Debunking a Few Popular Retirement Myths. By John Jastremski

Certain misconceptions ignore the realities of retirement.

Generalizations about money & retirement linger. Some have been around for decades, and some new clichés have recently joined their ranks. Let’s examine a few.

“When I’m retired, I won’t really have to invest anymore.” Many people see retirement as an end instead of a beginning – a finish line for a career. In reality, retirement can be the start of a new and promising phase of life that could last a few decades. If you stop investing entirely, you can risk losing purchasing power; even moderate inflation can devalue the dollars you’ve saved.1

    

“My taxes will be lower when I retire.” You may earn less, and that could put you in a lower tax bracket. On the other hand, you may end up waving goodbye to some of the deductions and exemptions you enjoyed while working, and state and local taxes will almost certainly rise with time. So while your earned income may decrease, you may end up losing a comparatively larger percentage of it to taxes after you retire.1

“I started saving too late, I have no hope of retiring – I’ll have to work until I’m 85.” If your nest egg is less than six figures, working longer may be the best thing you can do. You will have X fewer years of retirement to plan for, so you can keep earning a salary, and your savings can compound longer. Don’t lose hope: remember that you can make larger, catch-up contributions to IRAs after 50. If you are 50 or older this year, you can put as much as $23,000 into a 401(k) plan. Some participants in 403(b) or 457(b) plans are also allowed that privilege. You can downsize and reduce debts and expenses to effectively give you more retirement money. You can also stay invested (see above).1,2

“I should help my kids with college costs before I retire.” That’s a nice thought, but you don’t have to follow through on it. Remember, there is no retiree “financial aid.” Your student can work, save or borrow to pay for the cost of college, with decades ahead to pay back any loans. You can’t go to the bank and get a “retirement loan.” Moreover, if you outlive your money your kids may end up taking you in and you will be a financial burden to them. So putting your financial needs above theirs is fair and smart as you approach retirement.

“I’ll live on less when I’m retired.” We all have the cliché in our minds of a retired couple in their seventies or eighties living modestly, hardly eating out and asking about senior discounts. In the later phase of retirement, couples often choose to live on less, sometimes out of necessity. The initial phase of retirement may be a different story. For many, the first few years of retirement mean traveling, new adventures, and “living it up” a little – all of which may mean new retirees may actually “live on more” out of the retirement gate.

“No one really retires anymore.” Well, it is true than many baby boomers will probably keep working to some degree. Some people love to work and want to work as long as they can. What if you can’t, though? What if your employer shocks you and suddenly lets you go? What if your health won’t let you work 40 hours or even 10 hours a week? You could retire more abruptly than you believe you will. This is why even workaholics need a solid retirement plan.

There is no “generic” retirement experience, and therefore, there is no one-size-fits-all retirement plan. Each individual, couple or family needs a strategy tailored to their particular money situation and life and financial objectives.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – tiaa-cref.org/public/advice-guidance/education/financial-ed/empowering_women/retirement-myths [8/29/14]

2 – 401k.fidelity.com/public/content/401k/Home/HowmuchcanIcontrib [8/29/14]

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of John Jastremski, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Merck, Pfizer, Verizon, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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Money & Taxes After Marriage by John Jastremski

Money & Taxes After Marriage

Some not-so-small matters to think about.

 

When you tie the knot, your financial lives will change. Marriage is one of those life events that can really affect your money and tax situation. If you are about to wed, here are a couple of things you’ll want to consider when it comes to taxes and household cash flow.

 

You can now elect to file jointly. Marriage allows you to file your income taxes together, and that can really benefit your financial picture. Joint filers may deduct two exemption amounts from their income, which amounts to one of the biggest standard deductions in the federal tax code. For 2014, a single filer can take a standard deduction of $6,200 but a married couple filing jointly can take one of $12,400.1

 

In addition, joint filers are eligible for key tax breaks at comparatively higher income thresholds than single filers, and filing jointly opens the door to eligibility for the American Opportunity and Lifetime Learning Credits, the Child and Dependent Care Credit, the adoption credit and the Earned Income Tax Credit.2

  

So why would any married couple file separately? Good question. In most cases, filing separately invites higher taxes for a married couple, and when marrieds forego joint filing, they become ineligible for the tuition and fees deduction, the student loan deduction and most of the deductions mentioned in the preceding paragraph.2

 

The deduction for traditional IRA contributions really shrinks if you reject joint filing status. Want an example? Look at the difference if you contribute to a traditional IRA in 2014 while covered by a retirement plan at work. Marrieds who file jointly may take a full deduction up to the amount of their contribution limit if their 2014 modified AGI is $96,000 or less. Marrieds who file separately can’t take any deduction for traditional IRA contributions once their 2014 income hits $10,000. (Only a partial deduction is available underneath that threshold.)2,3

 

In rare circumstances, filing separately may offer particular tax advantages. Take the case of a couple with a high adjusted gross income and major out-of-pocket medical expenses. Under the federal tax code, you can only deduct the amount of those costs that exceeds 10% of AGI. If the hypothetical couple has an AGI of $220,000 when filing jointly, 10% of that is $22,000. If they file separately, the 10% threshold can apply to only one of the couple’s incomes. If the afflicted person has an AGI of $40,000, the 10% threshold becomes $4,000. (One note here: until December 31, 2016, taxpayers who are age 65 and older and their spouses may deduct out-of-pocket medical care expenses that exceed 7.5% of AGI. That also applies for individuals who turn 65 during the tax year.)2

Run the numbers to see which filing status gives you the lowest taxes. That may sound arduous, but software and/or a professional tax preparer will make it less so for you. You will probably elect to file jointly, but compare the projections to inform your decision.

