Alec Giesting, Author at Prime Capital Financial Denver

Setting Financial Goals for the New Year

By Alec GiestingFinancial Planning

It’s that time of year again—the time when many people set ambitious goals but struggle to follow through on achieving them.

As you reflect on your financial health, it’s important to remember that everyone is in a different place financially. Tailoring your resolutions to fit your unique situation can make a significant difference. Here are five steps that can help you set and achieve your financial goals, along with suggestions and strategies for short-term, mid-term, and long-term goals to help keep you on track.

Step 1: Reflect on Your Current Financial Situation

Begin with a thorough examination of your existing financial landscape. Review your income, expenses, assets, and liabilities. This analysis will provide a comprehensive understanding of your economic standing and help you craft a personalized plan for your financial future.

Step 2: Establish Clear Objectives

Articulate your financial objectives clearly. Whether your aim is to build an emergency fund, plan for a dream vacation, buy a home, or prepare for retirement, identifying your goals sets the foundation for your financial journey. Consider the time frame associated with each objective, from short-term to long-term commitments. (See below for more.)

Step 3: Make Your Goals SMART

Adhering to the SMART criteria helps to ensure your goals are clear and achievable:

Specific: Clearly define what you want to accomplish. For example, “Save $10,000 for a car down payment.”
Measurable: Set specific amounts and deadlines, like “Save $500 per month for 20 months to reach $10,000 by a specific date.”
Achievable: Make sure your goals are realistic within your current financial situation.
Relevant: Align your financial goals with your overall life objectives.
Time-Bound: Set a deadline for each goal to create a sense of urgency.

Step 4: Seek Professional Advice

Consider consulting a financial advisor, especially for complex goals like retirement planning or investment strategies. Advisors can provide tailored guidance and valuable insights to help you make informed decisions. Don’t hesitate to ask for help; their knowledge can greatly enhance your financial well-being.

Step 5: Stay Disciplined and Motivated

To achieve your goals, discipline is crucial. Regularly check your progress and celebrate milestones. Keep your ultimate dreams at the forefront of your mind. This personal financial journey requires consistency and enthusiasm.

Short-Term Financial Goal Ideas

Create and Stick to a Budget

Establishing a budget is a foundational step in financial planning. Track your income and expenses to understand your financial habits and use budgeting tools to categorize your spending. Identify areas to cut back and allocate funds toward savings or debt repayment.

Build an Emergency Fund

An emergency fund is important for financial stability. Start small with a goal of $500 to $1,000, and gradually expand it to cover three to six months of living expenses, or more depending on your situation. Consider automated savings transfers to this dedicated account, helping you prepare for unexpected financial shocks.

Mid-term Financial Goal Ideas

Save for Major Life Events

Consider significant life events like buying a home or funding a child’s education. Start by estimating the total amount needed and set a timeline for achieving it, breaking it down into monthly savings targets.

Pay Off Student Loans

If you have student loans, strategize to pay them off effectively. Explore refinancing options to help secure a lower interest rate while considering the potential loss of federal loan benefits.

Long-Term Financial Goal Ideas

Save for Retirement

Experts recommend that you work toward a comfortable retirement by saving 10-15% of your income in tax-advantaged retirement accounts, or more if possible. As you get closer to retirement, you should work with an advisor to create a customized retirement income plan based on your personal retirement lifestyle goals. Estimate your desired annual expenses to help gauge how much you will need.

Plan for Major Life Transitions

Consider potential long-term goals, such as caring for aging parents or planning for long-term care. Early planning and dedicated savings can help alleviate future financial pressure.

The Importance of Ongoing Financial Planning

Remember, achieving financial goals is not always a linear process. Life can throw unexpected challenges your way. It’s beneficial to remain flexible and adjust your goals as needed. Embrace the new year as an opportunity to shape your financial future, and take proactive steps toward achieving your dreams.

Call us and let’s talk about your goals for 2025!

Sources:

2024-12-10

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10 Considerations for Year-End Tax Planning

By Alec GiestingEstate Planning, Financial Planning

As we head into the holiday season, another season looms in the distance: tax season.

Don’t wait until March to see how 2024 shook out for you tax-wise. Before the year draws to a close, it’s an ideal time to evaluate financial strategies and take advantage of year-end tax planning opportunities. Now is the time to proactively review, consult with professionals, and implement strategies that can potentially benefit you now and in the years ahead.

RMDs (Required Minimum Distributions) Due In Retirement

Required minimum distributions (RMDs) must be withdrawn from traditional retirement accounts like 401(k)s and IRAs by December 31 each year beginning at age 73. There is no grace period to April 15 tax day; RMDs must be taken by December 31.

Calculate RMDs (Required Minimum Distributions) Before Retirement

Even if you are not 73 or older, remember, all the money you have socked away in traditional 401(k)s, IRAs, and similar qualified retirement accounts will require annual withdrawals, and ordinary income taxes will be due on the amounts withdrawn. According to the Social Security Administration, around 40% of Americans must pay federal income taxes on their Social Security benefits—up to 85%—because they have substantial income, like the income created by required minimum distributions.

Strategic Timing for Roth Conversions

Converting traditional IRAs or other tax-deferred accounts to Roth IRAs can be a strategic move, particularly if you anticipate being in a higher tax bracket in the future. Roth accounts contain already-taxed money, so they offer tax-free growth and withdrawals, meaning you can access your money in retirement without owing any federal taxes provided the account has been in place five years and all other IRS rules are followed. They are also tax-free to your heirs.

While there are no limits on the amounts you can convert, it’s essential to remember that the converted amount will be added to your gross income for the year, potentially affecting your overall tax situation. And since Roth conversions cannot be undone, it’s important to seek professional tax advice.

RMDs (Required Minimum Distributions) Due On Inherited Accounts

This July, the IRS finally issued clarifications about the SECURE Act 1.0 changes on the rules for non-spousal inherited traditional accounts, stating that enforcement will begin in 2025 on accounts inherited after 2019. If you inherited a traditional IRA or 401(k) or similar account, check with your CPA or tax professional now because RMDs will be due or you may owe penalties.

