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So far 2019 has been the year of breaking records. We are officially in the longest economic expansion, which started in June of 2009. After the steep market selloff in December, the major US indices have recovered their losses and reached new highs. The hopes for a resolution on trade, the Fed lowering interest rates and strong US consumer spending, have lifted the markets. At the same time, many investors remain nervous fearing an upcoming recession and slowing global growth.
S&P 500 in
S&P 500 hit an all-time high in June, which turned out to be best June since 1938. Furthermore, the US Large Cap Index had its best first quarter (January thru March) and the best first half of the year since the 1980s.
Market Outlook July 2019
treasuries rates declined
Despite the enthusiasm in the equity world, fixed income investors are ringing the alarm bell. 10-year treasury rate dropped under 2%, while 2-year treasuries fell as low as 1.7%.
We continue to observe a persistent yield inversion with the 3-month treasury rates higher than 2-year and 10-year rates. Simultaneously, the spread between the 2 and 10-year remains positive. Historically, a yield inversion has been a sign for an upcoming recession. However, most economists believe that the 2-10-year spread is a better indicator than the 3m-10-year spread.
Gold is on
Gold passed 1,400. With increased market volatility and investors fears for a recession, Gold has made a small comeback and reached $1,400, the highest level since 2014.
Bonds beating S&P 500
Despite the record highs, S&P 500 has underperformed the Bond market and Gold from October 2018 to June 2019 S&P 500 is up only 1.8% since October 1, 2018, while the 10-year bond rose 8.7% and Gold gained 16.8%. For those loyal believers of diversification like myself, these figures show that diversification still works.
Stocks lead the rally in Q2
Consumer Staples and Utilities outperformed the broader market in Q2 of 2019. The combination of lower interest rates, higher market volatility and fears for recessions, have led many investors into a defensive mode. Consumer staples like Procter & Gamble and Clorox together with utility giants like Southern and Con Edison have led the rally in the past three months.
stocks are still under all-time high levels in August of 2018. While both
S&P 600 and Russell 2000 recovered from the market selloff in December o
2018, they are still below their record high levels by -13.6% and 10%
International Stocks disappoint
Developed and Emerging Stocks have also not recovered from their record highs
in January of 2018. The FTSE
International Developed market index is 13.4% below its highest levels. While
MSCI EM index dropped nearly 18.3% from these levels.
After hiking their target rates four times in 2018, the Fed has taken a more dovish position and opened the door for a possible rate cut in 2020 if not sooner. Currently, the market is expecting a 50-bps to a 75-bps rate cut by the end of the year.
As I wrote this article, The Fed chairman Jerome Powell testified in front of congress that crosscurrents from weaker global economy and trade tensions are dampening the U.S. economic outlook. He also said inflation continues to run below the Fed’s 2% target, adding: “There is a risk that weak inflation will be even more persistent than we currently anticipate.”
The unemployment rate remains at a record low level at 3.7%. In June, the US economy added 224,000 new jobs and 335,000 people entered the workforce. The wage growth was 3.1%.
The US consumer
confidence remains high at 98 albeit below the record levels in 2018. Consumer
spending has reached $13 trillion. Combined with low unemployment, the consumer
spending will be a strong force in supporting the current economic expansion.
The Institute for Supply Management (ISM) reported that its manufacturing index dropped to 51.7 in June from 52.1 in May. Readings above 50 indicate activity indicate expanding, while those below 50 show contraction. While we still in the expansion territory, June 2019 had the lowest value since 2016. Trade tensions with China, Mexico, and Europe, and slowing global growth have triggered the alarm as many businesses are preparing for a slowdown by delaying capital investment and large inventory purchases.
truce for now
The trade war
is on pause. After a break in May, the US and China will continue their trade
negotiations. European auto tariffs are on hold. And raising tariffs on Mexican
goods is no longer on the table (for now). Cheering investors have lifted the
markets in June hoping for a long-term resolution.
rates remaining low, I expect dividend stocks to attract more investors’
interest. Except for consumer staples and utilities, dividend stocks have
trailed the S&P 500 so far this year. Many of the dividend payers like
AT&T, AbbVie, Chevron, and IBM had a lagging performance. However, the
investor’s appetite for income could reverse this trend.
As I was writing this article the S&P 500 crossed the magical 3,000. If the index is able to maintain this level, we could have a possible catalyst for another leg up of this bull market.
elections are coming
The US Presidential elections are coming. Health Care cost, rising student debt, income inequality, looming retirement crisis, illegal immigration, and the skyrocketing budget deficit will be among the main topics of discussion. Historically there were only four times during an election year when the stock market crashed. All of them coincided with major economic crises – The Great Depression, World War II, the bubble, and the Financial crisis. Only one time, 1940 was a reelection year.
S&P 500 Returns During Election Years
The US Economy remains strong despite headwinds from trade tensions and slowing global growth. GDP growth above 3% combined with a possible rate cut lat and resolution of the trade negotiations with China, could lift the equity markets another 5% to 10%.
Another market pullback is possible but I would see it as a buying opportunity if the economy remains strong.
If your portfolio has extra cash, this could be a good opportunity to buy short-term CDs at above 2% rate.
If have any questions about the markets and your investment portfolio, reach out to me at firstname.lastname@example.org or +925-448-9880.
You can also visit my Insights page where you can find helpful articles and resources on how to make better financial and investment decisions.
Getting rich is the dream of many people. When your sudden wealth becomes a reality, you need to be ready for the new responsibilities and challenges. As someone experienced in helping my clients manage their sudden wealth, I want to share some of my experience.
Your sudden windfall can come from many different sources – receiving an Inheritance, winning the lottery, selling your business or a real estate property, signing a new sport or music contract, royalties from a bestselling book or a hit song, or selling shares after your company finally goes public. Whatever the source is, your life is about to change. Being rich brings a unique level of issues. Your new wealth can have a variety of financial, legal and core repercussions to your life.
Avoid making any
immediate changes to your life
Don’t make big and hasty changes to your lifestyle. I
recommend that you wait at least six months. Let the big news sink in your mind. Let things settle down before quitting your
job, moving to another city or making a large purchase. Keep it quiet. The next
six month will give you a chance to reassess your life, control your emotions
and set your priorities.
Figure out what you
This is the moment you have been waiting for all your life.
You are probably very excited, and you deserve it. There are tons of things you
want to do with your money. But before you do anything. Take a deep breath. Figure out exactly what you
own. Gather all necessary information about your assets. Maybe your sudden
windfall is in cash. However, your new wealth could be in real estate, land, stocks,
art, gold, rare wines, luxury cars and so on. Not always your new fortunate can
easily be converted into cash. Each wealth source is unique on its own and has
specific legal and financial rules.
Build your team
Your financial life is
about to become a lot more complicated. You will need a team of trusted experts
who will help you navigate through these changes. Your financial team can help
you understand your wealth. They watch your back and flag any blind spots.
Talk to your team and figure what are your options.
Hire a CPA
You are rich. And that’s a great news for the IRS and your
state. There is a very good chance you will pay more taxes that you ever
imagined. Start assembling your financial team by hiring a reputable CPA who
understands your situation and can steer you through the complex world of
taxes. Each source of wealth has unique
tax rules. Find out what rules apply to you.