Your household budget will likely need adjusting. Maybe you were only budgeting for one before this; now you need to budget for two, or maybe two plus kids. If you are newlyweds without kids, you still need to watch income, debts and assets. Find a screen or a piece of paper and list your combined monthly income sources and your essential and discretionary expenses each month. Aim to save some money per month for your emergency fund, even just a little.

A conversation about how you each see money will be informative. How much should you spend each month? How should you attack debts? What accounts should you consolidate, and what legal and financial paperwork do you need to update? Will you own certain assets jointly, or individually? Beyond the budget, pursuing long-term money goals with a shared investment outlook is important. Life insurance and a will also go on your to-do list.

  

All this is relevant for blended families too, of course, and they have other concerns as well. Existing trusts and beneficiary designations may need to be modified with the marriage. College aid may be harder to come by: if a “custodial” parent goes from single to married, the stepdad or stepmom’s income goes into the FAFSA calculation. Child support from past spouses may be inadequate or absent. In late 2013, a Census Bureau report looking at the years 1994-2012 found that in cases where the child had no contact with the other parent, child support was paid less than 31% of the time. In 2011, less than 50% of eligible parents actually got 100% of the child support payments awarded to them. About a quarter of eligible parents received nothing. Blended families need to be vigilant about these possible predicaments.4,5

Set aside some time for a conversation. Turn to a financial professional for input, if you wish. When you address these issues proactively, you do yourselves a financial favor. Discussing these kinds of matters and planning for them as a couple can help “marry” your financial lives and put them on the same page.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – taxfoundation.org/article/2014-tax-brackets [11/27/13]

2 – turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Return/Should-You-and-Your-Spouse-File-Taxes-Jointly-or-Separately-/INF20137.html [8/21/14]

3 – tinyurl.com/k3omgyk [2/19/14]

4 – money.msn.com/family-money/4-money-traps-of-blended-families [2/15/13]

5 – articles.latimes.com/2013/nov/20/nation/la-na-1121-child-support-20131121 [11/20/13]

 

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, Glaxosmithkline, Hughes, Bank of America, ING Retirement, Northrop Grumman, hewitt.com, resources.hewitt.com, Merck, Pfizer, access.att.com, Verizon, Raytheon, Qwest, Chevron,  AT&T, ExxonMobil, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of John Jastremski, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

 

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6 Steps to Get Out of Debt. By John Jastremski

6 Steps to Get Out of Debt

 

Why not plan to lighten your financial burden?

 

provided by John Jastremski

Positive moves to counteract negative cash flow. The financial analysis website nerdwallet.com keeps track of the various debts common to the U.S. household. As of April 2014, they’ve found an average mortgage debt of $154,365. They have also discovered an average household has $7,087 in debt from credit cards, but when the numbers are revised to only look at American households already in debt, the average more than doubles to $15,191. When you add this to the average student loan debt of $33,607, it paints a rather bleak picture.1

Every day, people draw on money they don’t actually have – via credit cards, various loans, home equity lines of credit, and even their 401(k)s. Many of them end up making minimum payments on these high-interest loans – a sure way to stay indebted forever.

If this is your situation, you may be wondering: how do I get out of debt? Here are some ideas.

*Make a budget. “Where does all the money go?” If you are asking that question, here is where you learn the answer. You might find that you’re spending $80 a month on gourmet coffee, or $100 a week on lousy movies. Cable, eating out, buying retail – costs like these can really eat at your finances. Set a budget, and you can stop frivolous expenses and redirect the money you save to pay down debt.

*Get another job. I know, this doesn’t sound like fun. But having more money will aid you to reduce debt more quickly. A family member who isn’t working can work to help reduce a shared family problem.

 

*Sell stuff. The Internet has proven that everything is worth something. Go to eBay, craigslist or some other online marketplace – you’ll be amazed at the market (and the asking prices) for this and that. What people collect, want and buy may surprise you. Don’t be surprised if you have a few hundred dollars – or more – sitting around your house or in your garage. You might be able to pay off a couple of credit cards – or even a loan – with what you sell.

*Ditch the big car payment and drive a cheaper car that gets good MPG. You’ve likely been thinking about saying goodbye to your current car if it gets terrible mileage. Get a car that makes sense instead of a statement. Your wallet will thank you.

 

*Pay off all debts smallest to largest. The benefits are psychological as well as financial. Knock off even a small debt, and you have an accomplishment to build on – encouragement to erase bigger debts. Also, every debt you have incurs its own interest charge. One less debt means one less interest charge you have to pay.

 

*Or, pay off your highest-interest debts first. Take a minute to figure out which of your debts hits you with the highest interest rate. Pay the minimum amounts toward each of your other debts, and apply all the extra money you can toward paying off the debt with the highest interest. This will have a cumulative effect. Your highest-interest debt will become smaller, meaning you will be saving some dollars on interest charges on the balance because the balance is lower. If the balance is lower, you should be able to pay off the debt faster. When you say goodbye to that debt, you can start paying down the debt with the next highest interest, and so on.