Maximize Retirement Account Contributions

If you are still working, contributing the maximum allowable amounts to tax-deferred retirement accounts like traditional 401(k)s and IRAs can offer a significant opportunity to grow your retirement savings while reducing your taxable income for the tax year. The contribution limit for 401(k) plans for 2024 is $23,000 for individuals under 50, with an additional catch-up contribution of $7,500 for those 50 and older, bringing the total to $30,500. For IRAs, the limit is $7,000, or $8,000 with the catch-up provision for those 50 and older.

Implement Tax Loss Harvesting

If you’re seeking to reduce your taxable capital gains in 2024, tax loss harvesting may be a strategy worth considering. This involves selling underperforming investments, such as stocks and mutual funds, to help realize losses that can offset any taxable gains you may have accrued throughout the year.

Charitable Contributions

A charitable donation is a gift of cash or property given to a nonprofit organization to support its mission, and the donor must receive nothing in return for it to be tax-deductible. Taxpayers can deduct charitable contributions on their tax returns if they itemize using Schedule A of Form 1040, and contributions may be deductible to up to 60% of adjustable gross income for 2024.

Defer Income

Another way to help reduce your tax burden is by deferring, or shifting, income to the next year. If you’re employed, you won’t be able to defer your wages; however, you could delay a year-end bonus to the following year, so long as it’s a standard practice at your company.

Be Mindful of the Alternative Minimum Tax (AMT)

The alternative minimum tax (AMT) is designed to ensure that high-income individuals pay a minimum level of tax, regardless of how many deductions or credits they claim under the regular tax rules. The AMT is calculated by adding back certain deductions, such as state and local taxes, that are allowed under the regular system but not under AMT rules. In 2024, the AMT tax exemption for individuals is $85,700, and for married couples it’s $133,300.

Utilize Flexible Spending Accounts (FSAs) and Other Tax-Advantaged Accounts

For 2024, flexible spending accounts (FSAs) offered an increased contribution limit of $3,200, up from $3,050 in 2023, allowing employees to use pre-tax dollars for eligible medical expenses. Contributions to FSAs reduce taxable income, as funds are deducted before federal, Social Security, and Medicare taxes are applied. However, it’s essential to use all FSA funds before year-end to avoid forfeiture under the “use it or lose it” rule. Some employers offer a grace period, extending the deadline to use 2024 funds until March 15, 2025. Exploring other tax-advantaged accounts for 2025, such as dependent care FSAs, might further reduce future taxable income while maximizing the benefit of pre-tax dollars for qualifying expenses.

Don’t let time pass you by, start planning for this upcoming tax season today! If you’re not sure how these tips could be plugged into your overall financial plan, let’s meet together with your tax professional. We’re here to help you end the year strong financially. Give us a call today at (316) 655-9136!

This article is provided for general information only and is believed to be accurate. This article is not to be used as tax advice. In all cases, we advise that you consult with your tax professional, financial advisor and/or legal team before making any changes specific to your personal financial and tax plan.

Sources:

2024-11-12

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Estate Planning Awareness Month: Prepare for Your Family’s Future

By Alec GiestingEstate Planning, Financial Planning

October is recognized as Estate Planning Awareness Month, a reminder to reflect on the importance of organizing your affairs for the benefit of your loved ones.

As we approach 2025, at the end of which the current estate tax exemption is set to expire to around half of what it is now, it’s important to revisit your estate plan and explore options like life insurance and trusts to safeguard your legacy.

Why Estate Planning Matters

Estate planning involves organizing your financial affairs so that your assets and responsibilities are managed according to your wishes upon your death or incapacitation. An effectively written and legally executed estate plan aims to provide peace of mind for you and your loved ones during a time of loss or medical crisis, and can pave the way for an easy, tax-advantaged transfer of assets and decision-making authority to your chosen beneficiaries.

Key Legal Documents to Consider

Effective estate planning often relies on several essential documents:

Will: This legal document specifies how your assets should be distributed after your death and chosen guardians for your children. It is crucial for specifying which items go to whom, even if you also have a trust; in that case, it functions as a pour-over will. Dying intestate can complicate matters, as state laws and probate court will dictate asset distribution.
Trust: There are many types of trusts, but in general, a trust can allow you to designate a trustee to manage your assets for beneficiaries. This can expedite asset distribution and potentially bypass probate court, as well as keep matters private.
Power of Attorney (POA): This grants someone the authority to make financial or medical decisions on your behalf if you become incapacitated.
Living Will: This document outlines your preferences for medical treatment and end-of-life care, so your wishes are honored.

The Importance of Life Insurance and Trusts

As the estate tax exemption changes, it’s wise to explore life insurance and trusts for potential tax advantages. Life insurance offers tax-free liquidity for your family to cover expenses, easing financial burdens on beneficiaries. Trusts can protect assets from estate taxes and streamline distribution, potentially avoiding costly probate.

Many types of trusts can address different situations, so it’s essential to seek legal guidance for proper setup and execution.

Revisiting Your Estate Plan: Key Considerations

The lifetime gift and estate tax exemption amount is set to drop to nearly half from its current $13.61 million per person. If the Tax Cuts and Jobs Act (TCJA) provisions expire as planned, the exemption could drop to around $7.5 million per person for the 2026 tax year, adjusted for inflation. Families facing potential estate tax liability in excess of this amount should consider consulting with their attorney and financial professional as soon as possible, implementing a plan no later than next year, in 2025.

Common Estate Planning Mistakes

The most significant mistake is not having a plan at all. Other pitfalls include failing to communicate your wishes, naming only one beneficiary, and neglecting to update your plan after major life changes like marriage, divorce, or the birth of children. Regularly reviewing your estate plan—ideally every three to five years—can help ensure your documents remain aligned with your current situation. Without a clear estate plan, your assets could end up in probate court, leading to delays and potential family disputes, distribution will be based on state laws that may not reflect your intentions.

Conclusion

Procrastination is the enemy of effective estate planning, especially as we approach significant changes in estate tax laws. Take this opportunity during Estate Planning Awareness Month to organize your affairs and make certain your wishes are honored. Remember Benjamin Franklin’s words: “By failing to prepare, you are preparing to fail.” Acting now will help protect your loved ones and facilitate efficient management of your estate.

