Portfolio Management Archives | Page 21 of 22

4 Reasons to Introduce Your Children to Your Financial Planner

It’s safe to say that anyone who spends a lifetime building wealth wants to ensure that it’s managed well for generations to come, to have a plan in place not only for the next generation, but for the ones that follow as well.

For families with adult children – especially those who are transitioning into a new life phase, such as graduating, beginning careers or even starting families of their own – it’s important to plant the seeds of financial planning early.

“We have clients we’ve worked with since the mid-1990s, when the kids were tweens,” said Scott Cohen, CD Wealth Management’s principal, founder and CEO. “As the kids became adults, the parents brought them in and passed on a gift to work with our firm. These former kids now work independently with us and with their own nuclear families.

“It’s really special because now the third generation is growing up, and they know who we are, too.”

If you’re contemplating the best way to help a young adult in your family get started on financial planning, consider these arguments for doing so:

1. Starting early gives you an advantage: The earlier you start planning, Cohen says, the higher the likelihood of success.

“Take two 22-year-olds – one who maxes out his 401(k) for 40 years and one who waits,” he said. “The one who waits never catches up. Getting an early start gives you an advantage no matter what kinds of recessions come and go.”

2. Sharing a plan makes transitions easier: When an entire family uses the same financial planner, it’s easier to move through the seasons of life together.

“As the older generation starts to age, you want an easier transition where everyone knows what the plan is for all of the assets,” Cohen said. “Kids have to grow up fast sometimes, and picking up the pieces without knowing what to do ahead of time is not a pretty picture.”

3. It’s good to have everything in one place: Think of your financial planner as a hub for all records, account access and measurements against goals – and during times of transition, there will be less upheaval.

“When we work with multiple generations of a family, we manage the transparency so people know what they need to know when it’s appropriate,” Cohen said. “There is usually no need for the youngest generation to have the whole picture, for example, until they’re more mature.

“The key is to have a plan, and it’s our job to carry that plan out.”

4. You will need a neutral party to help you: The best financial planners are experts at dealing with human emptions and the psychology of money, and their focus is on making the right choices from an objective point of view.

“We didn’t earn your money, so we don’t feel the same way you do about it,” Cohen said. “We can act in a way that is not clouded by emotion. Sometimes, people have a hard time making investment decisions on their own.

“We always tailor our approach to each person with logic, objectivity and reason.”

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This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management.

Municipal bonds are moving; here’s what you should know

The past 60 days have seen an unprecedented move in the tax-free, municipal bond markets. In late March, we saw the municipal bond market* and tax-free bonds yielding 4 to 5 times higher than a 10-year U.S. Treasury bond. So, why the dislocation, what caused the panic and what are we doing to take advantage of this opportunity?

Historically bonds, or fixed income, provide solid diversification from equities. As investors age, often they shift additional dollars to bonds for capital preservation as well as income. We call it “sleep at night money” in the municipal bond market. Investments, that while are not guaranteed, provide much lower risk and allow the investor peace of mind. However, the last 60 days have not quite followed this playbook.

In March, as the COVID-19 pandemic took hold on the financial markets, we saw panic set in the bond markets as well. Selling pressures from investors liquidating their bond funds and ETFs cause historic levels of redemptions. Investors were selling bonds at any cost to have cash. Unfortunately, the bond market does not work the exact same way as the stock market. There are thousands of bonds in the market, many from the same issuer, with different maturities, and some more liquid than others. When a bond investor goes to sell a bond, the price received depends on the buyer on the other side and what they are willing to pay.

If you are not paying attention and just want to sell, a bond may be priced at $95 or $100 on your statement, but you may only get 60 or 70 cents on the dollar if there is no demand to buy your bonds.

This is what we saw in March. Panic selling by bond investors and the result was poor pricing and trade execution for those sellers, resulting in rock-bottom prices to virtually anyone willing to buy. We realize that there is more headline risk right now in the bond market, as Mitch McConnell recently suggested bankruptcy was a route for financially strapped states to consider.