 

Keep the real goal in mind. Building wealth, not reducing debt, should be your ultimate objective. Some debt reduction and debt consolidation planners obsess on getting you out of debt, but that is only half the story. Minimizing debt is great, but maximizing wealth is even better.

 

You can plan to build wealth and reduce debt at the same time. If you have a relationship with a financial advisor, you might be able to do it in the same unified process. Why just keep debt at bay when you can leave it behind? Do yourself a favor and talk with a good financial advisor who can show you ways toward financial freedom.

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/ [5/8/14]`

 

 

 

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of John Jastremski, and The Retirement Group or FSC Financial Corp. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Northrop Grumman, Chevron, Hughes ,Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

 

 

 

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The Right Beneficiary by John Jastremski

The Right Beneficiary

Who should inherit your IRA or 401(k)? See that they do.

Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k), life insurance policy, or savings account? You may be able to answer such a question quickly and easily. Or you may be saying, “You know… I’m not totally sure.” Whatever your answer, it is smart to periodically review your beneficiary designations.

Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Eighties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit since then – perhaps more than a bit?

While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life – and they may warrant changes in your beneficiary decisions.

In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. If you don’t have a designated beneficiary on your 401(k), the assets may go to the “default” beneficiary when you pass away, which might throw a wrench into your estate planning.

How your choices affect your loved ones. The beneficiary of your IRA, annuity, 401(k) or life insurance policy may be your spouse, your child, maybe another loved one or maybe even an institution. Naming a beneficiary helps to keep these assets out of probate when you pass away.

Beneficiary designations commonly take priority over bequests made in a will or living trust. For example, if you long ago named a son or daughter who is now estranged from you as the beneficiary of your life insurance policy, he or she is in line to receive the death benefit when you die, regardless of what your will states. Beneficiary designations allow life insurance proceeds to transfer automatically to heirs; these assets do not have go through probate.1,2

You may have even chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed, and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets? (See below.)

How your choices affect your estate. Virtually any inheritance carries a tax consequence. Of course, through careful estate planning, you can try to defer or even eliminate that consequence.

If you are simply naming your spouse as your beneficiary, the tax consequences are less thorny. Assets inherited from a spouse aren’t hit with estate tax, as long the surviving spouse who inherits them is a U.S. citizen.3

When the beneficiary isn’t your spouse, things get a little more complicated for your estate, and for your beneficiary’s estate. If you name, for example, your son or your sister as the beneficiary of your retirement plan assets, the amount of those assets will be included in the value of your taxable estate. (This might mean a higher estate tax bill for your heirs.) And the problem can persist: if your non-spouse beneficiary inherits assets from a 403(b) or a traditional IRA, for example, those assets will usually become part of his or her taxable estate, and his or her heirs might face higher estate taxes down the line. Your non-spouse heir might also have to take required income distributions from that retirement plan someday, and pay the required taxes on that income.4

If you designate a charity or other 501(c)(3) non-profit organization as a beneficiary, the assets involved can pass to the charity without being taxed, and your estate can qualify for a charitable deduction.5

Are your beneficiary designations up to date? Don’t assume. Don’t guess. Make sure your assets are set to transfer to the people or institutions you prefer. Let’s check up and make sure your beneficiary choices make sense for the future. Just give me a call or send me an e-mail – I’m happy to help you.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 Citations.

1 – individual.troweprice.com/public/Retail/Planning-&-Research/Estate-Planning/Transferring-Assets/Assets-With-Beneficiary-Designations [9/3/14]

2 – dummies.com/how-to/content/bypassing-probate-with-beneficiary-designations.html [1/30/13]

3 – nolo.com/legal-encyclopedia/estate-planning-when-you-re-married-noncitizen.html [9/3/14]

4 – individual.troweprice.com/staticFiles/Retail/Shared/PDFs/beneGuide.pdf [9/3/14]

5 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Estate-Taxes [7/3/14]

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of John Jastremski, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Bank of America, Alcatel-Lucent, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

 

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The Joys and Financial Challenges of Parenthood. By John Jastremski

Children are special. There’s nothing like them. They can be our sweetest blessing, as well as our biggest frustration. Most of all, however, they are our greatest responsibility, as well as our most important–and expensive–commitment.

Whether you are a first-time parent or a veteran of refereeing sibling squabbles and who-put-the-empty-milk-carton-back-in-the-fridge inquisitions, parenthood can be both wonderfully rewarding and frighteningly challenging. Our children give us gifts only a parent can understand–from sticky-finger hugs to heartfelt pleas to tag along on Saturday morning errands. We raise them with a clear goal that we secretly dread will actually take place–that someday they will be grown, independent, ready to move out into the world on their own, and our work will be over. As our children travel this long and never-dull road from infancy to adulthood, we nurture them, worry about them, scold them, love them. Most of all, we try to protect them. We want them to grow up in a stable world, one in which they are physically safe, emotionally nurtured, and financially secure. Still, meeting expenses can be a challenge.

How expensive is raising a child?