We are available to meet with you, your estate attorney, and your tax professional to create or review your estate plan. We can also bring these disciplines to the table if you don’t have them in place. Call us!

Sources:

2024-10-21

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Understanding Life Insurance: 7 Things You Should Know

By Alec GiestingFinancial Planning

Life insurance is an important part of a comprehensive financial plan. Here are 7 things you should know about it.

At its simplest, you probably already know that life insurance provides funds in the case of unexpected loss of life. But there may be other aspects of life insurance that are less clear to you. If there are things about life insurance that you don’t understand, you are not alone! In fact, from research conducted by LIMRA in 2019, American consumers answered “don’t know” to 40% of the questions on a life insurance knowledge test, and if they did answer, they were correct less than half the time (46%).

Not to worry. It’s September, which means it’s Life Insurance Awareness month, and we’re here to clear up some of the basics about life insurance.

1) Policy Beneficiaries Receive Payouts

The beneficiary or beneficiaries named on a life insurance policy are the ones who receive the payout from the insurance company that issues a life insurance policy. Often a spouse, child, or other loved ones are named as beneficiaries, but in some cases, the beneficiary of a life insurance policy might be a trust.

NOTE: It is very important that a policy owner keeps policy beneficiaries up to date as situations, ages, and relationships change through time. An annual review is recommended.

2) A Life Policy Is “Written On” a Named Insured or Insured Persons, Not Always the Policy Owner

A “named insured” on a life policy is the one whose life is being insured. Generally, an insured person will purchase a policy on themselves, naming themselves as the insured, so that when they die, the death benefit goes to their chosen beneficiaries.

But an owner is not always the same as the insured. As an owner, you control the policy, and you can purchase a life insurance policy on someone else, as long as you would suffer from their death as a family member, business partner, or some other close relationship.

For instance, sometimes spouses will purchase policies naming each of them as joint insureds. These can be set up as “first to die,” where the surviving spouse or other named beneficiary receives the death benefit as soon as the first spouse dies, or as “second to die” (sometimes called “survivorship”) policies that only kick in to pay beneficiaries after both insureds have passed away.

In some cases, you might want to purchase a policy but make someone else the owner, for example, as a strategy inside a trust.

Or sometimes a parent or grandparent will purchase a policy naming a child or toddler as the insured. Naming the child when they are young and healthy (while the cost of insurance is low) can be done as a strategy to help save for the child’s future college expenses, and to ensure that the child has life insurance in place should they develop a health condition later.

3) Life Insurance Usually Requires Medical Underwriting

Life insurance usually requires medical underwriting, which means that once you apply for a life insurance policy, the insured person’s lifestyle, height and weight, medical history, and general level of health will be assessed (and approved) before your policy will be issued. Sometimes a physical exam will be required, and sometimes life insurance coverage will be denied, for example, if the insured person has a terminal condition. But even if you are in poor health, you may be able to obtain a life insurance policy at a higher cost.

And you may be able to purchase life insurance even if you are age 70 or older. In fact, more people are doing so because the estate tax exemption amount is set to drop to around half the amount it is now in the 2026 tax year, and consumers are seeking tax advantaged strategies to pass on wealth to their heirs.

4) Premiums Are What You Pay for Insurance

The word “premium” in the context of a life insurance policy is how much you will pay monthly, annually, or once for single premium life insurance policies. Premiums are determined on an individual policy basis based on many factors, including age, health, and credit.

5) Most Life Insurance Payouts—aka Death Benefits—Are Tax-Free and Probate Free

The money paid by an insurance company to a beneficiary upon the death of the insured person is called a “death benefit.” In most cases, a death benefit is tax-free and bypasses the probate process unless it’s paid to a trust, in which case different IRS rules may apply.

This can be a tremendous help to the spouse and family members during their time of grief and beyond as they look to their futures. It’s often recommended that a life insurance policy’s death benefit be in an amount that can cover monthly living expenses, mortgage payments, future college expenses, etc., protecting families from immediate and future economic devastation.

6) Life Insurance Can Be Used for Estate Planning Trusts and Business Succession Plans

It’s important when setting up complex estate plans, trusts, and business succession plans which may include life insurance that you consult with a team comprised of your financial advisor, estate attorney and CPA/tax professionals. IRS rules and tax laws are always in flux.

For instance, a recent Supreme Court ruling may change the tax ramifications of business buy-sell agreements. Be sure to meet with your team of advisors to review.

7) There Are Many Types of Life Insurance

In addition to term life policies, there are many permanent life insurance policies, including whole life, universal life and variable life. While a death benefit is always part of a life insurance policy, different types of life insurance policies are structured differently, and may contain additional features as part of the structure of the policy itself, or available as a “rider” to the policy for an additional premium amount. For instance, some policies even offer coverage for long-term care should you develop the need for it but provide a death benefit for your heirs if you don’t.

Life insurance is complex, and a life insurance policy is a contract between you and an insurance company. It is recommended that you work with your team of advisors to examine each contract clause thoroughly before purchasing a life insurance policy.

If you would like to discuss life insurance, please contact us! You can reach PCIA Denver at 1800.493.6226.

This document is for general information purposes only and is not to be relied upon for financial advice. In every case, you should seek the advice of qualified tax, financial and legal professionals to ensure that a life policy is advisable based on your unique circumstances.

Life insurance often requires medical underwriting. Guarantees are provided by insurance companies and are reliant upon the financial strength and claims-paying ability of each individual insurance carrier issuing a life insurance contract.

Sources:

2024-09-17

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Ways to Save for College Costs

By Alec GiestingFinancial Planning

It’s back to school season—a perfect time to think about your children’s future. Parents and grandparents should start planning for college costs as early as possible.

Most Americans would do almost anything for their children and grandchildren, and sending them to college is a top priority for many. According to studies, more than 50% of parents are willing to go into debt to fund their child’s college education, and at least 95% of parent expect to cover at least half the costs.

The trouble is, college debt is extremely high—currently $1.77 trillion in the U.S. The average student loan debt amount is now $37,338 according to recent data.

Why is college debt so high? Well, for one thing, the average in-state tuition cost at public four-year institutions is $11,260 for the 2023-24 school year—and that’s per semester. That is about three times as high as it was in 1989-90, according to the College Board.

