personal finance

Roth or Traditional: Which IRA is right for you?

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There are many options when it comes to how to save for retirement, with one of the most popular being an Individual Retirement Account (or an IRA). With two different types leading the pack, it can be hard to determine which type of IRA you should go for. Here, we break down the differences between a traditional and a Roth IRA, as well as their advantages and disadvantages so you can determine which type is right for you.

What is a Traditional IRA?
A traditional IRA (individual retirement account) allows individuals to direct pre-tax income toward investments that can grow tax-deferred. The IRS assesses no capital gains or dividend income taxes until the beneficiary makes a withdrawal. Individual taxpayers can contribute 100 % of any earned compensation up to a specified maximum dollar amount. Income thresholds may also apply. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status and other factors.” - Investopedia

Pros

  • Tax deductions are made with pre-tax dollars

  • Flexible contribution restrictions

  • Extended contribution timeline per year (15.5 months instead of 12)

Cons

  • Required minimum distributions

  • Employer plans can interfere with tax-deductible contributions

  • Restrictions on investments

  • There are penalties for early withdrawal

What is a Roth IRA?
Roth IRAs are funded with after-tax dollars; the contributions are not tax deductible—although you may be able to take a Saver's Tax Credit of 10% to 50% of the contribution, depending on your income and life situation. But once you start withdrawing funds, qualified distributions (see below) are tax-free.” - Investopedia

Pros

  • Savings grow tax-free

  • There are no required minimum distributions

  • There is no penalty for withdrawing contributions

  • With right distribution management, you can diversify your taxes in retirement

Cons

  • Taxes are paid upfront, rather than when you withdraw

  • The maximum contribution is low - only $6,000/year

  • You have to keep track of your account and set it up yourself

  • You can only open a Roth IRA if you meet the income limit requirements

Is one better than the other?

Not necessarily - the biggest difference between the two is how the contributions are taxed, so, depending on your situation, this will be the biggest factor in your decision. Your income will also help - if you make too much to contribute to a Roth IRA, then the decision’s been made for you.

Typically, people will opt for a Roth IRA if they can, mainly because of the lack of restrictions for withdrawals and during retirement. Also, while you may be getting an immediate benefit of tax breaks now when you contribute to a traditional IRA, you’ll have to deal with that when you retire. In the end, it’s up to you to decide which IRA is best for your situation.

Which type of IRA do you contribute to? Do you think one is better than the other? Let us know in the comments!

Curated - June 2019

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Here are some of our favorite financial reads and Internet finds we came across from last month!

Remove temptation and the ability to act on it from your life as much as possible.
— Trent Hamm

My Biggest Retirement Fear | Can I Retire Yet? | We have many fears that creep up as we get closer to retirement. Darrow Kirkpatrick does an excellent job in breaking each of them down, along with what you can do to ease your worries.

12 Enemies of Good Spending Habits | The Simple Dollar | Does your budget suffer due to these temptations? Here’s how you can combat them.

How to Create a Budget-Friendly Spread for Fourth of July | Mint Life | Holidays and celebrations can get expensive, but they don’t have to be! Here’s how to save and still have fun.

Some Advice for New Investors | A Wealth of Common Sense | Don’t let investing scare you! Here are some tips on how to set yourself up for success.

When You Earn Extra Money, Don’t Save It All | Life Hacker | When was the last time you took a vacation?

ICYMI: How Much Should You Save in Your Emergency Fund? We’ve come up with some guidelines for you to evaluate your situation and figure out just how much you should have saved in your emergency fund before taking the next steps towards financial freedom. Check them out!

How to do a Semi-Annual Financial Check-In

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When a new year begins, it’s very easy to get excited about resolutions and goals. While this may be good for your finances at first, eventually life can and will get in the way. That’s why it’s always a good idea to do a 6-month check in with any of your goals, be they financial or otherwise.

Today, we’ll help guide you through your semi-annual financial check-in to make sure you’re still on track, or to get you back on track.