Fortunately, the Federal Reserve took serious action to help settle the stock and bond markets through both The Coronavirus Aid, Relief and Economic Security (CARES) Act as well as reopening the Money Market Liquidity Facility. The CARES Act authorized the U.S. Treasury to direct $150 billion to state, local, tribal and territorial governments to cover necessary expenditures incurred due to the pandemic not covered in their budgets. The legislation also provides liquidity benefits by authorizing $454 billion of direct loans and loan guarantees from the Treasury to corporations and municipalities. They are also considering direct bond purchases in the primary and secondary markets. Since these actions, we have seen the fixed income markets settle down, however, prices are still not back to pre-pandemic levels and we are now receiving questions from our clients on our thoughts on the municipal markets and the risk that exists today.

Many bonds that we purchase are tied to infrastructure, like utilities, school districts, toll roads.

We believe that while the economic shock of the coronavirus is severe, the investment grade municipal bond market still provides a safe haven to individual investors. There are a number of factors that should help municipal bonds survive this economic downturn:

1. The economy is reopening.

2. Municipal bonds tend to finance long term projects.

3. Municipalities have the ability to raise taxes as well as tap into reserves to overcome shortfalls.

4. Many bonds that we purchase are tied to infrastructure, like utilities, school districts, toll roads.

5. Municipalities have the flexibility to adjust budgets quickly through reduced costs as well as the ability to furlough employees.

6. The CARES Act provides additional resources to municipalities to purchase bonds as well as additional borrowing capabilities.

7. Future potential higher tax rates to counter influx of funding from the Federal Reserve and Government which will increase demand for municipal bonds to shelter additional income from higher taxes.

While municipal issuers will experience short term declines in tax revenues from stay at home orders and decreased consumer demand, we believe that the downgrade risk of bonds is significantly greater than default risk. Historically, the default risk in municipal bonds is less than 1% of all bonds. For perspective, the par value of the S&P Municipal Bond Index is $2.321 trillion. The par value of bonds defaulted as of April 2020, was $21 billion, of which $16 billion is attributed to Puerto Rico, a default risk of less than .03%.

We continue to actively buy individual municipal bonds and employ the same strategy we have for many years.

We believe in buying investment grade individual tax-free bonds, studying the underlying credit quality, looking at the revenue source for the bonds and monitoring the credit quality.

Also, an important difference to keep in mind, is that unlike corporate bonds, where if the corporation declares bankruptcy, then all their bonds are bankrupt, this is not the case in municipal bonds. Most recently when Detroit had issues, there were water bonds issued by Detroit that had no issue. Some bonds also have insurance as another source of security. That is why we stress looking at each bond and what the funding source is to understand the underlying risks.

In summary, we continue to believe that the bond market offers value. The headline risk will remain until the states open up and remain open. As always, we will actively monitor the portfolios and make changes as needed.

We appreciate your continued trust in CD Wealth Management.

^{*Municipal bonds are debt obligations of a state or local government entity. The funds may support general government needs or special projects. Safety is based on the viability of the issuing municipality and the community in general.}

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How will the race for a vaccine affect the markets?

As states have moved to ease the lockdowns which have cost tens of millions of jobs, a safe return to normal life without a vaccine has taken time.

In South Korea and Germany, countries that were among the most effective at controlling initial outbreaks of Covid-19, have been hindered by new flare-ups. While the virus is still present, America is continuing to reopen the economy.

If and when vaccines start to work, the next crucial step will be distributing them widely enough to rein in the Coronavirus so that social and economic life can continue down a positive path to a new normal.

VACCINE

Progress and setbacks in the vaccine race will continue to have positive and negative effects on stock market prices each day and week. We continue to increase our exposure to the healthcare sector to help take advantage of positive movements as Covid-19 plays itself out.

Investing into individual stocks in the biotech industry has substantial risks as those stocks could experience steep declines if their attempt at developing a Covid-19 vaccination falls short.

The FDA has the ability to issue emergency-use authorizations during public health crises to allow the use of unapproved medical products which could potentially be an unapproved vaccine.

If a vaccine comes to a fruition, whichever company that would bring a vaccine to the market first, will most likely will not be the last. The first vaccine might not be the best, and many scientists involved in the race for a vaccine say that making enough of a vaccine to inoculate the world is beyond the capability of even the largest drug maker.

MARKET OUTLOOK

The economies around the world are just beginning to emerge from the Covid-19 crisis. The pandemic is probably far from over, and the last 10 weeks have shown the importance of staying the course with a financial plan and diversified investment portfolio.