And on top of that, interest rates have risen. For the 2024-25 school year, federal parent PLUS loans will be at their highest point in more three decades, at a whopping fixed interest rate of 9.08% plus fees.

So, what is a loving parent or relative to do? Here are some of your options.

1) 529 Plans

A 529 plan, technically known as a “qualified tuition program” under Section 529 of the Internal Revenue Code, is an education savings plan offered by all 50 states and the District of Columbia. There are generally two types—prepaid tuition which allows you to lock in today’s tuition rates for the future college attendee, and the more popular 529 savings plan.

Keep in mind that you aren’t restricted to your own state’s plan. You can invest funds in any state’s plan, and your student can attend college in any state. Each state’s 529 plan is unique, with a different combination of sales channels, investment offerings and fees. It can pay to shop around when choosing a plan because even if your state offers a tax deduction or credit for contributing to your state’s plan, that benefit might not stack up against the performance or lower cost of another state’s plan.

PROS

As of 2023, if a 529 plan is owned by a grandparent, aunt, uncle or other person, it is virtually invisible on the FAFSA’s calculations for both assets and won’t count as student income later if used for qualified expenses.

Although contributions to a 529 plan aren’t tax deductible on your federal tax return, the earnings grow tax-free when withdrawn and used for qualified education expenses.

Many states offer state income tax deductions for contributions if you choose to invest in your state’s plan. (Your child can still attend college anywhere.)

There are no income limits on 529 plan contributions, so they’re available to everyone. Plans vary, but most have high total contribution limits—usually in the $235,000 to $529,000 range.

CONS

If owned by a parent or student, a 529 plan is counted as an asset on the student’s FAFSA (free application for federal student aid), although only a percentage of the total account is calculated.

There are limited investment options available with 529 plans, and only one investment change per year is permitted. Some plans have high costs and fees.

If your child, you or any family member does not want to attend college, and if 529 plan money is withdrawn and not used for education expenses, the account’s earnings are subject to both income tax as well as a 10 percent penalty tax, and you may have to pay back any state income tax deduction amounts as well. (There are exceptions to 529 plan penalties if your student receives scholarships.)

2) Roth IRAs

If a 529 plan doesn’t work for your family for some reason, a Roth IRA (individual retirement account) may be an option to consider. You can withdraw money from Roth IRA accounts to be used for college expenses for you, your spouse, children or grandchildren as long as the account has been in place for five years. If the account owner is under age 59-1/2, the only tax liability for college expenses will be on any withdrawn earnings—if over 59-1/2, the entire withdrawal amount is tax- and penalty-free for any purpose as long as you’ve owned the account for five years.

PROS

There is a lot of flexibility with a Roth—you can invest in nearly any type of account you want to within a Roth IRA wrapper.

If your child doesn’t choose to go to college, the money can be used for any purpose, including retirement, with no mandated withdrawals or RMDs (required minimum distributions) or taxes due. Inherited Roth IRA accounts are also tax-free.

CONS

One of the difficulties with Roth IRAs is that high earners can’t open them, and the yearly limit in 2024 for contributions is only $7,000 (The 2024 contribution limit is $7,000 or $8,000 if you are 50 or older). In some cases, what’s called a “backdoor Roth” might be indicated for high earners, where they can legally convert taxable IRA funds into Roth IRA accounts and pay taxes on the money converted, but these are complex and strict IRS rules apply.

While a Roth IRA does not show up as an asset for financial aid calculations, amounts withdrawn and used for college expenses are considered income for the next school year, and therefore may reduce the amount of student financial aid that’s available.

3) Life Insurance

Permanent life insurance policies, such as whole or universal life, include both a death benefit and a savings/cash account component which you can borrow against to pay for college.

PROS

Many permanent cash value policies regularly credit the policy with interest in a guaranteed* amount specified in the policy terms (*guaranteed by the claims-paying strength of the issuing insurance company.)

Money borrowed from the cash value in a life insurance policy is not taxable in most cases. Interest credited to a life policy grows tax-deferred, but the credited interest portion is taxable if that part of the money is borrowed for any purpose, including college.

If the insured dies, the death benefit plus remaining cash value is almost always tax-free when left to individually-named beneficiaries.

Buying a flexible, permanent policy for a child at a young age when they are healthy can ensure that they are insurable even if there’s an unexpected future adverse event; for instance, if they develop a severe illness later.

CONS

While a life insurance policy does not show up in financial aid calculations as an asset, amounts borrowed to pay for college are considered as income on the next year’s FAFSA, potentially reducing the amount of student financial aid available.

Life insurance policies can be costly for those who are older or in poor health. If you are using life insurance to pay for college, consider buying the policy when the child is a healthy toddler—with them as the insured to keep the cost of insurance low.

If you borrow money from the cash portion of a permanent life insurance policy, interest is charged by the insurance company on the amount borrowed until you pay the money back—in essence, you are paying “yourself” back—and regular premium payments must be made to keep the policy in force. It is advisable to work with a qualified professional to examine the structure of any policy so that you understand its terms.

4) Annuities

Annuities are another option to consider.

PROS

Annuities can offer a tax-advantaged option for college costs in some cases because annuity policy growth is not taxed until funds are withdrawn.

You could purchase a fixed annuity with a short payout schedule to make payments to cover tuition, but you may have to contribute a significant amount to achieve the payout needed. Another way to potentially make an annuity work is to start early when your child is young and purchase a deferred annuity policy which guarantees* a high credited interest rate (*guaranteed by the claims-paying strength of the issuing insurance company).

CONS

While an annuity does not show up on the FAFSA as an asset, annuity amounts paid out are considered income the next year, which can reduce your student’s chances of receiving financial aid. So rather than taking annuity payments while attending college, optionally you could take out student loans, allowing your annuity to continue to grow, then use the annuity to pay off the loans after graduation depending on interest rates, crediting rates, and whether or not it saves you money in the long run.

How College Savings Can Impact Financial Aid Eligibility

Working with a qualified financial and tax professional is advised when planning for college costs. Legislation is always changing for parents and grandparents looking to get a jump-start in funding their child or grandchild’s education. For example, due to the FAFSA Simplification Act of 2020, in July of 2023 the EFC (expected family contribution) was replaced by the SAI (student aid index).