Hire a financial advisor
Look for a trusted fiduciary financial advisor with experience managing sudden wealth. A fiduciary advisor will look after your best interest and guide you in your new journey. Talk to your new advisors about your personal and financial goals and how to reach them with the help of your new wealth.
Have a financial plan
Ask your advisor to craft a financial plan that is tailored
to your unique situation, specific needs and financial objectives. Figure out how
your sudden wealth can help you reach your goals – retire early, send your kids
to college, buy a new house, become self-employed. The list is endless. Talk to
your advisor about your risk tolerance. Many of my clients who earned a windfall
have a low risk appetite. An important part of our conversation is how to reach
their goals without taking on too much risk.
Protect your new
You need to take steps to protect your sudden windfall. For a starter, try to keep
If your new money is sitting in your checking account, make
sure you allocate it among several different banks and account types. Remember
that FDIC insurance covers up to 250k per person per bank in each account
If you inherited real estate or art or some other type of physical
property make sure to have solid Insurance to protect you from unexpected
In case you received stocks or other investments, speak to
your financial advisor how to hedge them from market volatility and losing
Have an estate plan
No matter how well
you plan, life can be unpredictable. Getting a windfall is a great opportunity
to update your estate plan or craft a new one. The estate plan will protect
your loved ones and ensure your legacy in the face of the unknown. If something
happens to you, your fortune will be used and divided per your own wish. The
alternative is going through a lengthy and expensive probate process that may
not have the same outcome.
Pay off your debts
If you owe money, you have a chance to pay off your debts. Credit cards debts and any personal loans with
high interest should be your priority. Your new wealth can help your live a debt-free
life. This is one area where working with a financial advisor will make a big
difference in your life.
Beware that many people who receive sudden windfall end up
borrowing more money and sometimes filing for bankruptcy. Don’t be that person. You still need to live within
Plan your taxes
Depending on the source of sudden wealth you may owe taxes to the IRS and your state either immediately or sometime in the near future. Don’t underestimate your tax bill. Your CPA and financial advisor should help you understand and prepare for your current and future tax bills.
Many lottery winners and former athletes file for bankruptcy
due to poor spending habits, lending money to family and friends and money mismanagement.
The fact that you are rich doesn’t mean that you can’t lose your money. You
need to be responsible. Talk to your advisor about your monthly budget and what
you can afford.
Making a donation is an excellent way to give back to the society and leave a legacy. If you have a charitable cause close to your heart, you make a difference. Often time, charitable contributions can be tax-deductible and lower your tax bill. Talk to your CPA and financial advisors how you can achieve that.
Sudden Wealth can come in all shapes and forms – cash, real estate, land, ongoing business, royalties, stocks, and many others. Even though it might not be completely unexpected, the way you feel about after the fact might be shocking to you. Don’t let your emotions get the worst of you. Getting windfall is a great life accomplishment. And you should make the best out of it. Work with your team of trusted professionals and build a long-term plan with milestones and objectives.
If you are expecting a windfall or recently received a sudden wealth, reach out to me at email@example.com or +925-448-9880.
You can also visit my Insights page where you can find helpful articles and resources on how to make better financial and investment decisions.
Do you have a Roth IRA? If you never heard about it, I hope this article will convince you to open one. Roth IRA is a tax-exempt investment account that allows you to make after-tax contributions to save for retirement. The Roth IRA has a tax free status. It is a great way to save for retirement and meet your financial goals without paying a dime for taxes on your investments. The Roth IRA offers you a lot of flexibility with very few constraints.
Opening a Roth IRA account is a great way to plan for your retirement and build your financial independence. The Roth IRA is an excellent saving opportunity for many young professionals and pretty much anyone with limited access to workplace retirement plans. Even those with who have 401k plans with their employer can open a Roth IRA.
If you are single and earn $122,000 or less in 2019, you can contribute up to $6,000 per year in your Roth IRA. Individuals 50 years old and above can add a catch-up contribution of $1,000. If you are married filing jointly, you can contribute the full amount if your MAGI is under $193,000.
There is a phaseout amount between $122,000 and $137,000 for single filers and $193,000 and $203,000 for married filing jointly.
2. No age limit
There is no age limit for your contributions. You can contribute to your Roth IRA at any age as long as you earn income.
Minors who earn income can also invest in Roth IRA. While youngsters have fewer opportunities to make money, there are many sources of income that will count – babysitting, garden cleaning, child acting, modeling, selling lemonade, distributing papers, etc.
3. No investment restrictions
Unlike most 401k plans, Roth IRAs do not have any restriction on the type of investments in the account. You can invest in any asset class that suits your risk tolerance and financial goals.
4. No taxes
There are no taxes on the distributions from this account once you reach the age of 59 ½. Your investments will grow tax-free. You will never pay taxes on your capital gains and dividends either. Roth IRA is a great saving tool for investors at all income levels and tax brackets.
With an average historical growth rate of 7%, your investment of $6,000 today could bring you $45,674 in 30 years completely tax-free. The cumulative effect of your return and the tax status of the account will help your investments grow faster.
5. No penalties if you withdraw your original investment
While not always recommended, Roth IRA allows you to withdraw your original dollar contribution (but not the return) before reaching retirement, penalty and tax-free. Say, you invested $5,000 several years ago. And now the account has grown to $15,000. You can withdraw your initial contribution of $5,000 without penalties.
6. Diversify your future tax exposure
It is very likely that most of your retirement savings will be in a 401k plan or an investment account. 401k plans are tax-deferred and you will owe taxes on any distributions. Investment accounts are taxable and you pay taxes on capital gains and dividends. In reality, nobody can predict what your tax rate will be by the time you need to take out money from your retirement and investment accounts. Roth IRA adds this highly flexible tax-advantaged component to your investments.
7. No minimum distributions
Unlike 401k plans, Roth IRA doesn’t have any minimum distributions requirements. Investors have the freedom to withdraw their savings at their wish or keep them intact indefinitely.
8. Do a backdoor rollover
Due to recent legal changes investors who do not satisfy the requirements for direct Roth IRA contributions, can still make investments to it. The process starts with a taxable contribution, up to the annual limit, into a Traditional IRA. Eventually, the contributions are rolled from the Traditional IRA to the Roth IRA.
9. Roth conversion from Traditional IRA and 401k plans
Under certain circumstances, it could make sense for you to rollover your Traditional IRA and an old 401k plan to Roth IRA. If you expect to earn less income or pay lower taxes in a particular year, it could be beneficial to consider this Roth conversion. Your rollover amount will be taxable at your current ordinary income tax level. An alternative strategy is to consider annual rollovers in amounts that will keep you within your tax bracket.
10. Estate planning
Roth IRA is an excellent estate planning tool. Due to its age flexibility and no minimum required distributions, Roth IRA makes it a good option for generation transfer and leaving a legacy to your beloved ones.
Roth IRA is an excellent starting point for young professionals. It can help you reach your financial goals faster. So open your account now to maximize its full potential. Investing early in your career will lay out the path for your financial independence.
If you’d like to discuss how to open a new Roth IRA or make the most out of your existing account, please feel free to reach out and learn more about our fee-only financial advisory services. I can meet you in one of our locations in San Francisco, Oakland, Walnut Creek, and Pleasant Hill areas or connect by phone. As a CFA® Charterholder with an MBA degree in Finance and 15+ years in the financial industry, I am ready to answer your questions.
