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.

Unemployment Has Changed Forever

The latest stimulus package, known as the American Rescue Plan Act of 2021 (ARPA), injected $1.9 trillion into the US economy. This relief spending has been divided into various categories, including $410 billion for stimulus checks, $360 billion for state and local governments, $130 billion to help schools safely reopen, and $122 billion for COVID-19 testing, tracing, and vaccine distribution.

Another big chunk of the $1.9 trillion stimulus package—$250 billion, to be exact—is allocated for unemployment benefits. The CARES Act, which passed in March 2020, expanded unemployment benefits through December 31, 2020. Now, those expanded benefits extend through September 6, 2021. Here’s what you need to know.

Supplemental Unemployment Benefits

The ARPA adds an extra $300 per week to the baseline employment benefits received from the state for 53 weeks, up from 24 weeks. In Florida, unemployment pays just under $300 per week. With the federal supplement, unemployed Floridians can earn nearly $600 per week. The biggest problem with this is that it incentivizes workers who make roughly $12 to $15 per hour to accept unemployment instead of looking for a job.

Tax-Exempt Unemployment Benefits

The first $10,200 per person of unemployment benefits received in 2020 is exempt from income taxes—assuming your income is less than  $150,000. This gives low- to moderate-wage workers yet another reason to remain unemployed, which could really hamper our country’s economic recovery.

The real kicker is that the government added this significant taxation provision in the middle of tax season! It affects a source of income that millions of Americans received last year, many for the first time ever. A significant portion of these people have already filed their income tax returns and paid taxes on the unemployment benefits they received in 2020.

Now, the only option is to wait, but the IRS has not provided instructions on how to proceed. In fact, the only guidance taxpayers have received so far is not to amend their returns just yet.

Other Tax Changes

In addition to newly tax-exempt unemployment benefits, the ARPA has allocated $143 billion toward three expanded tax credits for 2020:

The child tax credit has increased to $3,000 for children age 6 and older, and $3,600 for younger children, regardless of earned income.

The child and dependent care tax credit increased to $8,000 for one child and $16,000 for multiple kids.

The earned income tax credit was expanded for low- to moderate-income workers with qualifying children.

These tax credits are fully refundable, meaning that even qualified individuals who don’t owe taxes get money back when they file their return.

For answers to your remaining questions about tax-exempt unemployment benefits and other tax implications for 2020, please reach out to Nelson Financial Planning. Our team can fill you in on all the rules so you know what benefits apply to you. Contact us today at 407-629-6477 to schedule your free initial consultation.

The Biggest Lessons to Learn from 2020

It’s good to see 2020 in the rearview mirror, but investors can learn a lot from this tumultuous year. Here are some of the biggest takeaways. 

Fearless Forecast from 2020 

For the past three decades, Nelson Financial Planning has offered an annual “Fearless Forecast.” This tongue-in-cheek exercise goes out on the proverbial limb to predict the market’s future. 

As we started 2020: 

• Unemployment was at 3.5 percent. 
• Economic growth was humming along at 2 to 3 percent. 
• The Dow closed out 2019 at 28,538 points. (Our Fearless Forecast for 2019 predicted closing at 28,400 points.) 

Here’s how things unfolded: 

• Unemployment rose to 7.9 percent. 
• The economy shrank by 3.6 percent. 
• The Dow closed out 2020 at just over 30,600. (Our Fearless Forecast for 2020 predicted closing at 31,600 points.) 

Key Takeaways from 2020 

Investors can apply four big things from 2020 going forward: 

• Markets don’t perfectly reflect the economy. Fear over the pandemic caused the market to plummet about 35 percent in March 2020. The lockdowns obviously had a dramatic economic impact, and the market reflected that in this instance. However, remember that the market indicates what the future may hold rather than serving as a template for what’s happening today. 
• It pays not to time the market. If you pulled out at the beginning of the pandemic, you missed a tremendous opportunity. After all, the market rose 15 or 16 percent from its low point in March until closing in December. 
• Forecasts are just forecasts. No one can predict the future. That’s why forecasters constantly change their predictions. Ignore them as best you can. 
• Embrace new trends, but balance your portfolio. Big tech companies drove around 30 percent of the market performance in 2020. Moreover, technology dominated our personal lives. Remember how Zoom became a household name when everyone shifted to remote work environments and videoconferencing? Big drivers are important, but don’t neglect the opportunity to diversify your investments. Even consider those from overseas as international markets recover faster than the US. 