Where the EFC bottomed out at $0, the SAI goes as low as -$1,500, meaning students can qualify for more need-based financial aid. SAI also simplifies the FAFSA form itself, drastically reducing the number of questions. Where possible, the new law mandates data received directly from the IRS be used to calculate the SAI and federal Pell Grant eligibility.

Where the new SAI may truly be a boon to students who need more aid is through 529 plans owned by extended family members. As of July 2023, 529 accounts owned by grandparents, aunts, uncles or others are not counted as assets, nor are qualified distributions taken from them counted as income. Therefore, they no longer have significant impact on eligibility for financial aid.

FAFSA (free application for federal student aid) and the CSS (college scholarship service)

While it is true that life insurance, annuities and 529 plans owned by anyone other than parents or students are not counted as assets on the FAFSA, they may be counted on the CSS (College Scholarship Service) profile, another aid form used for aid by about 240 colleges in addition to the FAFSA. The CSS profile is extremely complex and steps are being taken to simplify it, but changes to the form have not been finalized.

More Resources

Federal Student Aid Estimator https://studentaid.gov/aid-estimator/
FAFSA https://studentaid.gov

If you have any questions or would like to discuss your family’s financial goals, please call us! You can reach PCIA Denver at 1800.493.6226.

This article is for general information purposes only and should not be relied upon for financial or tax advice. In every case, it is recommended that you work with financial, tax and legal professionals to determine what might be best for you and your family based on your unique situation and circumstances.

Sources:

2024-08-20

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Personal Finance: The Importance of Starting Early

By Alec GiestingFinancial Planning, Retirement Planning

Whether you’re just starting out in your career, you are a Gen-X-er sandwiched between your kids’ college expenses and aging parents’ needs, or you are a Baby Boomer eyeing retirement, starting early can help when it comes to your finances. Here are some reasons why.

When You’re Young—In Your 20s

We’ve all heard the famous quote by Albert Einstein, the one where he said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” And it’s true. In many cases, if you start out early—perhaps in your teens or 20s—saving just a small amount each month, you can amass more money through time than if you start saving at a later age, even if you save a larger amount each month. Of course, it depends on what you invest in. Be sure to check with a trusted financial advisor about how this works.

Investopedia uses this example:

Let’s say you start investing in the market at $100 a month, and you average a positive return of 1% a month or 12% a year, compounded monthly over 40 years. Your friend, who is the same age, doesn’t begin investing until 30 years later, and invests $1,000 a month for 10 years, also averaging 1% a month or 12% a year, compounded monthly.

Who will have more money saved up in the end? Your friend will have saved up around $230,000. Your retirement account will be a little over $1.17 million. Even though your friend was investing over 10 times as much as you toward the end, the power of compound interest makes your portfolio significantly bigger.

When You’re Older—In Your 40s, 50s or Early 60s

As you head into retirement, starting early to map and plan out your retirement—well before you retire—can help you for many reasons, because there are a lot of moving pieces to consider. Plus, everyone’s situation is completely different and what might work for someone else might not be right for you at all. For instance, one person’s desired retirement lifestyle could be drastically different than another person’s, requiring different budget amounts. (Consider whether you want to stay home and become a painter, or travel the world with your entire extended family. That’s what we mean by drastically different budgets.)

Once you have your required retirement budget amount settled, timing then becomes very important. A financial advisor with a special focus on retirement can really make the difference by laying out a retirement roadmap just for you. Here are some of the things you should know and think about:

1) Medicare Filing – Age 65

You are required to file for Medicare health insurance by age 65 or pay a penalty for life. To avoid this penalty, be sure to sign up for Medicare within the period three months before and three months after the month you turn age 65. If you are still working or otherwise qualify for a special enrollment period, you can sign up for Part A which is free for most people, and then sign up for Part B after you retire. Visit https://www.medicare.gov/basics/costs/medicare-costs/avoid-penalties to learn more about penalties and how you can avoid them.

You are required to have Medicare coverage if you are not working or covered by a spouse with a qualified health insurance plan, and Medicare (other than Part A) is not free. In fact, it costs more if your income is higher. Your Medicare premium is often deducted right out of your Social Security check, and premiums generally go up every year.

When you sign up for original Medicare Part B or a replacement Medicare Advantage plan, the least amount you will pay for 2024 is $174.70 per month per person. For those with higher incomes, the Medicare premiums you pay are based on your income from two years prior—those with higher incomes pay more. For couples filing jointly, the highest amount you might pay for Part B coverage if your MAGI (modified adjusted gross income) is greater than or equal to $750,000 is $594.00 per month per person for 2024.

So, depending on your income for the tax year two years prior to filing for Medicare, your premium could be from $174.70 to $594.00 in 2024, or somewhere in between.

If you plan ahead, your advisor might help you plan to take a smaller income in the years prior to turning age 65 in order to keep your Medicare premium smaller. For instance, some people might want to retire at age 62 or 63 and live on taxable income withdrawn from their traditional 401(k) or IRA account/s before they even file for Medicare or Social Security. Each person’s situation is completely unique, but advance retirement planning may help you come out ahead in the long run.

2) Social Security Filing – Age 62, 66-67, 70 or sometime in between

Another moving piece in the retirement puzzle is Social Security. The youngest age you can file for Social Security is age 62, but a mistake some people can make is thinking that their benefit will automatically go up later when they reach their full retirement age—between age 66 to 67 depending on their month and year of birth. This is not the case. If you file early, that’s your permanently reduced benefit amount, other than small annual COLAs (cost of living adjustments) you might or might not receive based on that year’s inflation numbers.

Filing early at age 62 can reduce your benefit by as much as 30% according to Fidelity. Conversely, waiting from your full retirement age up to age 70 can garner you an extra 8% per year. (At age 70, there are no more benefit increases.)

Planning ahead for when and how you will file for Social Security can make a big difference in the total amount of benefits you receive over your lifetime. And married couples, widows or widowers, and divorced single people who were married for at least 10 years in the past have even more options and ways to file that should be considered to optimize their retirement income.

