Being a Successful Investor!

Many studies have been conducted over the years to pinpoint the common traits of savvy investors. Here are five factors that these studies have identified as the keys to successful investing.

Save More

First and foremost, strive to spend less and save more. The more you tuck away each month, the more wealth you will accumulate over time. To put this advice into action, always pay yourself first. This means putting at least 10% of your income from every paycheck straight into a retirement account. Then, make sure your expenses don’t exceed the remaining 90% of your income. Cut back on your spending if you must to make sure everything else gets paid.

Avoid Worrying

We’re inundated with information 24/7, so it can be hard to ignore all the noise out there. However, as the old Bobby McFerrin song says, “Don’t worry, be happy.” Stop worrying about whether a bubble or a crash is happening right now. Stop worrying about what might happen with the market next week, next month, next quarter, or next year. Studies show that even if you invest at the market peaks each year, you still wind up with great, long-term results.

Start Early

When you start investing early, compounding interest has time to work its magic. Here’s what happens: Say you put $10 into an investment account. The balance grows by 10% in year one, so now you have $11. The balance grows by 10% again in year two, but you don’t make $1—you make $1.10. This compounding effect leads to a sizable amount of wealth over an extended period. Starting 10 years earlier than someone else could result in a much more sizeable retirement account.

Stay Positive

The world is not going to end if your investment account loses value from one month to the next. And if it does, then your financial plan doesn’t matter, right? All jokes aside, understanding that you need a positive outlook helps you stay the course as an investor.

Over the past 100 years, the markets have certainly seen ups and downs because of world wars, recessions, presidential assassinations, pandemics, and everything else you can think of. And yet, the trajectory has continued to move upward. Remember, the market represents the value of companies that produce high-demand goods and services. So it’s really no surprise that the market continues to trend upward over the long-term.

Have a Steady Temperament

Temperament cannot be learned. Rather, it’s an innate characteristic of your personality. A steady temperature allows you to consider the bigger picture and not lose sight of potential growth, even during periods of extended market upheaval. Others may get swept up in their emotions, but successful investors never abandon their discipline.

Looking to accumulate more wealth in 2021 and beyond? Turn to Nelson Financial Planning. We have over 35 years of experience helping our clients enjoy cost-effective financial plans and superior investment results. To schedule your free initial consultation, please call us at 407-629-6477.

The Benefits of Pre-Tax Retirement Accounts

Have you noticed the terms “pre-tax” and “post-tax” when looking at your retirement accounts? If you’re confused about what these terms mean, learn the difference between them to help maximize your tax savings.

One way or another, each dollar you earn as income usually runs through the tax system. The type of retirement account you set up determines whether this happens right away or years in the future. Here’s the big question: Is it better for you to pay taxes now or later? Let’s take a closer look at pre-tax contributions to help you answer this question.

What is a Pre-Tax Retirement Account?

“Pre-tax” means before paying taxes and usually refers to contributions made to a tax-deferred retirement account. These include:

• 401(k)
• 403(b)
• Traditional individual retirement account (IRA)
• Deferred compensation plan

Pre-tax contributions deposit directly into your retirement account. The money is not taxed as long as it remains in that account. This means your dividends, interest, and capital gains grow on a tax-deferred basis until you withdraw them.

Benefits of Pre-Tax Retirement Accounts

Many people choose to make pre-tax contributions because of these great benefits:

Pre-tax contributions save you money today by reducing your taxable income.

Pre-tax contributions are invested in stocks and bonds that pay dividends or interest each year. Being in a tax-deferred account means you don’t pay taxes on this growth. The compounding effect of these reinvested amounts can really snowball into amazing results by the time you withdraw the money after retirement.

When you make a withdrawal from a pre-tax retirement account, the money finally runs through the tax system. This is when you pay taxes on your retirement account contributions. Most retirees are in a lower tax bracket than when they were working. As a result, you will probably pay fewer taxes in the end than if you had opened a post-tax retirement account.