The United States Department of Agriculture estimates that the average nationwide cost of raising one child in a two-parent family from cradle to college entrance at age 18 ranges from $176,550 to $407,820 depending on income. (Source: Expenditures on Children by Families, 2013, released August 2014) Then, when they turn 18, add in college expenses, and your financial outlay can get even worse. How much worse? According to the College Board, for the 2014/2015 school year, the average cost of one year at a four-year public college is $23,410 (for in-state students), while the average cost for one year at a four-year private college is $46,272 (the total cost of attendance includes tuition and fees, room and board, books and supplies, transportation, and other miscellaneous costs). Even if those numbers don’t go up, that would come to $93,640 for a four-year degree at a public college, and $185,088 at a private university (and college costs have increased each year for decades). Oh, and don’t forget graduate school.

The bottom line: Children are expensive! Between raising them and educating them and making sure they get a good, strong start in life, one thing is obvious when it comes to children–they are a major responsibility. Fortunately, as long as we remain alive and healthy, we manage to somehow meet these expenses.  It’s part of what parenthood is all about.

Have you taken steps to protect them?

But here’s a question you need to consider: What would happen to them if something happened to you? No, it’s not the kind of question we like to dwell on. But these matters are important. This is why many financial professionals recommend that, above and beyond the day-to-day efforts to provide for their children, parents should take specific steps to help protect their financial well-being.

Review your life insurance coverage

Life insurance is an effective way to protect your family from the uncertainty of premature death. Life insurance can help assure that a preselected amount of money will be on hand to replace your income and help your family members–your children and your spouse–maintain their standard of living. With life insurance, you can select an amount that will help your family meet living expenses, pay the mortgage, and even provide a college fund for your children. Best of all, life insurance proceeds are generally not taxable as income. Keep in mind, though, that the cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance.

Consider purchasing disability income insurance

If you become disabled and unable to work, disability income insurance can pay benefits–a specific percentage of your income–so you can continue meeting your financial obligations until you are back on your feet. What about Social Security? If you do become permanently and totally disabled and are unable to do work of any kind, you may be eligible for benefits, but qualifying isn’t easy. For more flexible and comprehensive protection, consider buying disability income insurance.

Start building a college fund now

College costs may seem daunting (and they are expected to continue increasing), but you have about 18 years before your newborn will be a college freshman. By starting today, you can help your children become debt-free college grads. The secret is to save a little each month, take advantage of compound interest, and have a sum waiting for you when your child is ready for college.

The following chart shows how much money might be available for college when your child turns 18, if you save a certain amount each month.

Child’s Age Now $100/month $200/month $300/month $400/month
Newborn $38,735 $77,741 $116,08 $154,941
4 $26,231 $52,462 $78,693 $104,924
8 $16,388 $32,776 $49,164 $65,552
10 $12,283 $24,566 $36,849 $49,132
14 $5,410 $10,820 $16,230 $21,640
16 $2,543 $5,086 $7,629 $10,172
Table assumes an after-tax return of 6%, compounded monthly. This is a hypothetical example and is not intended to reflect the actual performance of any investment.

 

But keep saving for your own retirement, too. Many well-intentioned parents put their own retirement savings on hold while they save for their children’s college education. But if you do so, you’re potentially sacrificing your own financial well-being. Finally, enjoy watching your children grow up. And remember, just as they are important to you, you are important to them. Make sure they’re protected financially.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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Coping With College Loans. By John Jastremski

Paying them down, managing their financial impact.

Are student loans holding our economy back? Certainly America has recovered from the last recession, but this is an interesting question nonetheless.

In a November 2013 address before the Federal Reserve Bank of St. Louis, Consumer Financial Protection Bureau Assistant Director Rohit Chopra expressed that college loan debt “may prove to be one of the more painful aftershocks of the Great Recession.” In fact, outstanding education debt in America doubled from 2007 to 2013, topping $1 trillion.1

More than 60% of this debt is held by people over the age of 30 and about 15% is carried by people older than 50. The housing sector feels the strain: in a November National Association of Realtors survey, 54% of the first-time homebuyers who had difficulty saving up a down payment cited their college loan expenses as the main obstacle. The ProgressNow think tank believes that education debt siphons $6 billion of new car purchasing power out of the economy per year.2,3

As the Detroit Free Press notes, the average 2012 college graduate is burdened with $29,400 in education loans. If you carry five-figure (or greater) education debt, what do you do to pay it down faster?4

How can you overcome student loans to move forward financially? If you are young (or not so young), budgeting is key. Even if you get a second job, a promotion, or an inheritance, you won’t be able to erase any debt if your expenses consistently exceed your income. Smartphone apps and other online budget tools can help you live within your budget day to day, or even at the point of purchase for goods and services.

After that first step, you can use a few different strategies to whittle away at college loans.

*The local economy permitting, a couple can live on one salary and use the wages of the other earner to pay off the loan balance(s).

*You could use your tax refund to attack the debt.

*You can hold off on a major purchase or two. (Yes, this is a sad effect of college debt, but backhandedly it could also help you reduce it by freeing up more cash to apply to the loan.)

*You can sell something of significant value – a car or truck, a motorbike, jewelry, collectibles – and turn the cash on the debt.

Now in the big picture of your budget, you could try the “snowball method” where you focus on paying off your smallest debt first, then the next smallest, etc. on to the largest. Or, you could try the “debt ladder” tactic, where you attack the debt(s) with the highest interest rate(s) to start. That will permit you to gradually devote more and more money toward the goal of wiping out that existing student loan balance.