3) Taxes In Retirement

Thinking that your taxes will automatically be lower during retirement may not prove true in your case, and it’s important to find out early if there is a way to mitigate taxes through early planning. Don’t forget that all that money you have saved up in your traditional 401(k) will be subject to income taxes—and even your Social Security benefit can be taxed up to 85% based on your annual combined or provisional income calculation.

And the IRS requires withdrawals. Remember that by law RMDs (required minimum distributions) must be taken every year beginning at age 73 and strict rules apply. You must withdraw money from the right accounts in the right amounts by the deadlines or pay a penalty in addition to the income tax you will owe on the mandated distributions.

Planning ahead to do a series of Roth conversions—shifting money in taxable accounts to tax-free* Roth accounts—might be indicated to help lower taxes for the long-term in your case, but these must be planned carefully and are not reversible.

Let’s talk about your financial and retirement goals and create a plan to help you achieve them. Don’t put it off—give us a call!

*In order for Roth accounts to be tax-free, all conditions must be met, including owning the account for at least five years.

This article is for general information only and should not be considered as financial, tax or legal advice. It is strongly recommended that you seek out the advice of a financial professional, tax professional and/or legal professional before making any financial or retirement decisions.

Sources:

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2024-07-17

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Annuity Sales Are Surging. Do You Know What They Are?

By Alec GiestingInvestments

We’re here to help clear up some of the confusion about annuities during Annuity Awareness Month, which happens each June!

In the first quarter of 2024, U.S. annuity sales were $106.7 billion, the highest first quarter total since the 1980s, when LIMRA first started tracking annuity sales. Despite these high sales numbers, research indicates that many people don’t really know what annuities are.

One recent study revealed that only 9% of consumers say they feel very knowledgeable about annuities, while other studies confirm this lack of understanding. Research by the American College of Financial Services gave older Americans a score of 12% out of a possible 100% for their knowledge of annuities based on their performance on a short quiz. And a TIAA Institute and Stanford University study showed that the annuity ranks dead last—respondents know more about Medicare, life insurance and long-term care than annuities.

During Annuity Awareness Month, we wanted to cover some facts we hope will help you understand annuities better.

Annuities Are Contracts

When you invest in something, typically you assume all the risk. Since annuities are not investments, but instead are contracts between you and an insurance carrier, one of the main risks you assume with annuities is that the payouts will be made per the terms in your contract and that you can rely on the claims-paying ability and financial strength of the issuing insurance company. And there are many different types of annuity contracts.

Fixed Annuities

Fixed annuities are probably the easiest type of annuity to understand because they work similarly to the way a bank CD (certificate of deposit) works. An insurance company will pay a fixed interest rate on your fixed annuity contract for a selected term, usually from one to 15 years.

Variable Annuities

Variable annuities were developed in the 1950s, and unlike most other types of annuities, before purchase they require that you be issued a prospectus, since part of your money will actually be invested in the stock market. This means that there is market risk involved. While variable annuities are usually purchased with the expectation that at some point the contract owner will annuitize or begin taking periodic payments, depending on contract terms, your annuity payments may fluctuate based on stock market performance, and it’s possible that some variable annuity policies can lose principal due to stock market losses.

Fixed Indexed Annuities

Fixed indexed annuities (FIAs) were first designed in 1995. The biggest difference between FIAs and variable annuities is that fixed indexed annuities are not actually invested in the stock market so they are not subject to market risk. Instead, a selected index (such as the S&P 500) is used as a benchmark for policy credits at periodic intervals, such as annually.

Many FIA contracts offer a minimum amount which gets credited, and nearly all FIA contracts will not credit less than 0%, which means even that if the benchmark index loses money, your FIA contract value will not go down. With fixed indexed annuities, after you have owned the policy for a specified number of years (called the “surrender period”), any policy credits or gains are locked in. And most FIAs offer the option of lifetime income no matter how long you live either as part of the main annuity contract, or available as a rider for an additional charge.

Other Things to Know About Annuities

Some annuities can be purchased on a deferred basis, and some on an immediate basis, and you can use pre-tax or after-tax funds. It’s important to get professional help to understand the implications for your particular situation.

Annuities must be considered carefully based on your particular situation because they are not liquid. Almost all annuities are subject to early withdrawal penalties. Make sure you understand the contract terms and the type of annuity you are purchasing. Your financial advisor and tax and legal professionals can help you compare and analyze policies.

It is very important that you have a trusted financial professional, tax professional and/or legal professional by your side to examine the terms and language of your annuity contract as well as provide information about the insurance company’s financial rating before you make any decision.

Are you prepared for retirement? Contact us to explore your options!

This information does not constitute legal or tax advice. PCIA and its associates do not provide legal or tax advice. Individuals should consult with an attorney or professional specializing in the fields of legal, tax, or accounting regarding the applicability of this information for their situations. Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite 150, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management (“PCWM”) and Qualified Plan Advisors (“QPA”). Certain services may be provided by affiliates of PCIA.

This article is provided for general information purposes only and is accurate to the best of our knowledge. This article is not to be relied on or considered as investment or tax advice.

Guarantees provided by annuities rely on the claims-paying ability and financial strength of the issuing insurance company.

Sources:

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2024-06-21

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What is Sequence of Returns Risk?

By Alec GiestingInvestments, Retirement Planning

Sequence of returns risk can put your retirement portfolio in jeopardy, but what is it, and how do you fight it?

We get it. Retirement can be scary. We know this because it’s our job to help our clients plan for and seamlessly transition into what should be one of the most rewarding times of their lives. What we often find, however, is that most are worried about retirement because of the risks that come with it. But what are some of the risks that strike fear in the hearts of retirement hopefuls? Well, the first is related to longevity—it’s the possibility of running out of money as you get older, and being unable to go back to work in order to support yourself. We also find that people getting ready to retire are concerned about inflation, the cost of health care, the possibility of needing long-term care and more.

There’s one risk, however, that hides in the shadows, waiting to rear its ugly head and throw turbulence into the lives of new retirees and those right on the edge of retirement. It’s called market risk, or the possibility that you could lose your retirement money during market crashes or downturns. How might this look? Specifically, something called sequence of returns risk can be the most dangerous aspect of market risk. And while it might sound complicated, it’s a simple concept with the potential to have major implications on your retirement dreams. Let’s go over what sequence of returns risk is, as well as a few ways you may be able to fight it!

