• What You Need to Know About Your Cash at the Bank & Why You Should Roll Your 401k to an IRA

    Navigating the finance world can be a challenge. Do you know how safe your cash is at the bank? Are you familiar with the benefits of rolling your 401k to an IRA? The Certified Financial Planners at Nelson Financial Planning are here to provide valuable insights on these topics. Continue reading “What You Need to Know About Your Cash at the Bank & Why You Should Roll Your 401k to an IRA”

  • Habits That Destroy Your Retirement

    A whopping 39 percent of Americans have nothing saved for a rainy day, let alone retirement. This is a scary statistic! If COVID-19 has taught us anything this past year, it’s that having an emergency fund is critical to weather unexpected financial storms.

    We all have habits that undermine our ability to save money. Consider what these habits are and how to prevent them from destroying your retirement.

    Spending Now Rather Than Saving for Later

    With our culture of instant gratification, it’s easy to focus on the present and neglect potential needs for the future. The best way to avoid this habit is to stick to a budget. If you don’t already have one, there are plenty of resources available to help you create one.

    By keeping track of how much money is coming in, and what expenses are going out, you can calculate the amount you have left over to spend on “extras” each month. Just remember to allocate at least 10 percent to saving and investing!

    Underestimating the Amount You’ll Need for Retirement

    As you project what your budget after retirement may look like, don’t forget to include these three factors:

    • Taxes: As a W2 employee, your employer automatically takes taxes out of your paycheck. Once retired, you have to plan for those withholdings yourself.
    • Health insurance: Under your employer’s group plan, health insurance is quite affordable—and automatically deducted from your paycheck. Once you retire, you become responsible for your own health insurance. If you stop working early and aren’t yet eligible for Medicare, your premiums may be quite costly.
    • Free time expense: With more time on your hands after retirement, you may end up spending more money each week, whether it’s on golfing, traveling, or pursuing hobbies.

    Only Investing in the Best-Performing Funds

    Chances are, if you only invest in funds that have earned a Morningstar rating of Gold or Silver, you’re already late to the game. Funds that are top-rated today may not sustain that excellent track record because the Morningstar system only looks at short-term performance.

    If you constantly chase returns based on one- to three-year performance, your portfolio will end up under-performing in the long-term. You’ll achieve more sustainable returns if you look at a fund’s 10- or 15-year track record before deciding whether to invest in it.

    Misunderstanding What Diversification Is

    Diversification is about more than just owning multiple funds. It’s important to consider the balance between stocks and bonds, your investments in large companies vs. small companies, and how much money you have in domestic vs. international funds. As a rule of thumb, you should always keep your top 10 holdings below about 20 percent of the portfolio’s total value to ensure adequate diversification.

    For more on how to prevent bad habits from destroying your retirement, please contact Nelson Financial Planning. Our goal is to help you change your life through a successful financial plan that provides peace of mind for the future.

  • New Taxes Could Change Your Retirement

    COVID-19 has impacted America’s finances significantly. To help weather the storm, the country has increased its debt load by 30 to 40 percent. At the same time, our tax rates are at 100-year lows. This unsustainable dynamic simply can’t last.

    That’s why numerous tax changes are being considered, many of which target high-income households. Our financial planners have predicted which proposals could become a reality in the next decade. Consider those predictions here and how they might affect your retirement.

    Social Security Taxes

    One of America’s biggest financial problems is the projected shortfall of Social Security. Most Americans rely on this program to supplement their income after retirement, and it’s in serious need of some shoring up.

    In 2020, employees and employers paid a combined 12.4 percent on all earned income up to $137,700. Any income earned above this amount is not subject to a Social Security tax.

    Today, there’s talk of reinstating Social Security taxes for higher earners. This would involve being taxed at lower income levels and having taxes kick in again at a higher income, such as $400,000 or $500,000. Our financial planners believe this tax change is likely to occur soon.

    Standard Deductions

    Several deductions can no longer be written off, chief among them being unreimbursed employee expenses and real estate taxes and state income more than $10,000. These sorts of changes could lead to a system that offers a wide range of deductible expenses capped at 25 or 30 percent of your adjusted gross income. Our financial planners wouldn’t be surprised if this proposal was realized within the next decade.