Fearless Forecast for 2021 

Here are our predictions for this year: 

• We estimate economic growth of 3 percent, maybe a little higher. We expect 2021 to be a comeback year, but we believe the money injected into the market may have stolen some of the recovery we might have otherwise seen in 2021. 
• Low interest rates are here to stay. The Federal Reserve is doing everything it can to hold interest rates near 0 percent until 2023. 
• We predict the Dow will close out 2021 at 32,250, or 5 to 6 percent higher than it closed in 2020. 

If you’re ready to accumulate more wealth in 2021 and beyond, turn to Nelson Financial Planning for help. We have over 35 years of financial planning experience to provide superior investment results and peace of mind for the future through a successful and cost-effective financial plan. Call 407-629-6477 or schedule a free initial consultation online. 

The S&P 500 OR the S&P 5?

The S&P 500 is intended to be an index of 500 large companies listed on stock exchanges in the United States. However, if you take a closer look, you’ll find that just 10 stocks—or 2 percent of the total 500—account for almost one-third of the index’s overall performance. Why does this happen, and why should you care? Let’s take a closer look.

The S&P 500 is a Weighted Average

At first glance, it may seem like the S&P is an equal representation of 500 different stocks, but that’s not how it works. The index is actually a weighted average, so larger companies drive a more significant proportion of the index’s performance than relatively smaller companies. As the largest companies continue to grow ever larger, the market is becoming increasingly concentrated. This causes a dramatic lack of diversification, which can be financially catastrophic.

1999 was the last time we saw statistics similar to this. At the height of the dot-com bubble, excessive investments in Internet-related companies led to an inflated market rise. In March 2000, the NASDAQ Composite rose 400 percent, only to fall 78 percent—or $5 trillion—by October 2002, negating all the gains experienced during the bubble. The dot-com crash also caused countless Internet startups to fail.

How to Ensure Portfolio Diversification

The issue of poor diversification lurks beneath the surface of many portfolios, particularly these days, given the massive run-up of a small handful of companies driving a disproportionately high segment of the market. The media has labeled these companies the “FANGs” because they comprise Facebook, Amazon, Netflix, and Google, among others.

Clearly, when it comes to diversifying your portfolio, it’s not enough merely to own index funds. You really need to dig deeper and see what percentage of your portfolio is constituted in your top 10 holdings, which shows you what you ultimately own.

With the way things are right now, index funds may be comprised of the same kinds of companies. Remember, the top 10 holdings in any portfolio should never exceed about 20 percent of the portfolio’s total value. And if your top 10 holdings begin to exceed 30 percent, your portfolio is not nearly as diversified as it should be.

To sum up, it’s vitally important to be aware of the impact of investing in the S&P. If you’re not careful, you could end up with a serious lack of diversification, even when you think you’re diversifying effectively by investing in an index fund. For help digging into your portfolio and optimizing your investments, please contact Nelson Financial Planning. We’ll help you change your life with a successful financial plan.

Buying a House

As a financially savvy individual, you know you should be investing and preparing for retirement. Everyone wants to build a healthy nest egg, but what if you don’t have any extra cash or disposable income each month? These are two major roadblocks to investing. Another is buying a house while making sure you don’t end up “house poor.”

Problems with Rushing into Buying a House

The way you go about buying a house can dramatically impact the amount of money you have leftover at the end of the month. Spending too much on a mortgage or rushing into the wrong opportunity can cause two major issues:

• You rack up debt: If you put all your money into buying a house, you may end up taking out loans or putting day-to-day expenses on credit cards without the ability to pay them off. Going into debt just to make ends meet is never a good place to be financially.
• You have no disposable income to invest in: Because of inflation, money is always more valuable today than it will be tomorrow. As a result, you should strive to always keep your funds growing through wise, diversified investments.

A Look at Florida Homebuyers

Radio show host, author, and businessman Dave Ramsey recommends keeping housing expenses around 25 percent of your income. Following this advice, a Floridian earning the state’s median household income of $53,000 should spend no more than $13,500 per year—or $1,100 per month—on housing.