What is Sequence of Returns Risk?

Simply put, sequence of returns risk is the risk of negative market returns occurring right before you retire and/or very early in your retirement. During this time, market downturns can have a much more significant impact on your portfolio.

Again, it might sound like some buzzword the financial industry throws around to scare consumers, but sequence of returns risk is exactly what it sounds like. It’s the sequence, or the order, in which your portfolio provides market returns. It’s key to remember that sequence of returns risk is specifically associated with money directly invested in the market. That means it could apply to vehicles like employer-sponsored retirement accounts, traditional and Roth IRAs, mutual funds, brokerage accounts, variable annuities and any other assets that can lose value during market downturns.

Now, let’s think about your goals for your retirement. If you’re just starting your career, or you’re right in the middle of your working years, you may contribute to your various saving and investing vehicles with the goal of having a large pool of funds when you finally retire at, say, 65 years old. You’d hope that diligent saving and favorable returns would bring your assets to their highest total right at that point, giving you ample funds to draw from once you retire.

Sequence of returns risk is the potential of the market dipping near the end of your career, or in the first few years of your retirement, meaning those drops affect your account balances at their peak. You would then take losses on greater amounts of money, creating greater losses. While you never want to experience dips, it makes sense why you’d hope those periods of market volatility that you will likely encounter at some point during retirement occur farther down the road, especially when you’re concurrently withdrawing money to support your lifestyle.

An Example Where Both Retirees Have $1 Million Saved

Just as an example, let’s consider two retirees, and what happens during their first 10 years of retirement. Both have $1 million saved, and they both determine they need to withdraw $50,000 per year from their accounts to fund their lifestyles.

Our first retiree is lucky. They retire and then experience eight years of a bull market, growing their portfolio by 5% each year. In the next two years, however, they experience declines of 5%, bringing their balance back down.

The other retiree sees the exact opposite sequence. They immediately encounter a bear market upon entering retirement, which drops their accounts by 5% in each of the first two years. Then the market rebounds and goes up 5% each year for the next eight years.

Both retirees continued to withdraw $50,000 per year from their accounts. So, what was the result?

Even though both retirees had the same initial balance, withdrew the same amounts, experienced eight years of bull markets and two years of bear markets, the order or “sequence of returns” made a big difference.

The first retiree didn’t experience market dips at the beginning when their account balances were highest. At the end of the 10-year period, they still had $788,329 left in their account.

The other retiree, on the other hand, wasn’t so lucky. They took losses during the first two years of their retirement, on their highest balances, and by the end of the 10-year period, they only had $695,226.

Please remember this example is purely hypothetical and not reflective of real scenarios or real people. We simply used a starting balance of $1 million for each person, then subtracted $50,000 in income at the beginning of each year, then multiplied the accounts’ balances by the annual positive or negative effect on the market we imagined for this example. Actual market returns are unpredictable and tend to vary far more than in the case study shown. This is strictly to display the potential effects of the aforementioned risk.

What are Some Ways to Mitigate Sequence of Returns Risk?

You can see how the sequence of your returns can affect your portfolio. The market is unpredictable and bottomless, so it’s important to try to shield yourself from, or at least mitigate the possibility of, taking those losses at the starting gate. But how can you do that when the market is completely out of your control? Well, you have a few options.

First and foremost, you can work with a financial professional to diversify your portfolio. While diversification can never guarantee any level of protection or growth, it may give you the ability to withstand dips in certain sectors of the market. It also spreads risk across different asset classes, or even different categories within the market itself. That can potentially help you avoid taking losses in your entire portfolio, even if one sector experiences headwinds.

For instance, non-correlated asset classes, which could include annuities or life insurance policies, might be a retirement diversification option for some people. Modern policy designs like fixed-indexed annuities and indexed universal life insurance policies are typically linked to a market index, while not actually participating in the market. These products can provide the upside of market gains while still protecting the principal, or the money used to fund the policy, in addition to locking in the gains.

These solutions may not match every consumer’s situation or financial objectives, however, so it’s important to speak to your advisor to explore policies and see if they make sense for your portfolio. For some people, annuities can provide a stream of retirement income that can cover lifestyle expenses, allowing retirees to leave their assets in the market during downturns rather than being forced to make withdrawals.

Be sure to speak with a financial professional who understands your circumstances, goals and tolerance for risk. The right partner can help you develop a custom withdrawal strategy and a plan to generate a reliable stream of income with your accumulated retirement assets. Your plan may include portfolio diversification, the establishment of a liquid emergency fund, the inclusion of alternative strategies and more, all with the intention of making your money last your entire life.

If you have any questions about how you can fight sequence of returns risk, give us a call today! You can reach PCIA Denver at 1800.493.6226.

This article is not to be construed as financial advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment decisions, or any changes to your retirement or estate plans. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.

Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite #150, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management (“PCWM”) and Qualified Plan Advisors (“QPA”).

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2024-05-22

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Unlocking the Mysteries of Alternative Investments

By Alec GiestingFinancial Planning

Learn About Alternative Investments

So you’ve dipped your toes into the ocean of traditional investments—stocks, bonds, cash—only to find yourself nodding off at teh thought of another ETF or mutual fund. Fear not, intrepid investor! There’s a whole world out there beyond the realm of ticker symbols. Introducing the star of this blog — alternative investments.

If you have any questions, we have answers! To see how we can help you explore your options and build a plan for your future, please contact us!

Call: (303) 771-2700

2024-04-11

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5 Things You Need to Know About Retirement

By Alec GiestingRetirement Planning

Saving for retirement is important, but it’s also crucial to stay informed! Now that it’s Financial Literacy Month, we thought it would be the perfect time to discuss some things you need to know.

There’s an old saying that goes something like, “What you don’t know can’t hurt you.” You might have even used it, maybe when you came home past curfew without your parents finding out or poured your juice into the plant when no one was watching. And sure, no one being the wiser might have worked when you were young, but in retirement, what you don’t know actually CAN hurt you.

It’s important to stay informed about not just past trends, but also what you should expect as you make your way through that exciting phase of your life. It can give you a better chance to prepare for obstacles and implement a plan to overcome them. It can also help you take advantage of opportunities, especially as you look to make your money last for a quarter of a century or longer. Let’s go over five things you need to know about retirement.