When to Consider Post-Tax Contributions

Pre-tax retirement accounts aren’t for everyone. That’s why the IRS also offers post-tax contributions. “Post-tax” is when you pay taxes right away, leaving you with tax-exempt retirement income. Consider setting up a Roth 401(k) or Roth IRA if:

You’re in a low tax bracket now and expect to be in a higher bracket later due to retirement income or because you think taxes will increase.

You would rather have your income run through the tax system now instead of at retirement so your nest egg isn’t subject to further taxation.

If you still have questions about pre-tax vs. post-tax retirement accounts, Nelson Financial Planning can help you decide which option is best for you. Our team consists of Certified Financial Planners who fulfill their fiduciary duty to keep your best interests in mind at all times. With our help, you’ll understand the rules better than ever so you can maximize your tax savings. Contact us today at 407-629-6477 to schedule your free initial consultation.

The 8th Wonder of the World You Need to Know About

Why should you be investing today? Some people are steering away from investing during this pandemic, what with the foreboding headlines and uncertain future. However, investing remains an important way to accumulate wealth in this economic climate.

Saving vs. Trading vs. Investing

Many people confuse the terms saving, trading, and investing. What’s the difference?

Saving is when you put away money securely in a savings account, checking account, certificate of deposit (CD), or money market. Savings typically have easy access, a relatively low and stable interest rate, and an FDIC guarantee. We recommend maintaining emergency savings account with enough funds to get by for six to 12 months. For many people, this is anywhere between $25,000 and $50,000.

Trading is when you buy and sell stocks, bonds, or other financial products. You can make a quick buck, but there’s no opportunity for long-term growth and stability.

Investing is about financial growth over time. Whether you invest in your own business or purchase a share in a Fortune 500 company, you essentially own a slice of that operation. This proposition comes with more risk, but it also has a higher potential for return.

Once you have adequate savings in place, we recommend investing to help you accumulate wealth and prepare for retirement. Ideally, you should work toward having eight to 10 times more money in investments than you do in savings.

Think of investing as a garden. If you plant a tomato seed today, you won’t have a tomato plant tomorrow. There is no instant gratification the way there is in trading. It takes time, patience, and regular attention to build a successful investment portfolio, but if you’re consistent, the results can be amazing.

Investing requires an understanding of opportunity cost as well. This economic concept states that there’s an infinite number of ways you can spend every dollar you earn. Once you decide how to spend it, you can’t spend it any other way. Therefore, you need to earn another dollar to buy the next thing on your list. Thinking about the opportunity cost of every dollar you spend can help guide your investments.

What Makes Investing So Powerful?

Far too many people focus more heavily on saving than investing, but this is a mistake. Why is investing so important?

• Investing offers healthy returns. The historical average gain of long-term investments is 8 to 10 percent compared to 1 or 2 percent for savings.
• Compound interest can build incredible wealth. Dubbed the Eighth Wonder of the World, compound interest means your investment grows each year—not just on the original amount, but on the original amount plus the growth it made that year.
• Investing provides multiple aspects of growth. Dividends, interest, and capital gains are all possible ways to make money from investments.

Successful investing often requires help from a financial planner. Reach out to Nelson Financial Planning at 407-629-6477 or schedule your free initial consultation online to start putting your money to work for you!

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.

Why Taxes Will be a Mess This Year

Has filing your taxes felt confusing in past years? The 2020 tax season is a whole different animal. It’s turning into one of the craziest tax seasons we’ve ever seen. Let’s see if we can cut through all the red tape and make some sense of it all. 

New Tax Filing Deadline  

In mid-March, the Internal Revenue Service (IRS) extended the tax deadline from April 15 to May 17, 2021. Good thing, too—it gives filers more time to sort out the moving target that is this year’s tax season. 

However, if you have already filed and you owe taxes this year, the date you scheduled for your bank account withdrawal is pretty much etched in stone. So if you were hoping to take advantage of the extended deadline, you’re out of luck. 

Be aware that the deadline for funding individual retirement accounts (IRAs and Roth IRAs) and health savings accounts (HSAs) has also been extended to May 17. 

Self-employed people or anyone who generates significant income without having taxes withheld should file quarterly estimated tax payments. If this applies to you, be aware that the deadline for your first payment is still April 15, despite the tax deadline moving forward one month. 