However, the average American spends about 37 percent of their income on housing. This means a typical Floridian might spend nearly $20,000 per year—or over $1,600 per month—on rent or a mortgage. This is a difference of roughly $6,000 per year.

Putting Your Money to Work for You

$6,000 per year might not sound significant, but this amount can substantially affect your investment portfolio. $6,000 is enough to fully fund a traditional or Roth IRA. You can use $6,000 per year to fund your children’s college educations in a 529 college savings plan. Or you can put $6,000 into stocks and bonds as a personal investment. The possibilities are endless!

Assuming a 7 percent rate of return, investing $6,000 per year starting at age 25 can grow to over $1.2 million by the time you reach retirement age, or 65 years old. However, if you spend an excessive amount of your income on housing and don’t have anything left to invest, you will not end up with the same nest egg when you retire.

Clearly, it’s essential to understand the opportunity cost of buying a house, especially if doing so will push your housing expenses too high. For more on how we can help you determine if a mortgage is within your budget, please contact Nelson Financial Planning. Our team of certified financial fiduciaries focuses every day on helping you change your life through a successful financial plan that provides peace of mind for the future.

New Stimulus Update! Will You Get It?

$1.9 trillion. That’s how much money the government is injecting into the economy with the latest stimulus package known as the American Rescue Plan Act of 2021 (ARPA). Washington has now provided about $6 trillion in total economic relief during the coronavirus pandemic. Continue reading “New Stimulus Update! Will You Get It?”

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.

Unforeseeable Market Surprises

The current political atmosphere, economic recovery following the COVID-19 pandemic, and recently passed legislation will significantly impact your financial decisions in 2021. Don’t be caught unawares by unforeseeable market surprises! Work with a financial planner to help you navigate your retirement strategy.

Political Control and the Stock Market

Presidential elections tend to significantly impact the stock market and the economy as a whole. With the inauguration of President Joe Biden, you may be wondering, “How will this new presidency affect the stock market?”

No one knows exactly how the market will perform in any given year and past performance is no guarantee of future results. However, MFS Investment Management—an American-based global investment management company—has put together a chart offering some historical perspective. From 1926-2018, the S&P 500 index experienced different annual average returns in relation to the president’s political party and the majority party in both houses of Congress. Consider these five findings:

1. The S&P 500 gained 15 percent per year under Democratic presidents and Republican-led Congresses.
2. The S&P gained 6.6 percent under Republican presidents and Democrat-led Congresses.
3. The S&P gained 11.4 percent when the White House and both Congresses were run by the same political party.
4. The S&P gained 15.6 percent under Democratic presidents and split Congresses (one party controlling the House and the other controlling the Senate).
5. The S&P gained 0.9 percent under Republican presidents and split Congresses. This seemingly skewed data entry could be partly caused by the fact that this scenario has occurred infrequently over the past century.

Having a Democratic president and 50-50 tie in the Senate is the scenario we’re entering right now—the very definition of “divided government.” But if market data tells us one thing, it’s that “gridlock is good.” If the stock market moving forward follows historical trends, we could be in for a healthy S&P 500 annualized return for at least the next four years. That level of certainty—or at least the lack of uncertainty—really boosts the economy and helps businesses make decisions.

COVID-19 and the Economy

While historical market data is useful to consider, a unique and tremendously impactful factor is present in our current economic climate—a deadly pandemic. Moving into 2021, the Biden administration will have to deal with the fallout of COVID-19.

The damage this pandemic has caused is specific to certain sectors of the economy, while others are fairing just fine. Lower-wage jobs have also been disproportionately affected, with engineering, technology, finance, and other professional jobs left relatively unscathed.

Despite undeniable economic damage, the underlying economy is actually showing some strong performance and signs of recovery. Here is some economic data from the end of 2020 to consider as the new year gains steam:

• National unemployment dropped to 6.9 percent—nowhere near 3.3 percent, which is where unemployment was a year ago, but things are moving in the right direction.
• Corporate earnings for Q3 2020 declined by 7.5 percent compared to the previous year. This is far less severe than the anticipated 21 percent decline.
• The Institute for Supply Management (ISM)—a widely looked-at manufacturing index—rose to 59.3, the highest measurement since 2018.
• New factory orders, which serve as forward-looking economic indicators, rose to the highest level they’ve been in 17 years.

