When can I retire? Navigating Retirement

Posted on March 27, 2024January 19, 2025 by Brian Colvert

Are you contemplating retirement? Are you wondering when you can retire?

In the most recent episode of The Field Guide Podcast, Brian Colvert, CFP® of Bonfire Financial, dives into the complexities of retirement planning and addresses the question we often get asked… When can I retire? From financial considerations to psychological readiness, Brian offers insights to help you navigate this significant life transition.

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Psychological Preparedness:

One of the key factors in determining when to retire is psychological readiness. Many individuals tie their identity to their careers, making the prospect of retirement daunting. Brian emphasizes the importance of having a plan in place to alleviate anxiety and uncertainty. Whether it’s traveling, pursuing hobbies, or spending time with loved ones, having a structured schedule can enhance the retirement experience.

Financial Considerations:

While psychological preparedness is crucial, financial planning is equally important. Brian acknowledges the variability in retirement lifestyles, from extravagant globetrotting to simpler pleasures like hiking and local gatherings. Understanding your current expenses provides a baseline for retirement preparedness. Contrary to the popular notion that retirees spend significantly less, Brian suggests that initial retirement years may involve increased spending due to travel and leisure activities.

The 4 Percent Rule:

To estimate retirement income needs, Brian touches on the 4 percent rule—a widely used guideline in financial planning. By dividing the desired income by 4 percent, one can determine the required investment portfolio. While this rule provides a starting point, Brian emphasizes the need for flexibility and ongoing financial planning.

Beyond the Basics:

Retirement planning extends beyond simple calculations. Brian highlights the importance of accounting for factors like healthcare costs, inflation, and unexpected expenses. Collaborating with a financial advisor ensures a comprehensive strategy tailored to individual needs and goals.

Final Thoughts:

Answering the question of “When can I retire?” requires a blend of financial prudence and lifestyle considerations. While the prospect may seem daunting, proactive planning can pave the way for a fulfilling retirement experience.
If you’re seeking personalized guidance or additional resources, don’t hesitate to reach out to us. Our team is dedicated to helping individuals like you achieve their retirement aspirations.

Remember, retirement is not just about reaching a financial milestone—it’s about crafting a life that reflects your values and passions. Start planning today to embark on a retirement journey that’s as rewarding as it is fulfilling.

Get started with your Financial Plan today!

Navigating Retirement Contributions: Demystifying 401(a) and 415(c) Limits

Posted on September 19, 2023January 24, 2025 by Nick Coleman

Retirement planning isn’t just about saving; it’s about mastering the rules of the game. If you’re a high-flyer working for a major airline, you’ve probably heard about the 401(a) and 415(c) limits – but do you truly understand how they can help supercharge your retirement savings? Let’s break down these limits, unravel the intricacies, and set you on the path to maximizing your retirement nest egg.

What is the 401(a) limit?

The 401(a) limit caps the amount of money your employer can contribute to your 401(k), as described by a salary limit. Check here for current year limits. This means when your employer is contributing to your 401(k), they are going to contribute XX% of your salary up to the IRS limit.

For example in 2024, if United contributed 16% of your salary into your 401(k), the most they will add is $55,200 ($345,000 X 16%). If your salary is higher than $345,000, they can no longer contribute to your 401(k), and this is where the money may spill over.

Some more senior pilots may have a salary higher than the salary limit. In this case, they will get the maximum amount allowed from their employer. If your salary is under that, you don’t have to worry about that limit. However, both pilots will have to pay attention to the next limit, called the 415(c) limit, which will limit what you and your employer contribute as a total limit.

401(a) Limit: Your Key to More Employer Contributions

The 401(a)(17) compensation limit, nestled within the U.S. Internal Revenue Code, is your golden ticket to getting your employer to pump more money into your 401(k). This limit caps the portion of your earnings that counts when determining contributions to specific retirement plans, including beloved options like 401(k)s and defined benefit pension plans.

Now, the real magic happens when you align your contributions with the 401(a) limit. This strategic move can lead to a larger employer contribution to your 401(k), leaving you with more take-home dollars. The aim is to maximize your 401(k) without hitting the cap too soon or spilling over.

415(c) Limit: The Sibling of 401(a)

But wait, there’s more! The 415(c) limit, or Section 415(c) limit, is another player in this retirement savings game. This provision in the tax code sets the annual ceiling on contributions or benefits allocated to an individual’s retirement account within qualified plans, spanning 401(k)s, 403(b)s, and pensions.

These limits aren’t etched in stone; they evolve yearly to keep up with inflation and economic shifts. For the most current numbers, consult the IRS or your trusted tax advisor when making retirement contributions.

Making Sense of 415(c): Real-Life Scenarios

Let’s dive into real-life scenarios. Imagine you’ve maxed your contribution (based on 2024 numbers- Check here for current year limits.) at $22,500. Your employer can contribute up to $43,500. If your salary is $280,000 and your company matches 16%, that’s a generous $44,800 from your employer. However, there’s a $1,300 spillover due to the 415(c) limit. In this case, you could reduce your contribution to $21,200 and still receive the full $44,800 employer contribution, reaching a total of $66,000.

