retirement

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!

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

Investing for Beginners: When, Why, and How

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Almost every financial advice resource - from your advisors, to online blogs, to your family member you only see once a year at reunions who claims they know more about money than anyone else in the family - says that in order to have stable finances and independence, you should invest your money.

Sure, it sounds like a smart thing to do. All the rich people do it, right? Why shouldn’t I?

So, you sit down at your computer, and you wonder - how do I even begin? What is a stock? How do I “match my 401k?” What about my debts?

With all these questions in your mind, it’s easy to put investing off until you think you’re ready. But we’re here to tell you - the sooner you start investing, the better off your future will be. Even if it’s small, investing should absolutely be included in your financial planning.

Here’s our quick-start guide on how to research, prepare, and begin investing:

Figure out your why, and why now.

You’ve probably heard many times with almost every smart habit to just start now. Just start exercising now. Just start eating healthy now. Quit smoking now. Start saving now. The same can be said of investing - to an extent.

If you are in a viable position where putting money into investments won’t hurt your current living situation, then start now. If you don’t have savings, or have a huge loan to pay off (such as school), or if you haven’t done your research, make sure these are done first.

Best of all - if you can figure out how to manage these aspects and put a little way to start investments, then you’re golden.

Make sure you also figure out why you want to invest, as this will help you determine what to invest in. Is your goal long-term or short-term? Are you buying a house? Are you saving for retirement? Clearly determining your why will set you up on a much more successful - and much less intimidating - investment path.

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Learn the different types of investments.

There are many different options to choose from, and investing smartly means choosing the options that are best for you. These types include:

Stocks - These are probably what you think of when you hear “investing”. A stock is a share of a company that you purchase at a price determined by the stock market (depending on market climate and how well that company is performing). As a shareholder, you have the opportunity to vote at shareholder’s meetings, as well as receive dividends (which the amount is determined based on if you hold a common stock or a preferred stock).

Bonds - These are loaned by an investor to a company in exchange for interest payments plus the bond’s face value when the bond matures. Bonds are issued by corporations, the federal government, and states and municipalities.

Mutual Funds - Managed by an investment manager, mutual funds are pools of investing money that can be used in stocks, bonds, and other types of investments simultaneously. Mutual funds are valued at the end of a market day, and can be accessed and traded after market hours as well. Distributions are made in the form of dividends, interest, and capital gains.

ETF’s - Similar to mutual funds, but are traded on stock exchange during the market day. ETF’s are valued constantly while markets are open, unlike mutual funds.

Real Estate - These are made by purchasing a property directly - residential or commercial. These investment trusts are then pooled together with the investor’s money and purchase properties, and traded like stocks. Mutual funds and ETF’s can also invest in real estate investment trusts.

Hedge Funds - Only open to those who meet income and net worth requirements, hedge funds can virtually invest anywhere and are more likely to hold up in more volatile markets.

Private Equity - Another type of investment that has income and net worth requirements. This is a way for companies to raise capital without going public.

401K - Did you know that matching your employer’s contribution to your 401k is considered an investment? If your company offers this, take advantage of it as soon as possible. While it may be hard to part with that money now, your future self will certainly thank you later.

Determine your course of action.

Now that you have a better idea of your options, it’s time to make a plan. While it is possible to plan on your own, it’s much easier to find a professional who can help you. When you meet with Milborn Advisors, you will be asked to prepare all necessary documents to see exactly how far you are on your financial journey and if you are ready to invest. We’re even able to help you set up your investing account through TD Ameritrade - you tell us what you want to invest in, and we will take care of the rest!

Investing can be scary, but it doesn’t have to be - as long as you know why you want to invest, what you can invest in, and have a strong team behind you, you can absolutely use investments to supplement your financial goals!

Contact us today for your free consultation!

What’s holding you back from investing? Let us know in the comments!


How Tracking My Budget Has Changed My Life

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By Amy Lancaster. Originally published in the October 2018 Issue of the Milborn Newsletter.

Like most people my age (I'm assuming), most of my 20's have been less about financial freedom, and more about stressing about where my next dollar was coming and going. My adult life so far has been filled with nights of staying home, dodging plans, and not getting any sleep, rather than going out, partying, and traveling. Even more so, there were no saving habits to be found. Being almost 30, I knew things had to change.

Budgeting was something I knew I had to do - and wanted to do - but it wasn't until I started working at a financial firm and seeing the ins and outs of money and investing that I became truly interested in fixing my financial situation. From only two months of keeping track of my spending, I've managed to not only finally open a savings account, but I've tucked away over $700 that I just assumed I didn't have lying around otherwise. Here are a few more things I've discovered since tracking my budget:

1. I spend way too much on eating out. Lattes, sushi specials at the market, an alcoholic beverage or two - it adds up, and quickly. I'd always defend my eating out habit with "Well, I can spend $100 a week on groceries, or I can spend $5 a meal three times a day for seven days, which comes out to be the same amount." Oh Amy, you are so naiive. I'm still struggling with this, but being able to see how much I do spend on eating out (and so far, it's been 2 for 2 on being more than groceries a month) helps me curb this habit and see that I could be putting that amount towards something way more necessary (say, a new computer. I'm tired of living this USB keyboard life since my laptop's keyboard broke).

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2. I discovered automated payments I didn't even know I had. The very first day I started tracking my spending, I noticed a $40 monthly payment for a resume website I used once. Immediately I canceled it, and thanked myself for tracking my spending, otherwise who knows how long I would have paid $40/month for something I didn't even need or use. 

3. My financial goals are more tangible. I haven't had a car since February of 2017. While I've been able to mostly get around and have had wonderful people in my life be so gracious to give me rides or loan me their car, I do miss the freedom of having my own vehicle. Now that I am tracking my budget, I can stop thinking "One day when I graduate and have a high-paying job I can finally get a car", and start putting away x amount every month and physically seeing my money grow towards that goal. That trip to Japan that I've been wanting to take for years? It doesn't seem so far fetched of an idea anymore.

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4. It makes me excited for the future. One of my biggest fears for a while now has been being a financial burden on whoever my long-term partner ends up being. It's hard to admit, but in order to fix yourself, you need to admit what your problems are, and be candid with yourself. Now that I'm with that person, the last thing I want to do is put myself in that situation. I don't need to earn more than him (let's be real, I probably won't, He's a scientist, and I will brag about that at every opportunity), but rather have us spend our money on something for both of us - a spa day, a dream trip, our future home - than have him spend money on bailing me out of a bill or loan or a debt situation. By fixing my financial situation now, I can guarantee the future will be better for us - and it makes me look forward to it in a way I never have before. 

5. I can sleep at night. If that isn't financial freedom (or at least freedom from stress), I don't know what is.