Even just paying more than the minimum each month on your loan will help. Making payments every two weeks rather than every month can also have a big impact.

If the lender presents you with a choice of repayment plans, weigh the one you currently use against the others; the others might be better. Signing up for automatic payments can help, too. You avoid the risk of penalty for late payment, and student loan issuers commonly reward the move: many will lower the interest rate on a loan by a quarter-point or so in thanks.5

What if you have multiple outstanding college loans? Should one of those loans have a variable interest rate (about 15% of education loans do), try addressing that debt first. Why? Think about what could happen with interest rates as this decade progresses. They are already rising.5

Also, how about combining multiple federal student loan balances into one? If you graduated college before July 1, 2006, the interest rate you’ll lock in on the single balance will be lower than that paid on each separate federal education loan.5

Maybe your boss could pay down the loan. Don’t laugh: there are college grads who manage to negotiate just such agreements. In fact, there are small and mid-sized businesses that offer them simply to be competitive today. They can’t offer a young hire what the Fortune 500 can when it comes to salary, so they pitch another perk: a lump sum that the new employee can use to reduce a college loan.5

To reduce your student debt, live within your means and use your financial creativity. It may disappear faster than you think.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – consumerfinance.gov/newsroom/student-loan-ombudsman-rohit-chopra-before-the-federal-reserve-bank-of-st-louis/ [11/18/13]

2 – forbes.com/sites/halahtouryalai/2013/06/26/backlash-student-loans-keep-borrowers-from-buying-homes-cars/ [6/26/13]

3 – realtor.org/news-releases/2013/11/home-buyers-and-sellers-survey-shows-lingering-impact-of-tight-credit [11/13]

4 – tinyurl.com/nouty3k [4/19/14]

5 – tinyurl.com/k29m48y [5/1/14]

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of John Jastremski, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, AT&T, Qwest,  ING Retirement,Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

 

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Long-Term Investment Truths. By John Jastremski

Key lessons for retirement savers.

You learn lessons as you invest in pursuit of long-run goals. Some of these lessons are conveyed and reinforced when you begin saving for retirement, and others you glean along the way.

First & foremost, you learn to shut out much of the “noise.” News outlets take the temperature of global markets five days a week (and even on the weekends), and fundamental indicators serve as barometers of the economy each month. The longer you invest, the more you learn to ride through the turbulence caused by all the breaking news alerts and short-term statistical variations. While the day trader sells or buys in reaction to immediate economic or market news, the buy-and-hold investor waits for selloffs, corrections and bear markets to pass.

You learn how much volatility you can stomach. Volatility (also known as market risk) is measured in shorthand as the standard deviation for the S&P 500. Across 1926-2014, the yearly total return for the S&P averaged 10.2%. If you want to be very casual about it, you could simply say that stocks go up about 10% a year – but that discounts some pronounced volatility. The S&P had a standard deviation of 20.2 from its mean total return in this time frame, which means that if you add or subtract 20.2 from 10.2, you get the range of the index’s yearly total return that could be expected 67% of the time. So in any given year from 1926-2014, there was a 67% chance that the yearly total return of the S&P might vary from +30.4% to -10.0%. Some investors dislike putting up with that kind of volatility, others more or less embrace it.1

You learn why liquidity matters. The older you get, the more you appreciate being able to quickly access your money. A family emergency might require you to tap into your investment accounts. An early retirement might prompt you to withdraw from retirement funds sooner than you anticipate. If you have a fair amount of your savings in illiquid investments, you have a problem – those dollars are “locked up” and you cannot access those assets without paying penalties. In a similar vein, there are some investments that are harder to sell than others.

Should you misgauge your need for liquidity, you can end up selling at the wrong time as a consequence. It hurts to let go of an investment when the expected gain is high and the P/E ratio is low.

You learn the merits of rebalancing your portfolio. To the neophyte investor, rebalancing when the market is hot may seem illogical. If your portfolio is disproportionately weighted in equities, is that a problem? It could be.

Across a sustained bull market, it is common to see your level of risk rise parallel to your return. When equities return more than other asset classes, they end up representing an increasingly large percentage of your portfolio’s total assets. Correspondingly, your cash allocation shrinks as well.

The closer you get to retirement, the less risk you will likely want to assume. Even if you are strongly committed to growth investing, approaching retirement while taking on more risk than you feel comfortable with is problematic, as is approaching retirement with an inadequate cash position. Rebalancing a portfolio restores the original asset allocation, realigning it with your long-term risk tolerance and investment strategy. It may seem counterproductive to sell “winners” and buy “losers” as an effect of rebalancing, but as you do so, remember that you are also saying goodbye to some assets that may have peaked while saying hello to others that you may be buying at the right time.

You learn not to get too attached to certain types of investments. Sometimes an investor will succumb to familiarity bias, which is the rejection of diversification for familiar investments. Why does he or she have 13% of the portfolio invested in just two Dow components? The investor just likes what those firms stand for, or has worked for them. The inherent problem is that the performance of those companies exerts a measurable influence on the overall portfolio performance.

Sometimes you see people invest heavily in sectors that include their own industry or career field. An investor works for an oil company, so he or she gets heavily into the energy sector. When energy companies go through a rough patch, that investor’s portfolio may be in for a rough ride. Correspondingly, that investor has less capacity to tolerate stock market risk than a faculty surgeon at a university hospital, a federal prosecutor, or someone else whose career field or industry will be less buffeted by the winds of economic change.