Now, what if you’re 50 or older and want to hit the max of $73,500, including a $7,500 catch-up contribution?

401(a) at Play: Maximize Your Employer’s Share

Here’s a twist – you can contribute only the catch-up amount to your 401(k) if your employer’s contributions have already filled your account to the max. Say you earn $345,000, and your employer contributes 16%, giving you $55,200. If you’re under 50, you can add $13,200 to reach the $66,000 cap. If you’re 50 or older, it’s an extra $20,700 to hit the $73,500 limit. Fascinatingly, neither scenario requires you to max out your employee limit of $22,500 plus a $7,500 catch-up.

Crunching the Numbers for Your Benefit

To make the most of these limits, a little number-crunching and projection are in order. Consider your salary history and estimate future earnings to create a strategy that maximizes both your contributions and those from your employer.

Why does all this matter? Because it’s your gateway to getting more money into your 401(k), rather than spillover accounts. And the more you get in now, the better your financial future will look in retirement.

Beyond 401(k) – The Backdoor Roth Conversion

But our journey doesn’t end here. For our high-earning clients in the airline industry, we’re here to uncover your financial dreams and set you on the right track. One exciting strategy to explore is the Backdoor Roth Conversion. This allows you and your spouse to stash away even more, in addition to your 401(k) contributions. It’s a powerful way to build a pool of tax-free retirement dollars.

In a Nutshell

In real-life scenarios, these 401(a) and 415(c) limits offer opportunities for fine-tuning your contributions. By making thoughtful adjustments to your contributions, you can leverage your employer’s contributions and, if you’re 50 or older, take advantage of catch-up contributions. Ultimately, these limits are the building blocks of a more secure financial future in retirement. The more you invest wisely within these boundaries, the more comfortable and stable your retirement years will become. So, remember, it’s not just about accumulating savings; it’s about understanding and utilizing these financial limits to secure your financial well-being in retirement.

What We Can Do for You

As a Certified Financial Planner and Fiduciary Financial Planner, we’ve partnered with over 50 pilots just like you, helping them discover their financial goals and chart a course to success. We can help you navigate 401(a) and 415(c) limits. Those who work with advisors or have done so in the past often have at least double the retirement savings of their peers, sometimes even more. Your financial future deserves expert guidance – let us help you soar towards your retirement dreams.

Set up a free consultation call today to learn more about how we can help you!

Colorado Secure Savings Mandate – What you need to know

Posted on May 17, 2022April 26, 2024 by Brian Colvert

What business owners need to know about Colorado Secure Savings Act

In 2020 Colorado passed the Colorado Secure Savings Program. This law mandates that small business owners enroll in a state-run retirement savings plan. The pilot program launched in October 2022 and employers throughout Colorado are now required to comply.

The purpose of this mandate is to increase access to retirement savings for workers in Colorado. The Colorado Secure Savings Act mandates that qualifying employers provide an employer-sponsored individual plan. The cost of this program will be funded through auto payroll deductions.

In general, this seems like it will have positive benefits for employees. However, it may create additional burdens for employers and may in fact limit employees’ options. Here is what small business owners need to know about the Colorado Mandated Small Business Retirement Plan.

Who needs to comply:

The Colorado General Assembly states that you, as an employer, will be required to implement this program if:

You have five or more employees
Have been in business for two or more years
Don’t have an existing qualifying plan

Companies already offering 401ks or other qualified savings plans are not required to use the Colorado Secure Savings Program. The law states that employers with less than 5 employees or who have not yet been in business for 2 years will not be required to participate. However, they will have the option to offer the program to their employees.

What needs to be done:

While there is limited guidance at the moment from the State of Colorado, employers will be required to offer auto-enrollment and facilitate payroll deductions into the program.

Upon enrollment, employees will opt into the default savings rate for Colorado Secure Savings, which is 5% of their gross pay. Beyond this, deferral rates may vary depending on how much you want to save each year. In addition, age, marital status, and income play a role in the amount that employees can contribute.

However, employees will be able to change their contribution amount or opt-out if desired.

As it is written so far, employers will have 14 days to send employees’ contributions to the program administrator. The program oversight will be done by the board of the Colorado Secure Savings Program. The board is currently chaired by the Colorado State Treasurer. This board will be making a process for withholding employees’ wages and remitting withheld amounts into their Colorado Secure Savings account. It’s not yet clear if the program will offer any integrations with payroll providers to facilitate the timely deposit of contributions.

Penalties for noncompliance:

Fines can be costly. For non-compliance, fines will be $100.00 per employee per year and can ratchet up to $5000.00 annually. The compliance period is one year after implementation.

However, they do state they plan to create a grant program to incentivize compliance. Yet no further details have been released. The good news is it’s really easy to comply by setting up a 401k plan or another qualified plan in advance. Keep reading on to find out how.