Employee Stock Purchase Plan (ESPP) is a popular tool for companies to allow their employees to participate in the company’s growth and success by becoming shareholders. ESPP gives you the option to buy shares of your employer at a discount price. Most companies set a discount between 10% and 15%. Unlike RSUs and restricted stocks, the shares you purchase through an ESPP are not subject to any vesting schedule restrictions. That means you own the shares immediately after purchase. There are two types of ESPP – qualified and non-qualified. Qualified ESPP generally meets the requirements under Section 423 of the Internal Revenue Code and receive a more favorable tax treatment. Since most ESPP are qualified, I will only talk about them in this article.
How ESPP works
Your company will typically provide you with information about enrollment and offering dates, contribution limits, discounts, and purchasing schedule. There will be specific periods throughout the year when employees can enroll in the plan. During that time, you are required to decide if you want to participate and set a percentage of your salary to be deducted every month to contribute to the stock purchase plan. The IRS allows up to $25,000 limit for ESPP contributions. Make sure you set your percentage, so you don’t cross over this limit.
At this point, you are all set. Your employer will withhold your selected percentage every paycheck. The contributions will accumulate over time and will be used to buy the company stock on the purchase date.
Offering period and look-back
periods of most ESPPs are ranging from 6 to 24 months. The longer periods could
have multiple six-month periods for
purchase. Your employer will use your salary contributions that accrue over
time to buy shares from the company stock on your behalf.
ESPP offer a look-back provision will allow you to purchase the shares at a
discount from the lowest of the beginning and ending price of the offering
For example, let’s assume that on January 2nd, your company stock traded at $100 per share. The stock price had a nice run and ended the six-month period on June 30 at 120. Your ESPP will allow you to buy the stock at 15% of the lowest price, which is $00. You will end up paying $85 for a stock worth $120.
The price discount is what makes the ESPP attractive to employees of high growth companies. By acquiring your company stock at a discount, the ESPP lowers your investment risk, provides you a buffer from future price declines, and sets a more significant upside if the price goes up further.
Selling your ESPP shares
ESPPs allow you to sell your shares immediately after the purchase date,
realizing an instant gain of 17.65%. Others may have a holding period
restriction during which you cannot sell your shares. Find out from your HR.
An ESPP plan has its own unique set of tax rules. All contributions are pretax and subject to federal, state and local taxes.
your stock will not a create a tax event. In other words, you don’t owe any
taxes to IRS if you never sell your shares. However, the moment you decide to
sell is when things get tricky.
The discount is treated as ordinary income
The first to remember is that the price discount is always treated as ordinary income. You will add the value of the discount to your regular annual income and pay taxes according to your tax bracket.
The difference between the selling price and the purchase price is considered a realized capital gain. There are two types of capital gains – short-term and long-term. Short-term gains are triggered if you sell your stocks in less than one year after the purchase date. You will pay taxes on short-term capital gains as an ordinary income according to your tax bracket.
Long-term capital gains vary between 0%, 15% and 20% depending on your income. In order to get preferential this lower rate from the IRS, you need to keep your shares for more than 2 years from the offer date and 1 year from the purchase date.
Being a shareholder in a solid high growth company could offer a significant boost to your personal finances. In some cases, it could make you an overnight millionaire.
However, here is the other side of the story. Owning too much stock of a company in bad financial health could impose a significant risk to your overall investment portfolio and retirement goals. Participating in the ESPP of a company with a constantly dropping or volatile stock price is like a catching a falling knife. The discount price could give you some downside protection, but you can continue to lose money if the price continues to go down. The price of General Electric, one of the longest Dow Jones members, went down more than 65% in one year.
Remember Enron and Lehman
Many of you remember or
heard of Enron and Lehman Brothers. If your company seizes to exist for whatever
reason, you could not only lose your job but all your investments in the firm
could be wiped out.
You are already earning a
salary from your employer. Concentrating your wealth and income from the same
source could jeopardize your financial health if your company fails to succeed
in its business ventures.
As a fiduciary advisor, I
always recommend diversification and caution. Try to limit your exposure to your
company stock and sell your shares periodically. Sometimes paying taxes is
worth the peace of mind and safety.
in your employer’s ESPP is an excellent way to acquire company stock at a
discount and get involved in your company’s future. While risky, owning company
stock often comes with a huge financial upside. Realizing some of these gains
could help you build a strong foundation for retirement and financial freedom.
When managed properly, it can help you achieve your financial goals, whether
they are buying a home, taking your kids to college or early retirement.
Keep in many that most ESPPs have different rules. Therefore, this article may not address the specific features of your plan. If you’d like to discuss how to make the most out of your ESPP, please feel free to reach out and learn more about our fee-only financial advisory services. I will meet you in one of our offices in San Francisco, Oakland, Walnut Creek, and Pleasant Hill areas. As a CFA® Charterholder with an MBA degree in Finance and 15+ years in the financial industry, I am ready to answer your questions.
The solo 401k plan is a powerful tool for entrepreneurs to save money for retirement and reduce their current tax bill. These plans are often ignored and overshadowed by the more popular corporate 401k and SEP IRA plans. In fact, there is a lack of widely available public information about them. Simply put, not many people know about it. In this article, I will discuss 8 reasons why entrepreneurs should open a solo 401k plan.
Solo or one participant 401k plans are available to solo entrepreneurs who do not have any personnel on staff. If a business owner employs seasonal workers who register less than 1,000 hours a year, then he or she may be eligible for the solo 401k plans as well. The solo plans have most of the characteristics of the traditional 401k plan without any of the restrictions.
What are some of the most significant benefits of the self-employed 401k?
Maximize your retirement savings with a solo 401k
Self-employed 401k allows a business owner to save up to $56,000 a year for retirement, plus an additional $6,000 if age 50 and over. How does the math work exactly?
Solo entrepreneurs play a dual role in their business – an employee and an employer. As an employee, they can contribute up to $19,000 a year plus catch-up of $6,000 if over the age of 50. Further, the business owner can add up to $37,000 of contribution as an employer match. The employee’s side of the contribution is subject to 25% of the total compensation, which the business owner must pay herself.
Example: Jessica, age 52, has a solo practice. She earns a W2 salary of $100,000 from her S-corporation. Jessica set-up a solo 401k plan. In 2017 she can contribute $18,000 plus $6,000 catch-up, for a total of $24,000 as an employee of her company. Additionally, Jessica can add up to $25,000 (25% x $100,000) as an employer. All-n-all, she can save up to $49,000 in her solo 401k plan.
One important side note, if a business owner works for another company and participates in their 401(k), the above limits are applicable per person, not per plan. Therefore, the entrepreneur has to deduct any contributions from the second plan to stay within the allowed limits.
Add your spouse
A business owner can add his or her spouse to the 401k plan subject to the same limits discussed above. To be eligible for these contributions, the spouse has to earn income from the business. The spouse must report a wage from the company on a W2 form for tax purposes.
Reduce your current tax bill
The solo 401k plans contributions will reduce your tax bill at year-end. The wage contributions will lower your ordinary income tax. The company contributions will decrease your corporate tax.
This is a very significant benefit for all business owners and in particular for those who fall into higher income tax brackets. If an entrepreneur believes that her tax rate will go down in the future, maximizing her current solo 401k contributions now, can deliver substantial tax benefits in the long run.