Gather up all your accounts and statements

First, you’ll want to make sure you have all your ducks in a row by getting all your financial account statements. This includes your bank statements, credit card statements, investment statements, any debts or loan repayments you’re doing, real estate/mortgage, and anything else you can think of that falls into this category. You could also include your credit score statements, but just be careful you aren’t checking these scores too often in one year, as this can affect your score.

Having all the documents laid out will make sure that, when you evaluate them, you aren’t forgetting anything. Make a check-list if you want to be extra-organized!

Re-evaluate your goals

A lot of the time, people will feel as though they are trapped in their goals and have to see them through before making a new one. This doesn’t have to be the case! Sometimes our values or expectations change, which means that our goals will also change. Don’t be afraid to admit if your goal doesn’t align with your beliefs or lifestyle anymore, and change it accordingly.

If your goal is still relevant to you, however, take a look at what steps you’ve accomplished so far, and take time to congratulate yourself. Even if you aren’t quite where you want to be yet, acknowledging that you’ve made progress at all is a great way to keep yourself motivated.

Write down your action plan for the next six months

It’s one thing to think about what your next steps are going to be - it’s another thing entirely to write them down. According to a study at the Dominican University of California, you’re at least 42% more likely to achieve your goals if you write them down and revisit them consistently.

By taking your plan and writing it down step-by-step, you’ll set a clear path for yourself to make sure you will reach your financial goals, and you will also be able to know when you complete certain steps!

Do a quick check-in every month to stay on track

When it comes to my finances, I check my statements every single day to make sure I haven’t missed anything and that I’m on the right track. You don’t have to be as crazy as I am, but make sure you check in with your progress at the very least once a month. Once a week may be even better! That way, you can figure out immediately what has worked, what hasn’t, and change your plan accordingly.

Goals, especially financial ones, can be daunting if you don’t have a path or you’re unsure what to do. Follow these steps, however, and you’re much more likely to be successful!

What are some of your financial goals for the next six months? Have any of your goals changed from January? Let us know in the comments!

Curated - May 2019

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Here are some of our favorite financial reads and Internet finds we came across from last month!

I didn’t really understand what it meant to have a relationship with money until I hit my 20s. It was ingrained in me that to have money meant you were either inherently shrewd or corrupt. So we ignore our behaviors, thoughts, and beliefs about money until the damage is done.
— Jackie Lam

If you think financial advisors are a waste, here are six reasons why they aren’t | Rockstar Finance | Not that you need us to convince you, of course.

A Loan Won’t Solve Your Money Woes If You Don’t Fix These 10 Issues First | The Simple Dollar | Make sure you reevaluate your money habits before considering taking out a loan. The Simple Dollar gives great examples as to why.

What I Wish I Knew About Money Throughout the Years | Mint Life | How old were you when you learned these lessons?

Retirement Surprises: What I Wish I Knew About Retirement BEFORE I Retired | New Retirement | The sooner you learn these tips, the better your retirement will be! And - if you’re already retired, consider incorporating these into your life!

3 Fund Portfolio: The Lazy Investing Strategy That Crushes the Pros | My Money Wizard | An interesting take on how to construct your investing portfolio, and why it works.

An ETF That Pays You to Invest is Probably Not a Good Idea | Two Cents | But it does sound oh-so-tempting, right? Here’s why you shouldn’t go for it.

Investments for Beginners | Nerd Wallet | Here’s a list of 6 investments to help you get started on your investing journey.

Tips to Prepare for Retirement Success | The Balance | You can never be too prepared for your retirement!

How to Discuss Finances Before Tying the Knot | Milborn Advisors | Follow these tips to include this discussion in your wedding planning.

Keep up with us on social media, where we share content like this regularly:

How Much Should You Save In Your Emergency Fund?

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You’ve most likely heard many variations of answers when it comes to the question of “How much should I have in my emergency fund?” From $1,000, to six months of expenses, up to a year, and anywhere in between. These answers vary from person to person, so it’s hard to know which amount will be right for you.

We’ve come up with some guidelines for you to evaluate your situation and figure out just how much you should have saved in your emergency fund before taking the next steps towards financial freedom. Check them out below!