You learn to be patient. Even if you prefer a tactical asset allocation strategy over the standard buy-and-hold approach, time teaches you how quickly the markets rebound from downturns and why you should stay invested even through systemic shocks. The pursuit of your long-term financial objectives should not falter – your future and your quality of life may depend on realizing them.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088 [6/4/15]

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of John Jastremski, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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Are You Underprepared for Retirement? By John Jastremski

A university study serves as a wake-up call.

Financially speaking, how many Americans are truly on track to retire? A recently published white paper suggests that about half of us are approaching our “third acts” with faulty assumptions.

Perception differs from reality. Researchers from the University of Alabama and Ohio State University looked at the Federal Reserve’s Survey of Consumer Finances and assessed the retirement readiness of its 2,300-odd respondents. They determined that 58% of these workers (age 35-60) were saving too little for the future, with a near-majority of that 58% failing to recognize the gravity of their situation. Only 42% of households were sufficiently prepared for retirement, but 46% of households believed they were.1,2   

The researchers discovered two other interesting disconnects. One, a slight majority of those who were saving adequately for retirement believed they were not saving enough. Two, the insufficiently prepared workers who were in line to receive old-school pensions were more likely to have flawed assumptions about their retirement readiness than workers without future pensions.1

Just how much money do you really need for retirement? The answer to that question varies per household, but many households could stand to save more. One old rule of thumb says you should save the equivalent of 12 times your end salary for a comfortable retirement. If you retire earning $150,000 a year, that means $1.8 million.3

Very few IRAs or workplace retirement plan accounts contain that much – so if your retirement nest egg needs to be that large, other sources of funding for your retirement probably need to emerge.

A household with either or both spouses earning $150,000 may have those resources. A middle class household may need to dedicate 10% or more of its income to retirement savings accounts.

Saving 5% of your salary for retirement probably means saving too little. Take the case of someone who starts saving for retirement at age 30 while earning $40,000. Hypothetically, assume that this person gets a 3.8% raise annually (which may be optimistic) and gets a consistent 6% yield from his or her retirement accounts (this is a hypothetical example). What if this person works until full retirement age (67)? In 2052, 37 years from now, this worker will have, under these conditions, a retirement nest egg of $423,754. Not bad, but not fantastic.3

Another old rule of thumb says living comfortably in retirement requires 85% of your end salary. A nest egg of $423,754 is clearly too small to provide that for most of us, even with income withdrawn from it supplemented by Social Security payments.3

If you save and invest ably over 30 or 40 years, you might end up a millionaire with the help of strong yields and compounding. You may need to be a millionaire to retire.

What if interruptions mar your retirement savings effort? They may mar it, but they should never halt it. Divorce, medical issues, prolonged joblessness – these and other events may impede your progress toward your savings goals, but the effort to save must still be made as you want time on your side.

If you are able to anticipate such an interruption, there are ways to plan to possibly make up the slack. You could explore investing more aggressively during that time period – but you invite greater market risk. You could cut back on household expenses (or inessential expenses) to free up more money to sustain your pace of retirement saving. Or, you could determine potential strategies far ahead of such disruptions by sitting down with a financial professional to run some scenarios (laid off at 60, taking three years out of the workforce at age 35 or 40 to be a stay-at-home mom or dad, and so forth).

You should strive to be financially prepared for your retirement, and for the unexpected life events or financial surprises that may occur before it arrives.

Citations.

1 – time.com/money/3764455/retirement-readiness/ [4/1/15]

2 – plansponsor.com/Who-Has-a-Realistic-View-of-Retirement-Readiness/ [2/20/15]

3 – investopedia.com/articles/professionals/011215/retirement-savings-how-much-enough.asp [1/12/15]

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Merck, Pfizer, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of John Jastremski, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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Lump Sum vs. Dollar Cost Averaging: Which Is Better? By John Jastremski

Some people go swimming by diving into the pool; others prefer to edge into the water gradually, especially if the water’s cold. A decision about putting money into an investment can be somewhat similar. Is it best to invest your money all at once, putting a lump sum into something you believe will do well? Or should you invest smaller amounts regularly over time to try to minimize the risk that you might invest at precisely the wrong moment? Periodic investing and lump-sum investing both have their advocates. Understanding the merits and drawbacks of each can help you make a more informed decision.

What is dollar cost averaging?

Periodic investing is the process of making regular investments on an ongoing basis (for example, buying 100 shares of stock each month for a year). Dollar cost averaging is one of the most common forms of periodic investing. It involves continuous investment of the same dollar amount into a security at predetermined intervals–usually monthly, quarterly, or annually–regardless of the investment’s fluctuating price levels.

Because you’re investing the same amount of money each time when you dollar cost average, you’re automatically buying more shares of a security when its share price is low, and fewer shares when its price is high. Over time, this strategy can provide an average cost per share that’s lower than the average market price (though it can’t guarantee a profit or protect against a loss in a declining market).