Opt for Roth contributions
Most solo 401k plans allow for Roth contributions. These contributions are after taxes. Therefore, they do not lower current taxes. However, the long-term benefit is that all investments from Roth contributions grow tax-free. No taxes will be due at withdrawal during retirement.
Only the employee contributions are eligible for the Roth status. So solo entrepreneur can add up to $19,000 plus $6,000 in post-tax Roth contributions and $37,000 as tax-deductible employer contributions.
The Roth contributions are especially beneficial for young entrepreneurs or those in a lower tax bracket who expect that their income and taxes will be higher when they retire. By paying taxes now at a lower rate, plan owners avoid paying much larger tax bill later when they retire, assuming their tax rate will be higher.
No annual test
Solo 401k plans are not subject to the same strict regulations as their corporate rivals. Self-employed plans do not require a discrimination test as long as the only participants are the business owner and the spouse.
If the company employs workers who meet the eligibility requirements, they must be included in the plan. To be eligible for the 401k plan, the worker must be a salaried full-time employee working more than 1,000 hours a year. In those cases, the plan administrator must conduct annual discrimination test which assesses the employee participation in the 401k plan. As long as solo entrepreneurs do not hire any full-time workers, they can avoid the discrimination test in their 401k plan.
No annual filing
Another benefit of the 401k plans is the exemption from annual filing a form 5500-EZ, as long as the year-end plan assets do not exceed $250,000. If plan assets exceed that amount, the plan administrator or the owner himself must do the annual filing.
401k plans offer one of the highest bankruptcy protection than any other retirement accounts including IRA. The assets in 401k are safe from creditors as long as they remain there.
In general, all ERISA eligible retirement plans like 401k plan are sheltered from creditors. Non-ERISA plans like IRAs are also protected up to $1,283,025 (in aggregate) under federal law plus any additional state law protection.
You can open a self-employed 401k plan at nearly any broker like Fidelity, Schwab or Vanguard. The process is relatively straightforward. It requires filling out a form, company name, Tax ID, etc. Most brokers will act as your plan administrator. As long as, the business owner remain self-employed, doesn’t hire any full-time workers and plan assets do not exceed $250,000, plan administration will be relatively straightforward.
As a sponsor of your 401k plan, you can choose to manage it yourself or hire an investment advisor. Either way, most solo 401k plans offer a broader range of investments than comparable corporate 401k plans. Depending on your provider you may have access to a more extensive selection of investment choices including ETFs, low-cost mutual funds, stocks, and REITs. Always verify your investment selection and trading costs before opening an account with any financial provider.
About the author: Stoyan Panayotov, CFA is a fee-only financial advisor based in Walnut Creek, CA. His firm Babylon Wealth Management offers fiduciary wealth management and financial planning services to successful business owners and entrepreneurs.
Disclaimer: Past performance does not guarantee future performance. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The content of this article is a sole opinion of the author and Babylon Wealth Management. The opinion and information provided are only valid at the time of publishing this article. Investing in these asset classes may not be appropriate for your investment portfolio. If you decide to invest in any of the instruments discussed in the posting, you have to consider your risk tolerance, investment objectives, asset allocation and overall financial situation. Different investors have different financial circumstances, and not all recommendations apply to everybody. Seek advice from your investment advisor before proceeding with any investment decisions. Various sources may provide different figures due to variations in methodology and timing, Copyright: <a href=’https://www.123rf.com/profile_pablo631′>pablo631 / 123RF Stock Photo</a>
As a financial advisor working with many young families, I am regularly discussing college planning. Many of my clients want to help their children with the constantly growing college tuition. Currently, the amount of US student debt is $1.56 trillion spread among 45 million borrowers. By 2023, 40% of borrowers can default on their loans. I am not running for a president, but I am very curious about the upcoming debate about fighting the upcoming student debt in America.
One recent proposal from the Republican party was to allow 529 plan participants to pay off student debt.
Another proposal from the presidential candidate Elizabeth
Warren is to cancel student debt partially or entirely for households based on
their income. Furthermore, many Democrat Candidate signed for free public college
While all these ideas have certain merits, I am not confident that they will solve the problem long-term. As a parent and married to my wife who is paying off student loans, I would like to share my opinion. Here are some of my suggestions
Promote 529 plans
In one of my previous articles, I discussed the benefits of 529 plans. Sadly, only 30% of US families know about or use 529 plans. It’s really striking how little Americans know about this option. 529 plans are state-sponsored tax-advantaged investment accounts allowing parents and other family members to save for qualified college expenses. It literally takes 5-10 minutes to open a 529 account.
Make 529 contributions tax-deductible
Currently, 529 contributions are after taxes. The tax advantage comes from not paying taxes on any future capital gains if you use the funds to pay for eligible college expenses. Additionally, over 30 states offer full or partial state income tax deduction on 529 contributions.
I would like to go one step further and propose federal income tax deduction up to a certain annual limit (say $5,000 or $10,000) with a phaseout over certain household income level (call it $250,000). This income deduction will help low and middle-class families save for college without putting a massive strain on their budget.
Expand the Employer-sponsored 529 plans
In reality, most US families do not use the 529 plan because they don’t know about them or are uncertain about their investment choices. One way to popularize the 529 plan is motivating employers to include them as part of their benefits package similarly to 401k plans. Employees can set up automatic payroll deposits and make regular contributions to their 529 accounts. Unfortunately, according to a recent survey by Gradadvisor, only 7% of employers offer 529 plans through their benefits.
Currently, the employer 529 match is taxable income to the parent. At the end of the year, the parent must pay personal taxes on any amount received through their employer.
I believe this provision is discouraging a lot of people to participate in these plans. In order to encourage higher participation in employer-sponsored 529 plans., the employer match should not be treated as income to the parent if used for qualified educational expenses.
Promote more work study grants and employer sponsored scholarships
Many college graduates leave school unprepared for real world. Sometimes,
I feel that there is disconnect between skills learned at school and those
needed to compete in the work marketplace.
While many public and private schools are doing a great job in teaching students those skills, I think we can do much better by connecting the school programs with the business. Let’s face it. Unless you are from an Ivy League school, how many students have had the chance to speak to a corporate CEO, a successful small business owner or a community leader.
With US unemployment at a record low, many businesses are struggling to find qualified workers. If we can encourage schools and employers to work together and set up employer-sponsored scholarships, internship programs and work-study grants, we will have a lot more students learning real-life skills, earn money while study and potentially come out with smaller or no student loans.
Have personal finance as a mandatory class in high school and college
Only 1/3 states require a mandatory personal finance class in high school. And zero states mandate it in college. It may sound radical, but I believe that every high school and public college should require one personal finance class in the curriculum regardless of the student major.
Teaching kids and young adults essential financial skills like saving money, budgeting, and investing will help them make better choices later in life.
It also means that we need to find teachers who can coach personal finance. Unfortunately, finance and economics are mostly taught in business schools and largely ignored outside of the space. This is where connecting schools with local business leaders can be helpful.
Extend the Non-Taxable Loan Forgiveness
There are several Federal and State programs that offer Loan Forgiveness.
However, in most cases student loan forgiveness is treated as taxable income in
the year when the loan was written off. For
some borrowers performing public service or working as teachers, lawyers and physicians
in underserved areas, the loan forgiveness can be tax free.