The markets have been vulnerable to pullbacks after the main benchmarks managed to retrace much of the losses suffered in March. More aggressive Fed interventions may keep the stock market bottoms higher, and low interest rates and more innovation can boost the tops.

Timing the markets historically has proven to be dangerous; however, time in the market has historically proven a successful course of action. We will most likely continue to see different levels of volatility during Covid-19, and it has never been more important to focus on the long-term of your financial plan which is coordinated with your short-term needs and objectives.

We will continue staying the course of your financial plan and being proactive to make specific strategic moves in the portfolios that have proven necessary during these times. 2020 has been an abnormal year, and we have made more updates to our portfolios in the first 5 ½ months of the year than we have done in the previous 24 months. Our reduction in the exposure of the energy sector earlier this year, the reduction in the allocation of small and mid-cap companies and real estate, along with the moves to additional exposure to large and technology companies have been additive to the portfolio. These were all lateral moves in which we did not time the market, as these were moves made within the market.

Regarding the fixed income portion of our portfolios, we continue to stay the course with a combination of investment grade corporate bonds and a total return fund that has the flexibility to invest in different segments of the bond market. In March, we removed our exposure to emerging market debt and added those monies back into U.S. corporate bonds. While we believe that short-term interest rates will be held close to zero for years to come, there are still opportunities in the bond market that provide return, diversification from equities and add value to the portfolios.

We want you to continue to consider the following:

1. Revisit Your Investment & Financial Planning Objectives: For nearly all investors, longer-term objectives are made possible when taking an appropriate level of risk.

2. Continue to Maintain a Longer-Term Mindset: Avoid letting recent market volatility convince you to abandon your prudently designed, long-term investment plan. Short-term reactive decisions could significantly impair portfolio returns.

3. Excess Cash Reserves: Continue to contribute according to your periodic investment plans as investing a portion of your excess cash reserves while markets are trading at more favorable levels.

We continue to be all-hands on deck and focused on making sure we are doing our job as your wealth management, financial advisory, and financial planning team.

^{Barron’s, Josh Nathan-Kazis, May 17, 2020}

^{MarketWatch, May 19, 2020}

^{MarketWatch, May 20, 2020}

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What does the low price of oil mean for you as an investor?

Last week was a historic week for the oil markets, as for the first time ever, futures contracts for West Texas Intermediate Crude traded negative to start the week. Oil investors and traders were rushing to sell the May futures contracts as no one wanted to take delivery of oil, as there is nowhere to store it.

What does that mean for you as an investor?

We have seen global oil demand drop by 25 million barrels a day as the majority of the world economy has shut down to battle the COVID-19 pandemic. Going back to Economics 101, we are dealing with basic supply and demand issues for the price of oil.

As of today, there is a tremendous excess supply of oil. With global demand down 25% and oil storage capacity almost completely full, we have no place to store additional barrels of oil. Therefore, prices have to come down to combat excess supply. How do oil prices eventually go back up?

* Upstream companies begin cutting back on capital spending and reducing production – i.e. active rig counts have fallen over 40% this month.

* OPEC must cut oil production.

* Most importantly, when the global economy reopens, demand for oil will increase, thus causing prices in the future to increase.

A question that we receive often is, “How do I invest in oil in this very volatile time? The future price of oil has to go up, right?”

For retail investors, unfortunately, there is no easy way to invest in the current price of a barrel of oil (often referred to as spot price). Unlike gold, you cannot take possession of a barrel of oil, store it in your garage, and then sell it in the future when the price of oil has gone back up. There are several ETF’s (exchange-traded funds) that use futures-based pricing. These ETFs do not have good tracking records to accurately track the current price of oil. For example, USO, the most heavily traded ETF, saw massive inflows last week as retail investors try to “buy the dip” in oil prices. However, each month this ETF and others like it, have to continually roll into the next month future contract and end up paying more for the price of oil than in the current spot market. This “contango” occurs as the price of a futures contract on oil is higher than the current price. Consequently, we could actually see oil prices rise and the owners of the Exchange Traded Funds lose money.

In summary, while we all hope that the future price of oil will rise, there are no guarantees. We can expect the price of oil to continue this volatile trend as the world navigates the unprecedented global pandemic.