The accompanying graph illustrates how share price fluctuations can yield a lower average cost per share through dollar cost averaging. In this hypothetical example, ABC Company’s stock price is $30 a share in January, $10 a share in February, $20 a share in March, $15 a share in April, and $25 a share in May. If you invest $300 a month for 5 months, the number of shares you would buy each month would range from 10 shares when the price is at a peak of $30 to 30 shares when the price is only $10. The average market price is $20 a share ($30+$10+$20+$15+$25 = $100 divided by 5 = $20). However, because your $300 bought more shares at the lower share prices, the average purchase price is $17.24 ($300 x 5 months = $1,500 invested divided by 87 shares purchased = $17.24).

The merits of dollar cost averaging

In addition to potentially lowering the average cost per share, investing a predetermined amount regularly automates your decision-making, and can help take emotion out of your investment decisions.

And if your goal is to buy low and sell high, as it should be, dollar cost averaging brings some discipline to that process. Though it can’t help you know when to sell, this strategy can help you pursue the “buy low” portion of the equation.

Also, many people don’t have a lump sum to invest all at once; any investments come out of their income stream–for example, as contributions to their workplace retirement savings account. In such cases, dollar cost averaging may not only be an easy strategy; it may be the most realistic option.

The case for investing a lump sum

Maybe you’re considering rolling over an IRA or have just received a pension payout. Perhaps you’ve inherited a large amount of money, or the mail-order sweepstakes’ prize patrol has finally shown up at your door. You might be thinking about the best way to shift your asset allocation or how to invest the proceeds of a certificate of deposit. Or maybe you’ve been parking some money in cash alternatives and now want to invest it.

In cases like these, you may want to at least investigate the merits of lump-sum investing. Several academic studies have compared dollar cost averaging to lump-sum investing and concluded that, because markets have risen over the long term in the past, investing in the market today tends to be better than waiting until tomorrow, since you have a longer opportunity to benefit from any increase in prices over time.

For example, a 2009 study by the Association of Investment Companies found that an investor who put a lump sum into the average British investment company at the end of April 2008 (talk about bad timing!) would have been down 30% one year later. Someone who invested the same total amount divided over 12 months would have been down only 7%. However, when the study examined the previous 5 years rather than a single year, the lump-sum investment made in April 2004 would have been up 26% by April 2009, compared to the periodic investment strategy’s loss of 10% over the same time. Several U.S. studies over several decades reviewed overall stock market performance and reached a similar conclusion: the longer your time frame, the greater the odds that a lump-sum investment will outperform dollar cost averaging.

Caution: Past performance is no guarantee of future results.

Considerations about dollar cost averaging

• Think about whether you’ll be able to continue your investing program during a down market. The return and principal value of stocks fluctuate with changes in market conditions. If you stop when prices are low, you’ll lose much of the benefit of dollar cost averaging. Consider both your financial and emotional ability to continue making purchases through periods of low and high price levels. Plan ahead for how you’ll manage the temptation to stop investing when the chips are down, and remember that shares may be worth more or less than their original cost when you sell them.

• The cost benefits of dollar cost averaging tend to diminish a bit over very long periods of time, because time alone also can help average out the market’s ups and downs.

• Don’t forget to consider the cost of transaction fees, which can mount up over time with periodic investing.

Considerations about investing a lump sum

• The lump-sum studies reflect the long-term historical direction of the stock market since record-keeping began in 1925. That doesn’t mean the markets will behave in the future as they have in the past, or that there won’t be extended periods in which stock prices don’t rise. Even if they do move up, they may not do so immediately and forever once you invest.

• Even if you don’t have a large lump sum to invest now, you may be able to save smaller amounts and invest the total in a lump sum later. However, many people simply aren’t disciplined enough to keep their hands off that money. Unless the money is invested automatically, you may be more tempted to spend your savings rather than investing them, or skip a month–or two or three.

• Even seasoned investors have difficulty timing the market, so ignoring fluctuations and continuing to invest regularly may still be an improvement over postponing a decision indefinitely while you wait for the “right time” to invest.

• Don’t forget that though diversification alone can’t guarantee a profit or prevent the possibility of loss, a lump sum invested in a single security generally involves more risk than a lump sum put into a diversified portfolio, regardless of your time frame.

In the end, deciding between lump-sum investing and dollar cost averaging illustrates the classic risk-reward tradeoff that all investments entail. Even if you’re convinced a lump-sum investment might produce a higher net return over time, are you comfortable with the uncertainty and level of risk involved? Or are you increasing the odds that you won’t be able to handle short-term losses–especially if they occur shortly after you invest your lump sum–and sell at the wrong time?

It’s important to know yourself and your limitations as an investor. Understanding the pros and cons of each approach can help you make the decision that best suits your personality and circumstances.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Verizon, Bank of America, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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The Tax Benefits of Your Retirement Savings Plan. By John Jastremski

Taxes can take a big bite out of your total investment returns, so it’s encouraging to know that your employer-sponsored retirement savings plan may offer a variety of tax benefits. Depending on the type of plan your employer offers, you may be able to benefit from current tax savings; tax deferral on any investment returns you earn on the road to retirement; and possibly even tax-free income in retirement.

Lower your taxes now

When you contribute to a traditional retirement savings plan, such as a 401(k) or 403(b), your plan contributions are deducted from your pay before income taxes are assessed. These “pretax contributions” reduce your current taxable income, which in turn reduces the amount of income tax you pay to Uncle Sam each year that you participate. Consider the following example, which compares two different employees.