If your employer offers to pay off your student loans, you will receive a tax bill from the IRS. The amount of your forgiven loan will be added to your annual income and taxed as ordinary income. Knowing this tax trap, very few people opt for that option. If you can’t afford to pay off your student loan, what are the chances you can pay the taxes on the loan forgiveness?
Separately, being an elementary school teacher in a desirable area like Manhattan or San Francisco doesn’t make you financially better off than the rest of your colleagues. Most teachers can’t afford to live in San Francisco or Manhattan on a teacher’s salary, how do we expect them to pay off their loans.
Furthermore, non-taxable loan forgiveness should be designed to reward responsible borrowers who are paying off their loans regularly. I think a dollar to dollar match could encourage more people to pay off their loans.
What about loan cancellation
Canceling loans entirely or partially is a very admirable idea but it could turn into a double-edged sword. On one hand, it’s not completely fair to people who are diligently paying off their student loans month after month. They are being punished for their good behavior. And on the other hand, loan cancellation will encourage more people to take on student debt and not pay it. It might provide temporary relief, but it will not solve the problem long-term. I much rather find a way to empower and educate borrowers.
Improve student access to financial advice
How many parents or students speak to a financial advisor before taking a student loan? I bet a lot less than we hope for. Maybe it’s partially our fault as finance professionals but as a society, we need to find a way to get more financial advisors and colleges.
Before the TJCA of 2017, professional service expenses such as fees for
CPAs and financial advisors were tax deductible. I am not sure how many people
took advantage of this deduction, probably not too many, but it was one way to
encourage people to seek professional financial advice.
The sad truth is that the people who can afford financial advice are not those who needed it the most. So how about, make the financial advisory fees tax-deductible for low income and middle-class families. Or encourage financial advisors to provide free public service. I believe many of my colleagues will be happy to provide free advice in a meaningful and impactful way.
If you’d like to discuss how to pay off your student loans, open a new 529 plan or make the most out of your existing 529 account, please feel free to reach out and learn more about my fee-only financial advisory services. I can meet you in one of our offices in San Francisco, Oakland, Walnut Creek, and Pleasant Hill areas or connect by phone. As a CFA® Charterholder with an MBA degree in Finance and 15+ years in the financial industry, I am ready to answer your questions.
The 529 plan is a tax-advantaged state-sponsored investment plan, which allowing parents to save and invest for their children college expenses. Today, I would like to share how the 529 plan can help you send your kids or grandkids to college.
In the past 20 years, college expenses have skyrocketed exponentially putting many families in a difficult situation. Between 1998 and 2018, college tuition and fee have doubled in most private non-profit schools and more than tripled in most 4-year public colleges and universities.
Source: College Board
Student Debt is Growing
At the same time, student debt has reached $1.56 trillion with a growing number of parents taking on student loans to pay for their children’ college expenses. The total number of US borrowers with student loan debt is now 44.7 million.
Amid this grim statistic, less than 30% of families are aware of the 529 plan. The 529 plan could be a powerful vehicle to save for college expenses. Fortunately, 529 plans have grown in popularity in the past 10 years. There are more than 13 million 529 accounts with an average size of $24,057.
Let’s break down some of the benefits of the 529 plan.
College Savings Made Easy
Nowadays, you can easily open an account with any 529 state plan in just a few minutes and manage it online. You can set up automatic contributions from your bank account. Also, many employers allow direct payroll deductions and some even offer a match. Your contributions and dividends are reinvested automatically., so you don’t have to worry about it yourself. As a parent, you can open a 529 plan with as little as $25 and contribute as low as $15 per pay period. Most direct plans have no application, sales, or maintenance fees. 529 plan is affordable even for those on a modest budget.
Flexible Investment Options
Most 529 plans provide a wide variety of professionally managed investment portfolios including age-based, indexed, and actively-managed options. The age-based option is an all-in-one portfolio series intended for those saving for college. The allocation automatically shifts from aggressive to conservative investments as your child approaches college age.
Alternatively, you can design your portfolio choosing
between a mix of actively managed and index funds, matching your risk
tolerance, timeline, and investment preferences. Some 529 plans offer guaranteed
options, which limit your investment risk but also cap your upside.
Earnings Grow Tax-Free
529 plan works similarly to Roth IRA. You make post tax
contributions. And your investment earnings will grow free from federal and
state income tax when used for qualified expenses. Compared to a regular
brokerage account, 529 plan has a distinct tax advantage as you will never pay
taxes on your gains.
The chart hypothetically assumes a $6,300 annual contribution, 5% average annual return and 20% average tax rate on taxable income in a comparable brokerage account. The final year post-tax difference would be $14,539, without taking into consideration state tax deductions.on contributions and impact on financial aid application.
Your State May Offer
a Tax Break
Over 30 states offer a full or partial tax deduction or credit on your 529 contributions. You can find the full list here. If you live in any of these states, your 529 contributions can lower significantly your state tax bill. However, these states usually require you to use the state-run 529 plan.
If you live in any of the remaining states that don’t offer
any state tax deductions, such as California, you can open a 529 account in any
other state of your choice.
Use at Schools
529 funds can be used at any accredited university, college
or vocational school nationwide and more than 400 schools abroad. Basically,
any institution eligible to participate in a federal student aid program
qualifies. A 529 plan can be used to pay for tuition, certain room and board
costs, computers and related technology expenses as well as fees, books,
supplies, and other equipment.
The TCJA law of 2017 expanded the use of 529 funds and
allowed parents to use up to $10,000 annually per student for tuition expenses
at a public, private or religious elementary, middle, or high school. However,
please check with your 529 plan as not all states passed that provision
Smaller Impact on Scholarship and Financial Aid
Many parents worry that 529 savings can adversely affect
eligibility for scholarship and financial aid. Fortunately, 529 plan savings
have no impact on merit scholarships. You can even withdraw funds from the 529
plan penalty free up to the amount of the student scholarship.
For FAFSA, funds are typically treated as ownership of the parent, not the child, reducing the impact on financial aid application. A key component of the financial aid application is the Expected Family Contribution (EFC). Since 529 plans are considered parents’ assets, they are assessed at 5.64% of their value. For comparison, any accounts owned directly by the student such as custodial accounts (UTMAs, UGMAs), trusts and investment accounts are assessed at 20% of their value.
Lower Cost versus Borrowing Money
Starting the 529 plan early can save you and your child money in the long run. The tax advantages of the 529 plan plus the compounding growth over 18 years it will provide you with substantial long-term savings compared to taking a student loan.
Estate Tax Planning
Your 529 plan contributions may qualify for an annual gift
tax exclusion of $15,000 per year for single filers and $30,000 a year for
couples. The 529 plan is the only investment vehicle that allows you to
contribute up to 5 years’ worth of gifts at once — for a maximum of $75,000 for
a single filer and $150,000 for couples.
Other Family Members Can
Grandparents, as well as other family and friends, can make gifts to your 529 account. They can also set up their own 529 accounts and designate your child as a beneficiary. The grandparent-owned 529 account is not reportable on the student’s FAFSA, which is good for financial aid eligibility. However, any distributions to the student or the student’s school from a grandparent-owned 529 will be added to the student income on the following year’s FAFSA. Student income is assessed at 50%, which means if a grandparent pays $10,000 of college costs it would reduce the student’s eligibility for aid by $5,000.
