Asking for a Friend - How do I know when to retire? What do I do with my 401K?

May 13, 2024

Question:

How do I know when to retire? What do I do with my 401K?

Answer:

This is one of those questions that is so dependent upon each individual’s situation, but a big piece of it comes down to four main components:

1. Health - sometimes we are forced to retire.

2. Economy - sometimes we delay because of the economy, or we are forced into retirement due to a reduction in workforce.

3. Emotion - some people say "they just know" it's time and they are emotionally ready.

4. Finances - does your cash flow match your spending desire?

As for what to do with your 401K, you also have options there:

1. You can leave it in your 401K and take distributions when needed - but your plan may have some limitations and added costs for this.

2. Roll it over into an IRA - this is a non-taxable event and generally gives you the greatest amount of flexibility.

3. Take a lump sum distribution - this would result in a taxable event, and you would need to count the distribution as income.

The right decision for every person is different and depends on other financial goals and events going on in your life.

Not to be vague in answering this question, but there are so many variables, that it is hard to give a general response.

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Asking for a Friend - I’d like to work until I am 65, when I can qualify for Medicare. What if something happens and I need to stop work earlier?

May 6, 2024

Question:

I’d like to work until I am 65, when I can qualify for Medicare. What if something happens and I need to stop work earlier?

Answer:

That’s a very timely question.

A recently released survey from the Employment Benefits Research Institute (EBRI) reported that people often stop working 3 years earlier than they planned. Respondents said that they wanted to retire at 65, but actually retire 3 years earlier.

Why is there a relatively large gap between expectations and reality? The Wall Street Journal reporting on the research said that health issues, layoffs, ageism and caring for family members are among the contributing factors.

In terms of what you can do to prepare, the answer is planning, and your first assumption should be that you will have to stop working sooner than you would like.

Planning is twofold:

• First, is the financial part which ideally should start years before. This will give you a “long runway” and ideally some peace of mind.

• The second planning component is what you would like to do once your traditional working years end. An encore career, part time work, travel, or a combination?

This planning should start years before you want to retire, so you are prepared for any eventuality.

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Asking for a Friend - Can you talk about 401K 20% mandatory tax withholding? Does this also apply to other retirement plans?

April 29, 2024

Question:

Since you have been focusing on taxes and financial planning, can you talk about 401(k) 20% mandatory tax withholding? I am just hearing of this. Does it apply to other retirement plans (i.e. 403b, 457)? Isn't this forcing you to take out possibly more than you would have planned for in retirement?

Answer:

The 20% mandatory tax withholding applies to withdrawals from a 401(k) before age 59 1/2 (if the withdrawal does not meet an exception to this rule.)

This withholding does apply to other pre-tax retirement plans. The rule is a way to discourage people from taking funds out of their retirement accounts early.

Exceptions are:

• Receiving the payout over time.

• Qualifying for a hardship distribution with the plan administrator.

• Leaving your job and are over a certain age.

• Domestic abuse survivor.

• Getting divorced.

• Giving birth to a child or adopt a child.

• Become disabled.

• Put the money in another retirement account.

• Using the money to pay an IRS levy.

• Using the money to pay certain medical expenses.

• Disaster victim.

• If you overcontributed to your 401(k).

• If you were in the military.

• If you are terminally ill.

• If the owner passes away.

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Asking for a Friend - My refund for taxes was much lower this year than it has been in the past, did tax rates or brackets change this year? (Copy)

April 22, 2024

Question:

My refund for taxes was much lower this year than it has been in the past, did tax rates or brackets change this year?

Answer:

We've witnessed this a lot this year, but it actually doesn't have much to do with tax brackets or rates. There were three big areas we saw that increased in 2023: Interest, Dividends and Capital Gain Distributions.

With interest rates on money market much higher than past years, it has been great that we've been able to earn some real return on our cash, but that interest is taxed at your ordinary income tax rate and you don't have any taxes withheld from that interest when you earn it.

Dividends were up a bit this year too, we saw both individual stocks, mutual funds and ETFs generate more in dividends year over year. If the dividends are qualified, they do get taxed at the capital gains tax rate (15% - 20%), but again, no taxes are withheld when you earn those dividends (unless it is a foreign dividend).

Capital gain distributions from mutual funds were up a bit this year too. Mutual funds don't have to pay income tax on internal gains, but they do have to push those gains out to the shareholders. We generally get estimates towards the end of the year, but they are only estimates, so the final number is different. That doesn't mean you sold anything at a gain, it means the mutual fund did and they are passing it on to you, but no taxes are withheld from those distributions.

When you add all of those items up, it's likely that you just earned more this year (meaning your liability was more) and because it was from areas that no taxes were withheld, it had to be netted out of your refund.

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Asking for a Friend - I'm so confused about annuities. I've read they are good and that they are bad, so I don't know if they are right for me. Any tips?

April 8, 2024

Question:

I'm so confused about annuities. I've read they are good and that they are bad, so I don't know if they are right for me. Any tips?

Answer:

GREAT question!

