Outside Economics

Demographics play a significant role in how much we spend and how we spend it.  Spending is primarily dictated by age where different needs and life essentials change and evolve as consumers grow older. For many families some financial obligations never go away.

Housing, transportation and food are the three largest expenses incurred by all age groups. These basic expenses often fit into the typical needs that many families have for life insurance. When looking at how much insurance to get people should consider an amount that will cover these expenses long into their future. People, even after retirement will still have these expenses.

These long lasting expenses should be covered with a permanent insurance policy, like whole life. Where the premium will remain level for your entire life. For example a base policy might be something in the area of $250,000 to $500,000 in coverage. Such a policy is much less expensive in a person’s younger years, making them very cost effective over the long term. 

As consumers move from their late 20s into their 30s, we earn more money and families start to grow. Expenditures on transportation, health care and entertainment become prevalent as households grow with children. These more temporary expenses would typically be covered by term insurance. When the financial need or obligation is completed the insurance can be dropped. This allows a family to be covered for the extra needs for vary little money, while at the same time maintaining their base whole life policy, which will provide the needed protection long after retirement.

As we earn more, we also tend to save more in our 30s, 40s, and 50s by contributing to 401k plans and retirement savings. At 75 years of age and older, our retirement savings start to reduce as withdrawals increase to replace lost earned income. Retirement savings is critical to your financial success. The life insurance is what secures the retirement savings. However, even with a large retirement account or pension, the basic need for insurance may not ever go away. How have you determined your needs for life insurance? With September being National Life Insurance Month - now is a great time to review your coverage.

There is the simple acronym: DIME with the meaning: D: Debts; How much do you have in outstanding debt obligations (excluding your mortgage)? I: Income; What amount of your income do you want to replace and for how long? Mortgage: How much would it take to pay off your mortgage? E: Education; What do you want to leave for your children and/or grandchildren for education expenses?

Now add these DIME numbers up and get the total. Subtract from the total how much life insurance you currently have in place and that is your current need. Typically, your current needs may range from 10-20 times your annual income, with up to about three to seven times your annual income as a base amount. Review the second paragraph up top to determine your very long term needs and see how this matches up.

 Sources: Social Security Administration, U.S. Census Bureau

Whatever excuses you may have for not buying life insurance now will only sound ridiculous to your widow!

 - Unknown Author

Here we are at the start of the New Year when folks get to review their contribution limits to their retirement plans. Below are the limits, however depending on the type of plans available and whether or not you are using a qualified or non-qualified plan determines your limits (certain non-qualified plans have no limits).

Often times non-qualified plans may yield more after tax income during retirement than qualified plans will, so it depends on if you want to pay taxes now or in the future. Perhaps, there is a balance between the two? That analysis should be performed.

If you think taxes are going to go up in the future, consider using more non-qualified plans now. You can think about it this way: would you prefer pay taxes on the seeds you plant or all the vegetables you harvest? Both plans take time for money to grow!

For 2016, the elective contribution limit for employees who participate in 401(k)s will remain the same at $18,000 for the year. That is the amount that a saver can contribute annually on a tax-deferred basis, and it also applies to many plans offered by nonprofit and government employers. The catch-up contribution for employees age 50 and over will remain the same at $6,000, so someone in that age group could contribute a total of $24,000. (Matching contributions from employers do not count against this figure.)

IRA annual limits remain unchanged at $5,500, with the catch-up contribution for those 50 and over also flat at $1,000. Of IRA holders who contributed to their plan, 53.5% contributed the maximum annual amount, according to data from the Employee Benefit Research Institute (EBRI).

A change to Roth IRAs is the ability for workers to earn more and still be able to contribute to a Roth. Individuals making contributions to Roth IRAs have a new AGI phase out range, which is $184,000 to $194,000 for married couples filing jointly, up from $183,000 to $193,000 in 2015. 

For small business owners (and their employees) you may consider a SEP. Contribution limits for 2016 is $53,000 or 25% of total compensation, whichever is less. Employers must contribute the same percentage for all employees; often in a one person business the maximum is contributed.

If you are changing jobs, rolling over a 401(k) into a self-directed IRA is most often the best choice. The typical 401(k) plan may have anywhere from 12 to 25 investment options and often many over-lap in asset classes. For example: a large cap growth fund, an S&P 500 index fund and a large cap value fund.

There can be enough of an overlap in those three funds that there is little distinction between them. So really, you do not have three choices you have one, when trying to diversify based on asset class. Achieving a well balanced portfolio in a 401 (k) plan can be tricky as the fund offerings are not always clear.  As a suggestion you may want to look at this article for a basic format on how you might rebalance your 401(k) plan.

A self-directed IRA can allow you to invest, quite literally, A-Z type of investments. From precious metals, rental real estate, stocks, bonds, mutual funds, ETF’s, Annuities, commodities, alternative investments, REITS, and the list goes on. Many of these options have additional risks associated with the investments, but often time’s practical knowledge can help minimize those risks.

Work with your investment advisor to help make the right decisions for you and your current situation, doing the best you can to plan for your future. Examine the use of both qualified and non-qualified retirement plans and their complete income tax effects on income as well as your Social Security Benefits. Additionally, you should be familiar with the three legs of retirement planning: investments, estate planning, and long-term care. If you do not have an investment advisor I would be happy to answer your questions and help you understand which strategy is best for you, your business, and family – give me a call or click on the link below. In everything you do, I wish you the best of success.

Sources: IRS, Employee Benefit Research Institute

Remember:

"When you cannot do what you do what you have always done, then you only do what maters most" Robert D. Hales