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The adjustments we made in the most volatile month ever

As we are in this for the long haul, we know there will be peaks and valleys, and our plan is to continue to stay the course. From a portfolio perspective, we continue to actively monitor your portfolio. In late March, we made the following adjustments:

1. Increased large cap exposure, through additional exposure to technology and healthcare.

2. We funded the increase in large cap stocks by selling out of small and mid-cap stocks as well as real estate.

3. For fixed income, we sold emerging market debt and added to our U.S. bond portfolio through additional exposure to high quality corporate bonds.

From a planning perspective, we remain focused on tax loss harvesting, postponing Required Minimum Distributions for those clients who do not need the income from their IRAs, and repositioning the portfolio when appropriate.

Over the weekend, the Wall Street Journal relayed that markets are reacting not just to where the economy is, but also to the range of outcomes for where it could be going. Many factors are driving this recession with two prominent themes being the lockdowns and social distancing, which is in turn driven by the pandemic. The best minds in our country are working around the clock to help us get past this pandemic. The continued fiscal and monetary policy stimulus of epic proportions have pumped trillions of dollars into our economy. Medical experts continue to collaborate to provide a cure.

As of April 16^th, the curve has flattened as the U.S. had fewer new reported cases than it did 12 days prior.

The continued movement in the markets, paired with all the economic headlines you see daily, can leave you searching for facts to try and make sense out of all the information we see and hear. It has been roughly 2 months since the S&P 500 hit an all-time high, and about one month since it hit a low we have not seen since 2017. This made March the most volatile month in U.S. history and the S&P 500’s 34% drop between February 19 and March 23 the fastest decline from a record bull market to a bear market. Thanks to a massive government stimuli package, combined with discussions of upcoming plans to ease some restrictions due to COVID-19, the markets have rallied the last few weeks. The S&P 500 is now just 15% below its pre-pandemic high and the Nasdaq 100 is positive (1.1%), as of Friday, April 17.

Furthermore, earnings season kicked off last week giving a glimpse into how the pandemic affected the financials of key corporations during the first quarter, with many companies even stating their expectations for the remainder of 2020. The markets showed optimism last week for two potential reasons:

1. Talk of steps to begin to reopen the economy.

2. Flattening of the curve of new COVID-19 cases (see above graph).

Volatility has continued this week, with the markets coming down Monday and Tuesday and then rallying back on Wednesday. This shows that uncertainty continues to drive this market. While our views are to stay the course, we will continue to monitor and make necessary updates to your portfolio.

^{Wall Street Journal –}^www.wsj.com

^{The source for any S&P 500 Index (Daily) Data, will be Yahoo Finance (^GSPC). It will be shown assuming historical dividends are reinvested and in U.S. Dollar terms.}

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Studying historical response to health crises

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law by President Trump on Friday, March 27, 2020. Phase Three of the stimulus is estimated at more than $2.2 Trillion. Given the speed with which the U.S. economy is slowing down, the government is acting quickly to limit the economic damage wrought by the coronavirus and is indicating further actions may be needed.

Fiscal and monetary responses have been unprecedented. The Fed, for the first time, is buying corporate bonds. Other central banks have moved into buying equities. While the odds are stacked against the Federal Reserve stretching from corporate debt from buying stocks, the historical response has been to say, “never say never”. We expect as the news regarding jobless claims increases, monetary policy should respond accordingly.

Employers and workers will be adjusting to a new normal once this health crisis has passed. There has often been concern regarding how the internet would handle increased traffic all at once and how it would react to those changes. The good news is that US networks are handling internet traffic spikes without any major hiccups thus far while many people are having to work from home. Video streaming is up 38% and video chat has been up 212%¹.

Putting current market volatility into historical perspective will help you stay the course during turbulent times. While the market continues to be volatile, sticking to your investment strategy may be a challenge, but remains extremely important. Market cycles offer both obstacles and opportunities.

Remember, markets go up and down. Since the turn of the millennium, the market’s negative response to health crises has been relatively short-lived.

As this table shows, approximately six months after early reports of a major outbreak, the S&P 500 bounced back by an average of 10.47%. After 12 months, it rebounded by an average of 17.17%. Although there are no guarantees the current situation will follow a similar pattern, it may be reassuring to know that over even longer periods of time, stocks typically regain their upward trajectory, helping long-term investors who hold steady to recoup their temporary losses, catch their breath, and go on to pursue their goals.