Like anything in life, some annuities, in moderation, are a great solution for a financial gap; however, we would never recommend putting 100% into an annuity.

Sometimes we recommend an annuity product as part of a clients fixed income portfolio. That's how we envision them - annuity by definition according to Investopedia is "a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future."

But there are multiple types of annuities that exist, so the question might be, if it is right for you, which type should you invest in?

We've posted a grid on our website with a summary of the types of common annuities and who they might be suitable for in moderation: 2024 Common Annuity Products

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Asking for a Friend - I've been thinking about referring a friend to you - but I don't know how to say to her "I think you need help." Any tips?

April 1, 2024

Question:

I've been thinking about referring a friend to you - but I don't know how to say to her "I think you need help." Any tips?

Answer:

Well first, thank you for the referral, it's always an honor when someone trusts us enough to refer a friend.

Second, perhaps just share how we've helped you when the topic of finances come up.

Something like, I know when I had a lot of financial related questions running around in my brain, the Rooted Planning Group team helped me organize it and sort through the various topics (or however we helped you).

They can schedule a discovery call with us to make sure we offer the services they are looking for, and there is no cost to that meeting. If we can't help them, we might know who can.

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Pass those questions on to us at AskRPG@rootedpg.com and we will feature them in our future newsletters.

Asking for a Friend - I'm trying to teach my daughter about investing - any tips?

March 25, 2024

Question:

I'm trying to teach my daughter about investing - any tips?

Answer:

Kudos to starting the education process early.

It depends on your daughters learning style and age, but in many cases, doing is the best way of teaching.

Amy offers this tip: I started putting money in my niece and nephews 529 plans when they were born, instead of birthday presents. They didn't know the difference.

By the time they were 10, I started involving them by sharing the statement with them. They didn't comprehend it all that much at that time, but they are all starting to get to the age now that they see the value.

In addition, at age 10, I had them pick a stock for their birthday. Each year I ask them 2-questions:

• What do you want to buy this year and why?

• Are there any changes they want to make to their current holdings?

These are not big purchases, but by the time they are 18, they will own 9 different stocks and have a general understanding.

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Asking for a Friend - I've seen commercials on TV for reverse mortgages, is that something that I should consider?

March 18, 2024

Question:

I've seen commercials on TV for reverse mortgages, is that something that I should consider?

Answer:

Reverse mortgages are more highly regulated than they used to be and in certain cases may be a good option.

• A reverse mortgage might be worth looking into if you are over age 62, own more than 50% of your primary residence, and need additional income.

• You also want to be sure that you are staying in the home and that you are comfortable leaving the property to your heirs with a mortgage attached to it that will need to be paid off.

If these items apply to you, consider talking to a financial planner about this option.

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Pass those questions on to us at AskRPG@rootedpg.com and we will feature them in our future newsletters.

Asking for a Friend - What is the best way for me to earn extra money without having a side hustle or a 2nd job?

March 11, 2024

Question:

There are so many articles lately about people with side hustles. What is the best way for me to earn extra money without having a side hustle or a 2nd job?

Answer:

We’ve all heard the latest Gen Zer with a “side hustle” or someone who earns “x” thousand a month in “passive income”. I wonder how people manage multiple “hustles” or is this just the financial media trying to make the rest of us feel somehow inadequate.

Then I got to thinking what the best way is for the “rest of us” to generate passive income.

Though not as “clickbaity” as side hustles, generating dividend income from equities is the best way I know of to generate passive income. Many stocks of larger companies especially those in the S&P 500 pay annual dividends to shareholders. Not only can you benefit from potential price appreciation - many companies will pay you to hold their shares in the form of dividends.

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Asking for a Friend - How do I know if I need a LTC policy, and when should I get one?

March 4, 2024

Question:

How do I know if I need a LTC policy, and when should I get one?

Answer:

Those are great questions!

How do you know if you need a LTC Policy?

Everyone's situation is different and not everyone can get a LTC policy, as there is underwriting involved.

When we are analyzing care needs, we first have to ask what type of care you desire.

Some people want to stay in their home, while others would like to move to a senior living facility that starts out with independent living and then grows to more custodial care (i.e. nursing home). The cost between these two is very different.

Then determining how to fund that care is the next question. Knowing that the typical female needs 3.7 years of care (that doesn't necessarily mean nursing home, it just means care), while the average male needs about 2.2 is a starting point, but your family history and medical issues may change those averages significantly.

The most common ways to pay for this care include:

1) Self-pay from your income and assets.

2) Transfer some of the risk and purchase insurance.

3) Ask the State to pay for your care (Medicaid).

Understand that you have the most control over your care with options 1 and 2.

Why did I share all of this in order to answer your question? Because, like anything in financial planning...it depends - unfortunately, it's not cut and dry.

When should you get one?

The "best" age tends to be between 50 - 55. This is generally when your cash flow is sufficient to cover the premiums and your body hasn't started to show signs of aging for underwriting purposes.

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Do your friends ask you financial questions?
Pass those questions on to us at AskRPG@rootedpg.com and we will feature them in our future newsletters.