Market Downturns WILL Happen^[1,2]

When you spend between 25 and 30 years or longer in retirement, it’s not a question of “if” you’ll encounter market downturn; it’s a question of “when.” These declines are typically referred to as “bear markets,” which are defined as market drops of 20% or more. If we use the S&P 500 as an indicator of bear markets, there have been 12 instances of significant market decline since the index’s inception in 1957. That means you should expect to face some adversity in the market once every five or six years. So, what are your options?

Well, historically, patience has been the best way to overcome market adversity, as long-term outlooks have always trended upward. It can also be helpful to work with a financial professional who can tailor your portfolio to your goals and tolerance for risk. If you’re more comfortable with risk or have a longer timeline to retirement, you may have more assets invested in the market, whereas those approaching retirement are usually advised to shift more of the portfolio into assets that are fixed, like bonds or bond alternatives.

Rebalancing your portfolio and creating a customized retirement plan as you approach retirement is advised, especially to mitigate sequence of returns risk. Sequence of returns risk is the risk of retirees facing market downturn in the few years prior or the first few years of retirement, meaning they take greater losses on greater asset totals. Again, working with a financial professional to find ways to mitigate sequence of returns risk can be helpful. Sometimes this is done by creating a stream of income with part of your retirement assets to cover your living expenses. This allows you to wait out bear markets with your remaining assets which might remain directly invested in the market.

Decumulation is Just as Important as Accumulation

Yes, we all want to retire as multimillionaires, hitting on our investments and getting lucrative returns. That period of building your assets, investment and making growth-oriented decisions is often referred to as the “accumulation” phase. However, the fact is, it doesn’t matter how much money you accumulate if you don’t have a plan for how to spend it in the “decumulation” phase, after you retire and no longer have employment income coming in. Oftentimes, that plan includes a strategy to create income for your projected lifestyle, as well as a comprehensive budget dictating where that income will go. Additionally, many factors will play a role in decumulation, including taxation, legislation, your life expectancy, your spending habits and more.

We traditionally recommend getting a good idea of how much you plan to spend on an annual basis. That’s how much income you’ll likely need to create, along with a little bit of wiggle room giving you the freedom to cover emergencies or other unexpected expenses. The best way to do this is often by assessing your goals for retirement, then estimating the amount of money you’ll need to achieve them. Then, we can build a budget for you to strictly adhere to in retirement. It’s important to understand that if you start planning for retirement once you’re already there, it might be too late. If you’ve become accustomed to your lifestyle, it can be difficult to make cuts, especially when some retirees actually need more money in retirement than they did while they were working, leading us to our next point.

It’s Never Too Early to Prepare^[3,4,5]

Think about it. You reach the most exciting period of your life, your retirement accounts are as well-funded as they’ll ever be, and you have an endless list of things you want to do now that your time belongs entirely to you. Will you want to pull back? Not likely. That’s why it’s important to start preparing for retirement long before you call it a career, giving you the flexibility to course correct if you find that you haven’t saved enough to live comfortably. But how much do you need to live comfortably? Modern estimates say retirees have set that target figure at $1.3 million for a 67-year-old heading toward a 30-year retirement, but working with a financial professional may help you get a more accurate estimate for your unique situation. It might not require that much, depending on your plan.

A 2023 study found that the average person between the ages of 65 and 74 has saved a little over $600,000. Will that be enough? It depends. Working with a financial professional early in your career, developing your own personal retirement goals and consistently devoting a portion of your income to the recommended strategies in your plan can give you a better chance to reach the financial goals you have for your retirement.

Social Security May Not Suffice^[6,7]

Social Security figures to be one of the biggest sources of income for most American retirees. In fact, 40% of retirees rely on Social Security for more than half of their income, and 14% rely on it for 90% of their income or more. Sure, it’s a nice benefit, but it was never designed to be a primary source of funds in the first place. It was always a supplementary tool, originally created for the economic security of the elderly back in 1932, when the average life expectancy ranged from age 57 to 63. Now, relying on Social Security has never been more tenuous. Benefits are set to take a hit of more than 20% beginning in 2034 if no action is taken soon by Congress.

Still, action is where the problem lies. The choices appear to boil down to cutting payments for beneficiaries, raising the payroll tax rate or increasing the payroll tax increase limit. So far, all of those options have been met with opposition, presumably making benefits cuts the most likely solution. Granted, American taxpayers will always be contributing to the Social Security trust fund, meaning it’s unlikely the fund is drained completely, but it is running short, making it imperative to use other planning methods. Some of those methods can include saving more and creating more supplemental income streams to provide for your lifestyle.

Risk Runs Rampant in Retirement^[8,9,10]

Life expectancies continue to rise, which is fantastic news for anyone who plans to use their retirement years to check off bucket list items and spend time with their families. At the same time, it means spending more money, potentially for 20 years or longer. That can put you at risk of outliving your money, which is known as longevity risk. Then, even if you do save enough to provide for 20 to 30 years of a healthy retirement, you’ll start to introduce new factors that could drain your savings such as inflation, taxes, market, health care and long-term care risk.

Long-term care is one of the key factors that can quickly deplete your funds, and it’s easy to see why. On average, 70% of modern retirees will need some form of long-term care, and 20% will need it for five years or longer. Additionally, the cost for long-term care can run from $64,000 to $116,000 per year, and it’s not covered by Medicare because it’s a lifestyle expense as opposed to a medical expense.

That could mean enlisting in the help of long-term care insurance, which is historically expensive and useless for the 30% who end up not needing the care. Modern policies, however, can combine life and long-term care insurance, providing a pool of resources for long-term care if necessary and a death benefit to beneficiaries if not. But these policies aren’t right for everyone. We can help you compare your options and determine if they match your goals.

If you have any questions about how you can better prepare for retirement, give us a call today! You can reach PCIA Denver at 1800.493.6226.

Sources:

This article is not to be construed as financial advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment decisions, or any changes to your retirement or estate plans. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.

Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite #150, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management (“PCWM”) and Qualified Plan Advisors (“QPA”).

041024006 JG

2024-04-11

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