HISTORICAL RESPONSE TO HEALTH CRISES

(6 AND 12 MONTHS POST MAJOR OUTBREAK)

*Source: Dow Jones Market Data, as cited on foxbusiness.com, January 27, 2020.*
*End of month during which early incidents of outbreak were reported.
**H1N1 occurred during the financial crisis, when, as during other periods, many different factors influenced stock market performance.

The volatility in the market is largely driven by ever-increasing fears about the potential effects of the coronavirus (COVID-19) and its ultimate impact on the global economy. The unpredictability, strength, and suddenness of the historic tumble was and has been unsettling for all of us.

What should you do?

First, keep in mind that market downturns sometimes offer the chance to pick up potentially solid stocks at value prices, which could position a portfolio well for future growth. Again, there are no guarantees that stocks will perform to anyone’s expectations, and decisions could result in losses including a possible loss in principal, but it may be helpful to remember that some investors use downturns as opportunities to buy stocks that were previously overvalued relative to their perceived earnings potential.

Moreover, if you typically invest set amounts into your portfolio at regular intervals, a strategy known as dollar-cost averaging (DCA), which is commonly used in workplace retirement plans and college investment plans — take heart knowing you are utilizing a method of investing that helps you behave like the value investors noted above. Through DCA, your investment dollars purchase fewer shares when prices are high, and more shares when prices drop. Essentially, in a down market, you automatically “buy low”, one of the most fundamental investment tenets. Over extended periods of volatility, DCA can result in a lower average cost for your holdings than the investment’s average price over the same time period.

We are closely monitoring the still-unfolding situation. We do not currently find compelling reasons that would justify overriding our asset allocation methodology despite the current elevated uncertainty from the Coronavirus. CD Wealth Management continues to believe that our clients should remain patient and adhere to their well-constructed, diversified investment portfolio anchored to their long-term goals and time horizon.

¹Barrons.com, April 5, 2020

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Teaching Your College-Age Child about Money

Lesson 1: Budgeting 101

Perhaps your child already understands the basics of budgeting from having to handle an allowance or wages from a part-time job during high school. But now that your child is in college, he or she may need to draft a “real world” budget, especially if he or she lives off-campus and is responsible for paying for rent and utilities. Here are some ways you can help your child plan and stick to a realistic budget:

Help your child figure out what income there will be (money from home, financial aid, a part-time job) and when it will be coming in (at the beginning of each semester, once a month, or every week).
Make sure your child understands the difference between needs and wants. For instance, when considering expenses, point out that buying groceries is a need and eating out is a want. Your child should understand how important it is to cover the needs first.
Determine together how you and your child will split responsibility for expenses. For instance, you may decide that you’ll pay for your child’s trips home, but that your child will need to pay for art supplies or other miscellaneous expenses.
Warn your child not to spend too much too soon, particularly when money that has to last all semester arrives at the beginning of a term. Too many evenings out in September eating surf and turf could lead to a December of too many evenings in eating cold cereal.
Acknowledge that college isn’t all about studying, but explain that splurging this week will mean scrimping next week. While you should include entertainment expenses in the budget, encourage your child to stick closely to the limit you agree upon.
Show your child how to track expenses by saving receipts and keeping an expense log. Knowing where the money is going will help your child stay on track. Reallocation of resources may sometimes be necessary, but help your child understand that spending more in one area means spending less in another.
Encourage your child to plan ahead for big expenses (the annual auto insurance bill or the trip over spring break) by instead setting aside money for them on a regular basis.
Caution your child to monitor spending patterns to avoid excessive spending, and ask him or her to come to you for advice at the first sign of financial trouble.

Remind your child that life after college often involves student loan payments and maybe even car or mortgage payments. The less debt your child graduates with, the better off he or she will be. When it comes to the plastic variety, extra credit is the last thing a college student wants to accumulate!

You should also help your child understand that a budget should remain flexible; as financial goals change, a budget must change to accommodate them. Still, your child’s ultimate goal is to make sure that what goes out is always less than what comes in.