Funds can be transferred
to ABLE Account
Achieving a Better Life Experience (ABLE) account was first introduced in 2014. The ABLE account works similarly to a 529 plan with certain conditions. It allows parents of children with disabilities to save for qualified education, job training, healthcare, and living expenses.
Under the TCJA law, 529 funds can be rolled over into an
ABLE account, without paying taxes or penalties.
Extra Funds Can Be Assigned to Other Family Members
Finally, if your child or grandchild doesn’t need all the money or his or her education plans change, you can designate a new beneficiary penalty-free so long as they’re an eligible member of your family. Moreover, you can even use the extra funds for your personal education and learning new skills.
If you’d like to discuss how to open a new 529 plan or make the most out of your existing 529 account, please feel free to reach out and learn more about our fee-only financial advisory services. We can meet you in one of our offices in San Francisco, Oakland, Walnut Creek, and Pleasant Hill areas or connect by phone. As a CFA® Charterholder with an MBA degree in Finance and 15+ years in the financial industry, I am ready to answer your questions.
In my last commentary in early January, right after the December vortex, I gave 30% chance that the bull market will recover and 50% chance that we will see more volatility in the upcoming six months. My view of the economy was still positive. And I didn’t see reasons for a recession at that time. I was somewhat right and wrong. My market outlook remains cautiously positive. Let’s break it down.
The markets were a little bit choppy at the beginning of January and the end of March. But overall all major equity markets in the US and abroad posted impressive quarterly performance. In fact, it was the S&P 500’s best quarter in decades. The S&P 500 index rose by 13% in the first three months of the year. Russell 2000 added 14.3%. The international stocks grew by about 10%.
However, to put that in perspective, the S&P 500 is still a few percentage points below its all-time high in September of 2018. At the same time, Small caps are nearly 13% below its highest mark. While International Developed and Emerging Market stocks have been in a steep decline since their highs in January of 2018 and haven’t even come close to these levels.
So, I was wrong because, despite a few volatile trading days, the market remained relatively calm. The Q1 standard deviation was well below the 10-year average. After the Fed chair Jerome Powell stated that the Fed would be more cautious in raising interest rates in 2019 after their initial forecast of three rate hikes, the market took a leap of faith.
The US and international markets continue to diverge. The chart above shows the difference in performance between these two markets.
Growth versus value
Another interesting story is the growing gap between Growth and Value stocks. Value stocks have done pretty much nothing in the past 15 months while growth stocks have been a power horse.
The trade wars
We also got mixed but mostly positive news from the US-China trade negotiations. The investors want the deal, and both sides seem motivated to strike one. The truth is that the US is the biggest market for Chinese export and China is the biggest market for US tech and industrial giants. However, a lot of the issues with intellectual property and copyright protection, government subsidies and influence on corporate boards, privacy concerns, limited market access to China for US companies and so on, have accumulated for decades. But It will take more than a handshake to get these issues resolved.
Fixed Income Markets
The fixed-income traders have probably seen better days. For the first time in over a decade, the 10-year treasury rate is lower than the 3-month treasury rates. The maturity premium is now negative. This type of rate tightness is known as an inverted yield curve. The yield inversion has historically preceded all economic recessions. But not all inverted yield curves have led to a recession.
This second chart below shows the gap between the Fed and Wall Street on their view of the world. The Fed who can only influence the short-end of the curve by its lending window has pushed the short-term rates by nearly 39% in the past 12 months. Those of us with saving accounts are finally seeing decent rates after ten years of drought.
However, the long end of the curve, which is primarily determined by market supply and demand has declined by almost 12%
Soft landing or
The fixed income markets are waiving the red flag while the equity market remains positive. Somebody must be wrong.
I see a mixed bag of both positive and negative signals. On one side, US and Chinese economies continue to grow steady though with a slower pace. US Q4 GDP growth was 2.4% down from 3.4% in the third quarter of 2018. The Chinese economy expanded 6.6 percent in 2018, which is the weakest pace since 1990.
Furthermore, according to FactSet, the S&P 500 EPS estimate dropped by 7.2% (to $37.33 from $40.21) during Q1 of 2019. The decline in EPS was larger than the 5-year average (3.2%), the 10-year (3.7%), and the 15-year average (4%) cut. Additionally, payroll slowdown below forecast in the third quarter, hitting an 18-month low in March.
On the other track, Germany posted only 0.6% YoY GDP growth in 2018 with a nearly zero growth in the Q4 of 2018. Japan reported a 0.3% annual growth, after contracting -0.6% in Q3 of 2018. Earlier in March ECB’s Mario Draghi said that there had been a “sizable moderation in economic expansion that will extend into the current year.” The ECB lowered its growth forecast for 2019 from 1.7% to 1.1%. Furthermore, the ECB halted its plans to hike rates and introduced another round of financing for European banks.
On the positive side, new home sales posted the highest gain in February after a steep decline in the second half of 2018. The US unemployment rate remains low at 3.8%. The US consumer sentiment went up to 98.4 in March 2019 after diving in January. The Chinese PMI surpassed economists’ estimates. New orders climbed to their highest level in four months, while the index for new export orders returned to expansionary territory.
The big question remains if the US will follow the EU and Japan into a recession/stagnation mode. Or the Fed and the Trump administration will maneuver the economy into a soft landing with slower but still healthy earnings growth, high consumer sentiment and robust business spending.
What to expect
Predicting the markets could be a treacherous task. Even successful economists sometimes make wrong conclusions. Humbly, I thought that the UK and the EU will figure out a soft Brexit, while the outcome is still hanging up in the air. I also thought that the economy would not slow down so quickly, but the combination of volatile oil prices, high interest rates, and trade war rhetoric really moved the needle in the wrong direction. The next three to six months will be crucial to see if we are indeed heading into a slowdown or the economy is just taking a deep breath before going into another growth spurt.
The first quarter market recovery created an opportunity to
take some risk off the table and rebalance your portfolio to your original risk
What to watch
I am going to watch the performance of Growth versus Value stocks. In a world of slowing global economy, companies with a wide moat, high earnings growth, and big margins will continue to drive the markets. Separately, the flat yield curve and interest rates could boost interest in higher dividend paying stocks.
Also, I am going to watch the yield curve for significant moves in either direction. With short-term rates effectively higher than 10-year treasuries, for those sitting on extra cash, it might be tempting to get into one of those high-interest CDs. Currently, a 1-year CD is paying anywhere between 2.65% and 2.85%.
If you’d like to discuss how the market impacts your investments, please feel free to reach out and learn more about our fee-only financial advisory and OCIO services. We will meet you in one of our offices in San Francisco, Oakland, Walnut Creek, and Pleasant Hill areas. As a CFA® Charterholder with an MBA degree in Finance and 15+ years in the financial industry, I am ready to answer your questions.