Changes Implemented by the SECURE Act

The traditional retirement strategies that financial planners have recommended for decades were upended in early 2020 with the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation is a significant departure from what the rules used to be regarding retirement accounts.

Before this new bill passed, beneficiaries had the option of spreading out distributions from inherited retirement accounts throughout their lifetime. They would have been required to take out 2 to 3 percent each year, but then the rest of the money could remain in the account, earning interest on a compounded, tax-deferred basis for decades.

With the SECURE Act, beneficiaries must empty inherited retirement accounts within 10 years. This new rule greatly accelerates the payment of taxes on that sum of money and shortens the amount of time the funds can grow.

Adjusting Your Retirement Strategies in Response to the SECURE Act

The tax implications of the SECURE Act are profound. There hasn’t been much analysis yet because the COVID-19 pandemic broke out shortly after the bill was passed, distracting the entire country in the process. Still, everyone should adjust their retirement planning strategies in response to the SECURE Act. Here’s how to be more tax-efficient, not just for you, but for succeeding generations.

Use more of your retirement account now.

The old recommendation was to pay for things like end-of-life medical care with an after-tax account to keep taxes low and preserve any IRAs for the next generation. However, because of the new 10-year rule, it now makes more sense to reverse this recommendation in many cases. Using more of your before-tax retirement accounts now means you don’t end up passing on more taxes to your beneficiaries, who may be in a higher tax bracket when they receive the money than you are as a retiree living on social security.

Pull down the balance of your retirement account with a qualified charitable distribution.

This strategy involves sending your required minimum distribution directly to charity so you don’t have to report that portion as income on your tax return.

Consider converting your account into a Roth IRA.

From a historical standpoint, financial planners have generally recommended traditional IRAs to most of their clients. However, because of the SECURE Act’s 10-year rule, Roth IRAs—which are comprised of after-tax dollars—are getting more attention. Just remember that if you convert a traditional IRA into a Roth account, you must be able to afford the taxes now.

If you need help navigating unforeseeable market surprises and changes brought about by the SECURE Act, please contact Nelson Financial Planning for a consultation today.

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.

When Should you Start Investing

When you’re young, you might not think too much about retirement. It seems like a long way off, but in fact, your youth is the best time to start thinking about setting yourself up for the future. When should you start investing? Probably much sooner than you think.

Why should you start saving for retirement when you’re still decades away from it? Investing in your late teens and early 20s is much more impactful than investing at a later age, even if you invest less money. Do you know why? It’s because of compound interest.

Let’s consider the example of two people investing $2500 each year into a tax-deferred account (assuming a roughly 10% return). One starts at age 18 and continues to invest until they’re 27, investing a total of $22,500. The other doesn’t start investing until they’re 27, but continues until he’s 65, for a total investment of $97,500. Now here’s what may surprise you: the person who started investing at 18 will have $1.5 million in the bank, while the one who began at 27 will only have $1.1 million. So even though the first person put in just a little over 25 percent of what the other person invested, they ended up with nearly half a million dollars more.

Investing 10-15 percent of your income each month when you’re young can yield a healthy retirement account when the time comes. Before you get started, though, create a budget and make sure you’re living within your means. Pay down high-interest debt, so that your debt to income ratio is low- preferably below 35 percent. Then make an appointment with a financial advisor, who can help you create a successful financial plan. Because you’re young, you’ve got plenty of time for your money to grow, but the drawback of being young is a lack of experience. Aligning yourself with a knowledgeable professional is one of the smartest money moves you can make.

If you’re over 18 and this information has caused you to feel hopeless, don’t throw in the towel just yet. The magic of compound interest can still help you. You’ll just have to make a larger investment because you’ve got less time. Even in your 40s, if you contribute the maximum allowable amount to a 401k, you should be able to retire comfortably in your 60s. You’ll have to prioritize your retirement fund, though, not siphoning it off to pay for college or accumulating debt. It’s also important not to make risky investments, but with the right financial advice, it’s possible to save for retirement at almost any age.

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.