Lesson 2: Opening a bank account

For the sake of convenience, your child may want to open a checking account near the college; doing so may also reduce transaction fees (e.g. automated teller machine (ATM) fees). Ideally, a checking account should require no minimum balance and allow unlimited free checking; short of that, look for an account with these features:

A simple fee structure
ATM or debit card access to the account
Online or telephone access to account information
Overdraft protection

To avoid bouncing checks, it’s essential to keep accurate records, especially of ATM or debit card usage. Show your child how to balance a checkbook on a regular (monthly) basis. Most checking account statements provide instructions on how to do this.

Encourage your child to open a savings account too, especially if he or she has a part-time job during the school year or summer. Your child should save any income that doesn’t have to be put towards college expenses. After all, there is life after college, and while it may seem inconceivable to a college freshman, he or she may one day want to buy a new car or a home.

Point out that buying groceries is a need and eating out is a want. Your child should understand how important it is to cover the needs first.

Lesson 3: Getting credit

If your child is age 21 or older, he or she may be able to independently obtain a credit card. But if your child is younger, the credit card company will require you, or another adult, to cosign the credit card application, unless your child can prove that he or she has the financial resources to repay the credit card debt. A credit card can provide security in a financial emergency and, if used properly, can help your child build a good credit history. But the temptation to use a credit card can be seductive, and it’s not uncommon for students to find themselves over their heads in debt before they’ve declared their majors. Unfortunately, a poor credit history can make it difficult for your child to rent an apartment, get a car loan, or even find a job for years after earning a degree. And if you’ve cosigned your child’s credit card application, you’ll be on the hook for your child’s unpaid credit card debt, and your own credit history could suffer.

Here are some tips to help your child learn to use credit responsibly:

Advise your child to get a credit card with a low credit limit to keep credit card balances down.
Explain to your child that a credit card isn’t an income supplement; what gets charged is what’s owed (and then some, given the high interest rates). If your child continually has trouble meeting expenses, he or she should review and revise the budget instead of pulling out the plastic.
Teach your child to review each credit card bill and make the payment by the due date. Otherwise, late fees may be charged, the interest rate may go up if the account falls 60 days past due, and your child’s credit history (or yours, if you’ve cosigned) may be damaged.
If your child can’t pay the bill in full each month, encourage him or her to pay as much as possible. An undergraduate student making only the minimum payments due each month on a credit card could finish a post-doctorate program before paying off the balance.
Make sure your child notifies the card issuer of any address changes so that he or she will continue to receive statements.
Tell your child that when it comes to creditors, students don’t get summers off! Your child will need to continue to make payments every month, and if there’s a credit card balance carried over from the school year, your child may want to use summer earnings to pay it off in order to start the next school year with a clean slate.

Taking Advantage of Employer-Sponsored Retirement Plans

Understand your employer-sponsored plan

Before you can take advantage of your employer’s plan, you need to understand how these plans work. Read everything you can about the plan and talk to your employer’s benefits officer. You can also talk to a financial planner, a tax advisor, and other professionals. Recognize the key features that many employer-sponsored plans share:

Your employer automatically deducts your contributions from your paycheck. You may never even miss the money — out of sight, out of mind.
You decide what portion of your salary to contribute, up to the legal limit. And you can usually change your contribution amount on certain dates during the year or as needed.
With 401(k), 403(b), 457(b), SARSEPs, and SIMPLE plans, you contribute to the plan on a pre-tax basis. Your contributions come off the top of your salary before your employer withholds income taxes.
Your 401(k), 403(b), or 457(b) plan may let you make after-tax Roth contributions — there’s no up-front tax benefit but qualified distributions are entirely tax free.
Your employer may match all or part of your contribution up to a certain level. You typically become vested in these employer dollars through years of service with the company.
Your funds grow tax deferred in the plan. You don’t pay taxes on investment earnings until you withdraw your money from the plan.
You’ll pay income taxes (and possibly an early withdrawal penalty) if you withdraw your money from the plan.
You may be able to borrow a portion of your vested balance (up to $50,000) at a reasonable interest rate.
Your creditors cannot reach your plan funds to satisfy your debts.

Contribute as much as possible

The more you can save for retirement, the better your chances of retiring comfortably. If you can, max out your contribution up to the legal limit (or plan limits, if lower). If you need to free up money to do that, try to cut certain expenses.