Disclaimer: Past performance does not guarantee future performance. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The content of this article is the sole opinion of the author and Babylon Wealth Management. The opinion and information provided are only valid at the time of publishing this article. Investing in these asset classes may not be appropriate for your investment portfolio. If you decide to invest in any of the instruments discussed in the posting, you have to consider your risk tolerance, investment objectives, asset allocation, and overall financial situation. Different investors have different financial circumstances, and not all recommendations apply to everybody. Seek advice from your investment advisor before proceeding with any investment decisions. Various sources may provide different figures due to variations in methodology and timing,
Employers, especially many startups, use different compensation options to attract and keep top performing employees. A common alternative is equity compensation, which allows employees to share in the ownership and the profits of the company. Equity compensation takes different forms such as stock options, restricted stocks, and deferred comp. Today, most companies are resorting to the use of restricted stock unit (RSU) as a significant compensation package. If you are fortunate to receive RSUs from your employer, you should understand the basics of this corporate perk.
Here are some essential things you need to know about Restricted Stock Units (RSUs).
What are Restricted Stock Units (RSUs)?
A restricted stock unit (RSU) is a type of equity compensation issued by an employer to an employee in the form of company stock. Employees receive RSUs through a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with their employer for a particular length of time. RSUs give an employee interest in company stock but they have no tangible value until vesting is complete.
Companies issue restricted stock units according to a vesting schedule. The vesting schedule outlines the rules by which employees receive full ownership of their company stock. The restricted stock units are assigned a fair market value when they vest. Upon vesting, they are considered income, and often a portion of the shares is withheld to pay income taxes. The employees receive the remaining shares and can sell them at their discretion.
Date and Vesting Date
As an employee, you
should be aware of these essential RSU
dates. A grant date is the date when the
company pledges the shares to you.
You only own the shares
when the granted shares are ‘vested.’ The
vesting date is when the shares are fully vested, and they are wholly owned by the employee.
Even though RSUs offer
employees ownership in company stock, they usually don’t have a tangible value
until vesting is accomplished. When
vesting is complete, the restricted stock units are
valued according to the fair market value at that time.
Taxes on RSUs
The fair market value of
your vested RSUs is considered personal income in the year of vesting. Typically,
companies withhold part of the shares for federal and state income taxes. The
remaining shares are given to the
employees who are then allowed to keep them or them at their wish. If your
employer doesn’t withhold taxes for your vested shares, you will be responsible
for paying these taxes during the tax season.
Once the RSUs are converted
to company stock, you become a shareholder in your firm. You will be able to sell
some of these shares subject to companies’-imposed trading windows and
executive limits. If the stock price goes up after vesting you will need to pay
either short-term capital gain taxes for shares held less than a year from date
or long-term capital gains taxes in shares held longer than one year.
Being a shareholder in your firm could be very exciting. If your company is in great health and growing solidly, this could be an enormous boost to your personal finances.
However, here is the
other side of the story. Owning too much of your company stock could impose significant
risks to your investment portfolio and retirement goals. You are already earning
a salary from your employer. Concentrating your entire wealth and income from the
same source could jeopardize your financial health if your employer fails to succeed
in its business ventures. Many of you remember the fall of Enron and Lehman
Brothers. Many of their employees lost not only their jobs but a significant
portion of their retirement savings.
As a fiduciary advisor, I always recommend diversification and caution. Try to limit your exposure to your employer and sell your shares periodically. Sometimes paying taxes is worth the peace of mind and safety.
RSUs is an excellent way to acquire company stock and get involved in your
company’s future. While risky owning RSUs often comes with a huge financial upside.
Realizing some of these gains could help you build a strong foundation for retirement
and financial freedom. When managed properly, they can help you achieve your
financial goals, whether they are buying a home, taking your kids to college or
If you’d like to discuss how to make the most out of your RSUs, please feel free to reach out and learn more about our fee-only financial advisory services. We will meet you in one of our offices in San Francisco, Oakland, Walnut Creek, and Pleasant Hill areas. As a CFA® Charterholder with an MBA degree in Finance and 15+ years in the financial industry, I am ready to answer your questions.
I recently had the chance to work with several young families looking for help to build their wealth and improve their finances. We discussed a broad range of topics from buying a house, saving for retirement, savings for their kids’ college, budgeting and building legacy. As a financial advisor in my late 30s, soon to be early 40s, I have gone personally through many of these questions and was happy to share my experience.
Some of my clients already had young children. Others are
expecting a new family member. Being a dad of a nine-month-old boy, I could
relate to many of their concerns. My experience helped me guide them through
the web of financial and investment questions.
While each family is unique, there are many common themes
amongst all couples. While each topic of them deserves a separate post, I will
try to summarize them for you.
Successful couples always find a way to communicate effectively. I always advise my clients to discuss their financial priorities and concerns. Through the process, partners often discover that they have entirely different objectives. Having differences is normal as long as there are common goals if both partners are aware of them while you still work to achieve your common goals.
Any of the themes discussed in this article can be addressed with proper communication and strong spousal partnership.
If it helps, talk to an independent fiduciary financial
advisor. We can help you get a more holistic and objective view of your
finances. We often see blind spots that you haven’t thought about before.
Set your financial
Most life coaches will tell you that setting up specific goals is crucial in achieving success in life. It’s the same when it comes to your finances. Set specific short-term and long-term financial goals and stick to them. These milestones will guide you and help you make better financial decisions in the future.
There is nothing more important to any family wellbeing than budgeting. Many apps can help you budget your income and spending. You can also use an excel spreadsheet or an old fashion piece of paper. You can break down your expenses in various categories and groups similar to what I have below. Balance your budget and live within your means.
Utilities (Phone, Cable, Gas, Electric)
Non-Discretionary Flexible Expenses
Automotive (Fuel, Parking,
Dues & Subscriptions
One common issue I see amongst young couples is the
dispersion of their assets. It’s very common for spouses to have multiple 401k,
IRAs and savings accounts in various financial institutions and former
employers. Consolidating your assets will help you get a more holistic view of your
finances and manage them more efficiently.
Manage your debt
The US consumer debt has grown to record high levels. The relatively low interest rates, rising real estate prices and the ever-growing college cost have pushed the total value of US household debt to $13.25 trillion. According to the New York Fed, here is how much Americans owe by age group.
Under 35: $67,400
75 and up: $34,500
For many young families who are combining their finances, managing their debt becomes a key priority in achieving financial independence.
Manage your credit
One way to manage to lower your debt is having a high credit score. I always advise my clients to find out how much their credit score is. The credit score, also known as the FICO score, is a measure between 300 and 850 points. Higher scores indicate lower credit risk and often help with a lower interest rate on your mortgage or personal loan. Each of the three national credit bureaus, Equifax, Experian, and TransUnion, provide an individual FICO score. All three companies have a proprietary database, methodology, and scoring system. You can sometimes see substantial differences in your credit score issued by those agencies.
Your FICO score is a sum of 64 different measurements. And
each agency calculates it slightly differently. As a rule, your credit score
depends mainly on the actual dollar amount of your debt, the debt to credit
ratio and your payment history. Being late on or missing your credit card
payments, maximizing your credit limits and applying for too many cards at once
will hurt your credit score.
Own a house or rent
Owning your first home is a common theme among my clients. However, the price of real estate in the Bay area, where I live, has skyrocketed in the past 10 years. The average home price in San Francisco according to Zillow is $1.3 million. The average home price in Palo Alto is $3.1 million. (Source: https://www.zillow.com/san-francisco-ca/home-values/ ). While not at this magnitude, home prices have risen in all major metropolitan areas around the country. Buying a home has become an impossible dream for many young families. Not surprisingly a recent survey by the Bank of the West has revealed that 46% of millennials have chosen to rent over buying a home, while another 11% are staying with their parents.