What is your living/family situation like?

The first thing you’ll need to consider is how many people you’ll need to support should you have to rely on your emergency fund for a while. If it’s just you, obviously you’ll need less than someone who is married with three children, or who has their elderly parent living with them. Keep in mind that the more people you have to support, the less your emergency fund money will be spent on you directly.

How do you pay for your living arrangements?

Do you have a mortgage? Do you rent an apartment? How long do you want to be able to make payments before going to work again, should you lose your job or have medical leave or maternity/paternity leave? Are you paying for it all yourself, or are you splitting payments with someone?

Do you own a vehicle?

If you car is your primary source of transportation with no options of biking, walking, or public transportation, you need to take that into account when building your fund. If your car breaks down, you have to be able to fix it as soon as possible so you can continue to go to work.

How much do you spend each month on bills?

Similar to how you assess your living payments, figure out how much you pay monthly on bills. Are there any bills you could negotiate to a lower monthly rate? Are there any recurring subscriptions that you could cancel (whether you’re even aware of them or not)? Do you split costs with anyone? Knowing how much goes out each month will help you figure out how much you can put into savings each month, and how much you’ll need to live three-to-six months without worrying about extra income should the situation arise.

How much do you spend on extra expenses (non-necessary)?

Ah, here come the worst part. We all have to have our vices now and again, but how often do you indulge? Those daily coffee runs can add up, so see where you can cut back. After that, figure out how much this monthly cost is, and figure out if you’ll be able to spend that much after you put away your monthly savings contribution.

Do you have savings already?

Perhaps you have some money tucked away already, but you aren’t quite sure what to do with it. Figuring out a goal for your emergency fund helps give those dollars just floating into accounts a job to do. Plus - you’ll have a cushion already, and you’ll be that much closer to hitting your goal and taking your next financial steps.

Do you use healthcare frequently?

How often you need to visit the doctor and dentist will drastically affect your emergency fund. Make sure you have enough saved to cover any co-pays, medication, and hospital visits should an emergency arise.

Do you have debt to pay off?

If you do, hopefully you’re already making monthly payments. Make sure to figure out how much you can pay if you need to rely on your emergency fund to cover costs. That being said, don’t dip into your emergency fund to pay for debt if you don’t have to. Ideally, this account should be used for last-minute emergencies that may come.

Do you expect a major financial crisis to occur in the next year?

Obviously, it’s hard to predict financial crises, but if you feel as though you may have to make a big payment (for example, you have a feeling your car will break down for good and you need solid transportation), it’s good to trust that intuition and budget accordingly. Hope for the best, but expect the worst (or at least, prepare yourself for it).

What number are you comfortable with?

All in all, it really depends on what number you feel you’ll be comfortable living off of for an extended period of time. Ideally. you won’t need to use your emergency fund hardly ever, but it’s good to have a solid number and time frame should you end up in that situation.

Still not sure how much you should save? Contact us for a free consultation, and we’ll be able to tell you exactly what you should do!

Overlooked Aspects of Planning for Retirement

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If there’s one thing we all have in common in personal finance, it’s that the finish line is retirement. Most of us are working our entire young lives to make sure we are financially comfortable and secure in our 60’s and beyond (or earlier, if you’re strategic!).

It is, however, easy to let some aspects slip into the cracks. Here are some key pieces of retirement that we noticed tend to get overlooked, and how you can get started on including them in your financial retirement plan.

Having enough life insurance coverage

As we get older, unfortunately the reality of death gets closer. It’s understandable as to why people are more likely to overlook this step, but it has to be considered and planned for - what will happen to the finances when one spouse passes away?

“Here are some crucial facts to consider:

  • The surviving spouse will receive the greater of the two social security amounts — which is about a 30 percent loss of income.

  • The surviving spouse will typically receive only 50 percent of their spouse’s pension (if they have one).

  • Most group life insurance either reduces greatly or entirely upon retirement.

  • There is a strong probability that one of the two spouses will live into their 90s and an early death could leave a surviving spouse 20-30 years to live with these reduced incomes.