    Step-Up in Basis

    A step-up in basis is the process of readjusting an appreciated asset’s value upon inheritance for tax purposes. The proposed change is to eliminate the step-up in basis, which would tax inherited assets based on the appreciated value, not the purchase price.

    This potential change could affect taxpayers at all income levels. However, our financial planners think it has a low likelihood of going into effect because it has been discussed for decades without being implemented yet.

    Other Tax Predictions

    • Corporate income tax rates could creep up slightly, but they shouldn’t reach the level they were at prior to 2018.
    • The highest marginal income tax rate is ripe for an increase. This would affect incomes above $600,000 for married couples filing jointly.
    • The Section 199A qualified business income deduction might not change much. Since small businesses are still reeling from the required pandemic shutdowns, leaders are likely to avoid any detrimental tax changes.
    • Changes to the capital gains tax for incomes above $1 million may take effect. This would tax long-term capital gains at 43.4 percent compared with 23.8 percent now. In other words, capital gains would be taxed as ordinary income.

    If you have questions about how these proposed taxes could change your retirement, please contact Nelson Financial Planning. With over 30 years of experience, we know what financial plans work best over time.

  • 6 Numbers You Must Know Before Retirement

    Throughout your lifetime, you’ll have many numbers to remember, and as you get older, it seems like there are even more. We’ve got some more numbers for you, and you’re going to want to remember these, because they’re important when you’re preparing for retirement. What are some financial numbers you need to know for your financial future?

    1. The first number is your monthly cashflow. It’s important to have a handle on your income vs expenses and know exactly where your money is going. To determine this, write down all your income, subtract all of your expenses, and look at the dollar amount that remains. If it’s a gain, great! If it’s a loss, it’s time to rethink your budget. Use a budget to keep track of the income and expenses occurring on regular basis and be aware of your loss or gain each month.
    2. The next number is the money you can expect from your Social Security benefits. What would you get if you took Social Security at age 62? What about the ages between that and 70? Social Security benefits account for about 40 percent of the average retiree’s income, so you’ll need to determine how you’ll pay for the rest of your expenses.
    3. Know how much you have in your retirement savings. Calculate how much money you will be able to access from all sources of liquid investments. These are investments you can immediately convert to cash, as opposed to things like real estate, which can’t be easily liquidated. Divide that number by 25 to find the amount of income you could reasonably use to fund your retirement. The sooner you start saving for retirement, the better off you’ll be when you reach retirement age, because compound interest will help you build your fund. Be aware that when you do access your retirement funds, you’ll likely owe taxes.
    4. It’s important to know your credit score. This number determines how much you can borrow and how much interest you’ll pay. A score below 760 means there’s room for improvement. Paying your bills on time is the biggest factor in your credit score, and your debt to income ratio also has a big impact.
    5. That brings us to the next number: your debt to income ratio. To determine this, add up all of your monthly payments, including rent or mortgage, student loans, credit cards, and other debts. Divide this number by your gross monthly income, and the resulting percentage is your debt to income ratio. Below 35% is optimal.
    6. Know the interest rate on your debts. This is the cost of your money. Look at your statements to determine your interest rates, then put your cash into paying down the highest-interest debts.

    As you can see, the first three numbers have to do with how much you’re putting away for your retirement- your assets. The last three are about the debt you’re carrying, or your liability. Planning for retirement also involves carefully considering how much money you’ll need once you’re no longer working. The rule of thumb has been to plan for 70 to 80 percent of your current income, but many retirees are finding that a comfortable amount is closer to 100 percent.

    When you’re ready to create a strong financial plan for the future that will allow you to live the lifestyle you want to live, Nelson Financial Planning can help. As one of the best financial planning firms in Central Florida, we provide guidance and financial advice so that you can make informed decisions about your future. We believe you should enjoy your retirement, so we’ll work with you to create a plan for a stress-free future. Call (407) 307-3061 or contact us today to set up your free consultation.