Buying a home in today’s market conditions is a big commitment
and highly personal decision. It depends on a range of factors including how
long you are planning to live in the new home, available cash for downpayment,
job prospects, willingness to maintain your property, size of your family and so
Maximize your retirement
Did you know that in 2019 you can contribute up to $19,000
in your 401k? If you are in your 50s or older, you can add another $6,000
catch-up contribution. Maximizing your retirement savings will help you grow
your wealth and build a buffer of solid retirement savings. Not to mention the fact
that 401k contributions are tax-deferred and lower your current tax bill.
Unfortunately, many Americans are not saving aggressively for retirement. According to Fidelity, the average person in their 30’s have $42.7k in their 401k plan. people in their 40s own on average 103k.
If your 401k balance is higher than your age group you are already better off than the average American.
Here is how much Americans own in their 401 plan by age group
20 to 29 age: $11,500
30 to 39 age: $42,700
40 to 49 age: $103,500
50 to 59 age: $174,200
60 to 69 age: $192,800
For those serious about their retirement goals, Fidelity recommends having ten times your final salary in savings if you want to retire by age 67. They are also suggesting how to achieve this goal by age group.
By the age of 30: Have the equivalent of your starting salary saved
35 years old: Have two times your salary saved
40 years old: Have three times your salary saved
45 years old: Have four times your salary saved
50 years old: Have six times your salary saved
55 years old: Have seven times your salary saved
60 years old: Have eight times your salary saved
By age 67: Have 10 times your salary saved
Keep in mind that these are general guidelines. They are highly dependent on your lifestyle, individual circumstances, spending habits and alternative sources of income.
Know your risk
One common issue I see with young families is the substantial gap between their risk tolerance and the actual risk they take in their retirement and investment accounts. I have seen clients who are conservative by nature but have a very aggressive portfolio. Or the opposite, I have met aggressive clients with a pile of cash or a large bond portfolio. Talking to a fiduciary financial advisor can help you understand your risk tolerance, bridge that gap between your emotions and real circumstances, and then connect it to your financial goals and milestones.
Diversification is said to be the only free lunch you will get in investing. Diversifying your investments can reduce the overall risk of your portfolio. Without going into details, owning a variety of uncorrelated assets will lower the long-term risk of your portfolio. I always recommend you have a portion of your portfolio in US Large Cap Blue Chip Stocks and add some exposure to Small Cap, International, and Emerging Market Stocks, Bonds and Alternative Assets such as Gold and Real Estate.
Invest your idle cash
One common issue I have seen amongst many of my clients is holding a significant amount of cash in their investment account. The way I explain it is that most millennials are conservative investors. Many of them observed their parents’ negative experience during the financial crisis of 2008 and 2009. As a result, they are more risk averse than their parents.
However, keeping ample cash in your retirement account in your 30s will not boost your wealth in the long run. You are probably losing money as inflation is deteriorating the purchasing power of your idle cash. Even if you are a very conservative investor, there are ways to invest in your retirement portfolio without taking on a lot of risk.
I talk about early retirement a lot often than one might imagine. The media and online bloggers have boosted the image of retiring early and made it sound a lot easier than it is. I am not saying that early retirement is an illusion, but it requires a great deal of personal and financial sacrifice before and after the target day of retirement. Unless you are born rich or rely on a huge payout, most people who retire early are very frugal and highly resourceful. If your goal is to retire early, you need to pay off your debt now, cut down spending and save, save and save.
While most of the time we talk about our 401k plans, there are other investment and retirement vehicles out there such as Roth IRA, Traditional IRA and even your brokerage account. They all have their own tax advantages and disadvantages. Even if you save a million bucks in your 401k plan, not all of it is yours. You must pay a cut to IRS and your state treasury. Not to mention the fact that you can only withdraw your savings penalty free after reaching 59 ½. Roth IRA and brokerage account do not lower your taxes when you make contributions, but they offer a lot more flexibility, liquidity, and some significant future tax advantages. In the case of Roth IRA, all your withdrawals can be tax-free when you retire. Your brokerage account provides you with immediate liquidity and lower long-term capital gains tax on realized gains.
Plan for child’s
Most parents will do anything for their children. But having kids is expensive. Whether a parent will stay at home and not earn a salary, or you decide to hire a nanny or pay for daycare, children will add an extra burden to your budget. Not to mention the extra money for clothes, food, entertainment (Disneyland) and even another seat on the plane.
Plan for college with
a 529 Plan
Many parents want to help their children pay for college or at least cover some of the expenses. 529 plan is a convenient, relatively inexpensive and tax-advantageous way to save for qualified college expenses. Sadly, only 29% of the US families are familiar with the plan. Most states have their own state-run 529 plan. Some states even allow state tax deductions for 529 contributions. Most 529 plans have various active, passive and age-based investment options. You can link your checking account to your 529 plan and set-up regular monthly contributions. There are plentiful resources about 529 plans in your state. I am happy to answer questions if you contact me directly.
Protect your legacy
Many young families want to protect their children in the case of sudden death or medical emergency. However, many others don’t want to talk about it at all. I agree it’s not a pleasant conversation. Here in California, unless you have an established estate, in case of your death all your assets will go to probate and will have to be distributed by the court. The probate is a public, lengthy and expensive process. When my son was born my wife and I set up an estate, created our wills and assigned guardians, and trustees to our newly established trust.
The process of protecting your legacy is called estate planning. Like everything else, it’s highly personalized depending on the size of your family, the variety of assets you own, your income sources, your charitable aptitude, and so on. Talking to an experienced estate attorney can help you find the best decision for yourself and your family.
I never sell insurance to my clients. However, if you are in a situation where you are the sole bread earner in the household, it makes a lot of sense to consider term life and disability insurance, which can cover your loved ones if something were to happen to you.
I realize that this is a very general, kind of catch-all checkpoint but let me give it a try. No matter what happens in your life right now, I guarantee you a year or two from now things will be different. Life changes all the time – you get a new job, you have a baby, you need to buy a new car, or your company goes public, and your stock options make you a millionaire. Whatever that is, think ahead. Proper planning could save you a lot of money and frustration in the long run.
I realize that my checklist is not complete. Every family is unique. Each one of you has particular circumstances, financial priorities, and life goals. There is never a one-size-fits-all solution for any family out there. If you contact me directly, I will be happy to address your questions.
About the author:
Stoyan Panayotov, CFA is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm based in Walnut Creek, CA. Babylon Wealth Management offers personalized investment management and financial planning services to individuals and families. To learn more visit our Private Client Services page here. Additionally, we offer Outsourced Chief Investment Officer services to professional advisors (RIAs), family offices, endowments, defined benefit plans, and other institutional clients. To find out more visit our OCIO page here.
Disclaimer: Past performance does not guarantee future performance. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The content of this article is a sole opinion of the author and Babylon Wealth Management. The opinion and information provided are only valid at the time of publishing this article. Investing in these asset classes may not be appropriate for your investment portfolio. If you decide to invest in any of the instruments discussed in the posting, you have to consider your risk tolerance, investment objectives, asset allocation, and overall financial situation. Different investors have different financial circumstances, and not all recommendations apply to everybody. Seek advice from your investment advisor before proceeding with any investment decisions. Various sources may provide different figures due to variations in methodology and timing,