General Concerns:

There is little to no guarantee of the level of quality or support that will be available to business owners from the state in implementing and managing the Colorado Secure Savings Program. The government has not released any real guidelines. There are some basics, but how is still very undefined.

Further, if a company offers the state-run plan many of their higher income employees will be excluded. Employees with a Modified Adjusted Gross Income of more than $139,000 or $206,000 married filing jointly cannot participate.

As we wait for more details it’s not a bad idea to consider all the various plan options available to you and your company.

State Sponsored vs Employer Sponsored

There are a handful of states that currently have state mandated plans in place. California, Oregon, and New York are a few for instance. State sponsored plans have pros and cons, which business owners should carefully weigh. On one hand, government-mandated plans are generally a cheap solution with few fiduciary implications. On the other, these plans tend to be inflexible, one-size-fits-all. Plus they come with potential government penalties.

State sponsored retirement plans:

Roth IRA Investment structure (after-tax)
The state board selects investments
The plan will “travel with” people if they change jobs or leave the state
Excludes higher income employees
No employer contributions
No federal tax credits for employers
Creates a significant burden for the employer

As an alternative, an employer sponsored 401k or other qualified plans may be a better option than having the state do it for you. A common misconception is that employer sponsored plans are expensive. However, that simply isn’t the case. Many plans are now being tailored for smaller companies. Plus, the IRS gives tax credits to firms with fewer than 100 employees for some ordinary and necessary costs of starting an employer sponsored plan.

Employer Sponsored 401K plans:

Allow an employee to make contributions either before or after-tax, depending on plan options
Wide range of investments at various levels of risk chosen by the employer or by an advisor
Employee may direct their own investments
Higher Annual Salary Deferral Limit
No employee income limits
Allows for employer contributions
Federal tax credits for the employer for start-up and admin costs and employee education

In addition, offering an employer-sponsored plan to your employees may increase your company’s competitiveness in the job market. It could also help you retain valuable staff. Plus, you and other company leaders can participate.

If you work with a payroll services provider, the software can easily and automatically transfer employees’ funds, making the procedure effortless. Additionally, private plans typically come with the support of financial advisors. Moreover, a financial advisor can help regarding plan types and how best to implement them for your business.

Clearly, adding a 401k or other qualified plans to your company’s benefits package has strategic advantages. Yet, by not providing your employees with a retirement plan, you risk having the state impose one.

Do State-Run Plans Even Work?

Time will tell. However, Oregon, the first state to legally mandate a retirement plan, has pretty dismal enrollment numbers. Since its inception in 2018, only 114 thousand workers have enrolled out of a potential of over 1 million total.

Using Oregon again as an example, there are a lot of restrictions. First, the percentage contribution is fixed. Second, the employee’s first $1,000 gets put into a stabilization fund that since its inception has earned 1.52% per annum, or basically 0%, Or less after factoring in inflation. Finally, if and when they have more than $1,000 invested, they must decide between a fund that is a mixture of stocks and bonds and one that is invested entirely with the State Street Equity 500 Index Fund. (03/31/2022)

By comparison, in the private sector, there are multiple low-cost, exchange-traded funds, most of which averaged an annual return of over 10% during the most recent 10 year period. Some would argue that directing employees away from these superior investment products arguably does a disservice to the employees.

Sample Administrative Duties

Further, Oregon has demonstrated what a significant burden the plan can be on employees. Here is a short list of employer duties that Colorado will likely have as well.

Submit an employee census annually
Track eligibility status for all employees
Provide enrollment packets to all employees 30 days after date of hire
Plus, track whether each employee has opted in or out
If an employee doesn’t opt out within 30 days, set up 5% payroll deduction
Manually auto-escalate all employees annually unless they’ve opted out
Repeat auto-enroll process annually for all employees who have opted out
6-month look-back for auto-escalation:
- Track if the employee has been participating for 6 months with no auto-escalation
- Provide 60-day notice if they do not opt-out again
Hold open enrollment
Auto-enroll anybody who hasn’t been participating for at least 1 year

It’s too early to know whether state-run programs work. After all, Saving for retirement is a marathon, not a sprint. As an employer, it is important to weigh all options.

What Are Alternatives to the Colorado Secure Savings Program?

If you do not already have an existing plan, and you are skeptical about a government-mandated plan, you can always make your own employer-sponsored plan. Bonfire Financial has many 401k, Simple IRA, and SEP IRA options. We provide affordable, hassle-free solutions that will reduce the administrative burden.

Colorado Secure Savings vs Retirement Plan with Bonfire Financial

How can my business establish its own retirement plan?

Above all, retirement plans don’t have to be expensive or difficult to manage. In light of Colorado’s rollout of the Secure Savings Plan, we are offering small business owners and employers a free, no-obligation call with a CERTIFIED FINANCIAL PLANNER™ to help answer all your questions. We can help you create a better, more efficient retirement plan that is tailored to you and your employee’s specific needs. We are local in Colorado Springs and are here to help with all your retirement plan needs.