Also, the deadline for corporations, partnerships, and non-profits to file tax returns remains April 15, 2021. 

Tax Changes 

The most recent stimulus package, called the American Rescue Plan Act of 2021 (ARPA), implemented several significant tax changes in the middle of tax season. These include: 

• Unemployment: 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 ). 
• Health insurance: If you had health insurance through the marketplace in 2020 and earned more than your estimated income, the need to repay the advance premium tax credit is waived. 

While it’s easy to celebrate these changes, the fact that they came so late is creating incredible confusion. For the tens of millions of Americans who filed their returns before the changes were implemented, the only option is to wait. The IRS hasn’t provided instructions on how to proceed. All they have said is not to amend returns yet. But at some point, the IRS must put a mechanism in place to deal with the millions of incorrect returns. 

Even for those who haven’t filed yet, confusion abounds. Electronic filing is a popular option, but tax software hasn’t been updated to reflect the changes yet. Many new tax laws enacted after the CARES Act passed a year ago still haven’t filtered through the tax return system! This includes the 10 percent penalty exemption for taking distributions from retirement accounts due to COVID-19. 

How are filers expected to maximize their returns when the tax law keeps changing in significant ways? 

Interest Rates 

The Federal Reserve announced in mid–March that they intended to hold interest rates near 0 percent until 2023. In addition, the Fed plans to continue quantitative easing, the process of injecting money into the economy by purchasing government bonds and other financial assets to expand economic activity and keep interest rates low. Spending is currently at about $120 billion per month. Despite the Fed’s efforts, 30-year mortgage interest rates recently crept above 3 percent for the first time since July 2020. 

The Fed expects the US economy to grow 6.5 percent this year as the pandemic winds down, the country fully reopens, and economic activity spikes. If that estimate holds, it will be the fastest pace since 1983. Meanwhile, unemployment is back down to 6.2 percent. 

Stock Market 

March 17, 2021 was a big milestone for the Dow Jones. The market closed at just over 33,000 points, a new threshold for the Dow that had never been reached before. This milestone occurred just five days after closing above 32,000, making it the fastest 1,000-point increase in the Dow’s history. 

Just remember to keep this in perspective. Increasing by 1,000 points now is a 3 percent increase, compared to a 10 percent increase if the Dow was at 10,000 points. Still, this is certainly a noteworthy market shift. 

Required Minimum Distributions 

The rules regarding required minimum distributions (RMDs) have already changed in the past year, courtesy of the SECURE Act. Here’s what happened in 2020: 

• The 50 percent penalty for failing to take the minimum distribution was waived. 

• The RMD age rose from 70.5 to 72. 
• The timeframe for retirement account beneficiaries to empty the account changed from a lifetime to just 10 years. 

RMDs were waived in 2020, but they’re back for 2021. You may find that your required minimum distribution jumped quite high compared to 2019. Here’s why this may have happened: 

• The market performed pretty well last year. 
• You’re one year older now. 

• More money has accumulated in the account if you suspended distributions in 2020. 

Looking ahead to 2022, here’s what you can expect from RMDs: 

• The IRS will issue a new Uniform Lifetime Table used for calculating RMDs to reflect higher life expectancies. 72-year-olds can expect a 6.5 percent reduction in required minimum distributions compared to the current Life Expectancy Factors. 
• Some professionals speculate that the RMD age may rise to 75. 

Common Traits of Successful Investors 

Five key things set successful investors apart: 

• Save more: Pay yourself first. Then, make sure everything else gets paid. 
• Avoid worrying: You can expect great long-term results, no matter what the market is doing in the short term. 
• Start early: Compound investing is much more powerful if you start saving early. 
• Stay positive: Having an optimistic outlook helps keep your investments on track. 

• Have a steady temperament: Consider the bigger picture and don’t lose sight of potential growth despite what may be happening now. 

For answers to your questions about tax changes, interest rates, required minimum distributions, or successful investing, please contact Nelson Financial Planning at 407-629-6477.

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?”