Example: Let’s assume Employee 1 gets paid every two weeks, with gross pay of $2,000 and a 25% federal tax rate. In this case, Employee 1 would pay about $500 in taxes each pay period. Now let’s assume Employee 2, who earns the same gross pay and has the same tax rate, contributes 6% of his salary each year to a retirement savings plan. In this instance, his gross pay would be reduced by $120 each pay period, resulting in a taxable income of $1,880. In this case, taxes would be $470–or $30 less than the previous scenario. So Employee 2 would have invested $120 in a retirement savings plan and saved $30 in current income taxes.

  Employee 1 Employee 2
Biweekly Pay $2,000 $2,000
Plan Contribution $0 $120
Taxable Pay $2,000 $1,800
Taxes Paid $500 $470

 

Amount invested: $120

Immediate Tax Savings: $30

Keep in mind that this example is hypothetical and has been simplified for illustrative purposes only. Your actual situation will differ. Withdrawals would be taxed at then-current rates. Early withdrawals prior to age 59½ will be subject to a 10% penalty tax, unless an exception applies.

Tax-deferred growth potential

Tax deferral is the process of delaying (but not necessarily eliminating) the payment of income taxes on returns you earn. Whereas in taxable investment accounts, you would have to pay taxes on your earnings–even if you reinvest them–in a tax-deferred account, you can delay paying taxes on your returns until you withdraw money. For example, the money you put into your employer-sponsored retirement account isn’t taxed until you withdraw it, which might be 30 or 40 years down the road!

Tax deferral can be beneficial because:

• The money you would have spent on taxes remains invested

• You may be in a lower tax bracket when you make withdrawals from your accounts (for example, when you’re retired), and

• You can potentially accumulate more dollars in your accounts due to compounding

Compounding means that your earnings become part of your investment dollars, and they in turn can potentially earn returns. In the early years of an investment, the benefit of compounding may not be that significant. But as the years go by, the long-term boost to your total return can be dramatic. Keep in mind that returns cannot be guaranteed. Your investments will fluctuate through the years. Also, withdrawals prior to age 59½ will be subject to a 10% penalty tax in addition to regular income taxes unless an exception applies.

Tax-free income in retirement

Tax deferred is not the same as tax free. “Tax free” means that no income taxes are due at all. Some employer-sponsored savings plans, like Roth 401(k)s, Roth 403(b)s, and Roth 457s, can generate tax-free income during retirement. When you contribute to a Roth account, you don’t receive a current tax benefit like you would with a traditional pretax savings account, but your earnings can still grow without having to pay taxes on them each year. Then, qualified withdrawals are tax free. (Nonqualified withdrawals are subject to regular income and penalty taxes.) In general, a withdrawal from a Roth account is qualified if it satisfies both of the following requirements:

• It’s made after the end of a five-year waiting period

• The payment is made after you turn 59½, become disabled, or die

Taxes make a big difference

Let’s assume two people have $5,000 to invest every year for a period of 30 years. One person invests in a tax-free account like a Roth 401(k) that earns 6% per year, and the other person invests in a taxable account (an investment account outside his or her retirement plan) that also earns 6% each year. Assuming a tax rate of 28%, in 30 years the tax-free account will be worth $395,291, while the taxable account will be worth $295,896. That’s a difference of $99,395.

This hypothetical example is for illustrative purposes only, and its results are not representative of any specific investment or mix of investments. Actual results will vary. The taxable account balance assumes that earnings are taxed as ordinary income and does not reflect possible lower maximum tax rates on capital gains and dividends, as well as the tax treatment of investment losses, which would make the taxable investment return more favorable, thereby reducing the difference in performance between the accounts shown. Investment fees and expenses have not been deducted. If they had been, the results would have been lower. You should consider your personal investment horizon and income tax brackets, both current and anticipated, when making an investment decision as these may further impact the results of the comparison. This illustration assumes a fixed annual rate of return; the rate of return on your actual investment portfolio will be different, and will vary over time, according to actual market performance. This is particularly true for long-term investments. It is important to note that investments offering the potential for higher rates of return also involve a higher degree of risk to principal.

How much can I contribute?

Individuals can contribute up to $18,000 (in 2015 and 2016) to a 401(k), 403(b), or 457 plan. The limit increases to $24,000 (in 2015 and 2016) for those age 50 or older.

If your plan offers a Roth option, you can split your contributions between the traditional and Roth plans, but the total amount cannot exceed these limits. Be sure to check your plan’s documents as some plans may impose lower limits.

Even if you cannot contribute the maximum amount, be sure to contribute what you can. Through the power of compounding, even small amounts have the potential to add up over time. Then, try to increase your contribution whenever possible–for example, as you receive raises or pay off debts.

A word about employer contributions

Your employer may also contribute to your plan account through matching or profit-sharing contributions. These contributions also benefit from tax deferral. In other words, you do not have to pay taxes on employer contributions or their earnings until you withdraw them. If your employer offers a matching contribution, try to contribute enough to receive the full amount. Employer matches are free money so try to take full advantage of them!

Bottom line

Though tax considerations shouldn’t be your only concern when investing for retirement, it’s a plus to know that participating in your employer-sponsored plan can help you keep more money in your own pocket and put less in Uncle Sam’s.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, Hughes, Northrop Grumman, ING Retirement, AT&T, Qwest, Chevron, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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