  • Term insurance will eventually become cost prohibitive or terminate in coverage as the spouse ages.

  • Health care costs and taxes will go up — the longer the surviving spouse is alive, these costs can impinge on budgets” (Marlowe 2018).

Luckily, retirement planning is our specialty. Whether you’re retiring in 30 years, or next week, we can help you go over everything and make sure you’re ticking all the boxes to guarantee you and your spouse have a stress-free, bountiful retirement.

The home you will retire to

Are you planning on staying where you currently live? Will you be moving into a senior center? Are you going to finally flock to that vacation home permanently? No matter where you end up living, you need to make sure the home is adjusted to your needs as you continue to age. Mobility must be considered, along with the labor financial and time costs to maintain the house.

Will you be living close to your family, or moving to another country? Make sure that, where ever you move or live, you have enough access to people who can help and support you. Be candid about potential assistance needs with your spouse, and decide from there the proximity.

Having a withdrawal plan

We tend to focus so much on how we’re saving for retirement that we forget to set up a plan for how we will take out that money once we get there. There are many different strategies you can research, but general rules of thumb are to not forget about the taxes, always revisit and revise your plan, include all streams of income, try to pay off debt before retiring, and plan with the idea that the amount you withdraw every year will be different.

What aspects of retirement planning have you overlooked? Do you feel your retirement plan is air-tight, or do you need a second opinion? Contact us today and we will be happy to look over your plans and finances!

References

Coombes, Andrea (31st October, 2018). “Retirement Withdrawal Strategies: Which Should You Use?” NerdWallet. Retrieved from https://www.nerdwallet.com/blog/investing/retirement-withdrawal-strategies-which-should-you-use/

Marlowe, Robert (1st December, 2018). “The Most Overlooked Aspect of Retirement Planning.” Knights of Columbus. Retrieved from https://www.kofc.org/en/news/insurance/overlooked-aspect-of-retirement-planning.html

Wroblewska, Anna B. (9th February, 2015). “The Most Overlooked Aspect of Retirement Planning.” Motley Fool. Retrieved from https://www.fool.com/retirement/general/2015/02/09/the-most-overlooked-aspect-of-retirement-planning.aspx

Hey, Mom - Here's How to Start Focusing on Your Personal Finances

Moms have a ton of responsibilities – so much so, that we recognize their hard work every year on Mother’s Day! If you’re a mom who wants to focus on improving your finances, but you just can’t seem to find the time outside of your responsibilities and your schedule, here are some tips that we hope can help you make your personal financing a little bit easier.

1.      Prep your day before everyone else’s

First thing in the morning – before the kids are awake, before your husband rises, even before the pets escape their snooze – set time aside to put your day together. This is probably a step you forego quite often; it’s time to kick that habit and replace it with a new, better one.

Make yourself a cup of coffee or tea, sit down, and take time to organize your day – schedule a time to look at your finances. If you’re not a particularly early riser (which, as a mom, is hard to believe honestly), do this the night before, right before bed.

That way, when you’re chasing the kids around to get ready for school, you’ll feel that much more put together yourself!

2.      Actually do the financial check-in you scheduled

Now that the financial check-in is on your calendar, make sure you actually do it (and don’t you dare do it during your lunch – that is your downtime!). Give it priority and your full attention. Truthfully, once you get into the habit of this, it most likely won’t take you more than 10 minutes a day.

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3.      Nurture your finance’s growth

Like you would with your own children, give your finances the best options for its growth. Use a high-yield savings account. Research what type of IRA is right for you. Make sure you’re making the most out of your 401K contributions. The more you put in the legwork at the start, the more your finances will give back to you in the future!

4.      Have an incentive

If you have trouble justifying savings, or not spending all your money on your kids all the time, make a goal for yourself. It could be small, like a spa day, or larger, like a vacation for the family. Make sure you’re also putting away money for your children’s future – be it college, helping them be secure while job-searching, a wedding, or any other need that you want to help with. These are all great incentives to encourage a little more saving.

From all of us at Milborn Advisors, we hope you have a wonderful Mother’s Day!

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