Why put your retirement dollars in your employer’s plan instead of somewhere else? One reason is that your pre-tax contributions to your employer’s plan lower your taxable income for the year. This means you save money in taxes when you contribute to the plan — a big advantage if you’re in a high tax bracket. For example, if you earn $100,000 a year and contribute $10,000 to a 401(k) plan, you’ll pay income taxes on $90,000 instead of $100,000. (Roth contributions don’t lower your current taxable income but qualified distributions of your contributions and earnings — that is, distributions made after you satisfy a five-year holding period and reach age 59½, become disabled, or die — are tax free.)

Another reason is the power of tax-deferred growth. Your investment earnings compound year after year and aren’t taxable as long as they remain in the plan. Over the long term, this gives you the opportunity to build an impressive sum in your employer’s plan. You should end up with a much larger balance than somebody who invests the same amount in taxable investments at the same rate of return.

For example, say you participate in your employer’s tax-deferred plan (Account A). You also have a taxable investment account (Account B). Each account earns 6% per year. You’re in the 24% tax bracket and contribute $5,000 to each account at the end of every year. After 40 years, the money placed in a taxable account would be worth $567,680. During the same period, the tax-deferred account would grow to $820,238. Even after taxes have been deducted from the tax-deferred account, the investor would still receive $623,381. (Note: This example is for illustrative purposes only and does not represent a specific investment.)

Capture the full employer match

If you can’t max out your 401(k) or other plan, you should at least try to contribute up to the limit your employer will match. Employer contributions are basically free money once you’re vested in them (check with your employer to find out when vesting happens). By capturing the full benefit of your employer’s match, you’ll be surprised how much faster your balance grows. If you don’t take advantage of your employer’s generosity, you could be passing up a significant return on your money.

For example, you earn $30,000 a year and work for an employer that has a matching 401(k) plan. The match is 50 cents on the dollar up to 6% of your salary. Each year, you contribute 6% of your salary ($1,800) to the plan and receive a matching contribution of $900 from your employer.

Evaluate your investment choices carefully

Most employer-sponsored plans give you a selection of mutual funds or other investments to choose from. Make your choices carefully. The right investment mix for your employer’s plan could be one of your keys to a comfortable retirement. That’s because over the long term, varying rates of return can make a big difference in the size of your balance.

Note: Before investing in a mutual fund, carefully consider the investment objectives, risks, charges, and expenses of the fund. This information can be found in the prospectus, which can be obtained from the fund. Read it carefully before investing.

Research the investments available to you. How have they performed over the long term? How much risk will they expose you to? Which ones are best suited for long-term goals like retirement? You may also want to get advice from a financial professional (either your own, or one provided through your plan). He or she can help you pick the right investments based on your personal goals, your attitude toward risk, how long you have until retirement, and other factors. Your financial professional can also help you coordinate your plan investments with your overall investment portfolio.

If you can’t max out your 401(k) or other plan, you should at least try to contribute up to the limit your employer will match.

Know your options when you leave your employer

When you leave your job, your vested balance in your former employer’s retirement plan is yours to keep. You have several options at that point, including:

Taking a lump-sum distribution. Before choosing this option, consider that you’ll pay income taxes and possibly a penalty on the amount you withdraw. Plus, you’re giving up the continued potential of tax-deferred growth.
Leaving your funds in the old plan, growing tax deferred. (Your old plan may not permit this if your balance is less than $5,000, or if you’ve reached the plan’s normal retirement age — typically age 65.) This may be a good idea if you’re happy with the plan’s investments or you need time to decide what to do with your money.
Rolling your funds over to an IRA or a new employer’s plan (if the plan accepts rollovers). This may also be an appropriate move because there will be no income taxes or penalties if you do the rollover properly (your old plan will withhold 20% for income taxes if you receive the funds before rolling them over, and you’ll need to make up this amount out of pocket when investing in the new plan or IRA). Plus, your funds continue to potentially benefit from tax-deferred growth.

Saving for Retirement and a Child’s Education at the Same Time

Know what your financial needs are

The first step is to determine your financial needs for each goal. Answering the following questions can help you get started:

For retirement:

How many years until you retire?
Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what’s your balance? Can you estimate what your balance will be when you retire?
How much do you expect to receive in Social Security benefits? (One way to get an estimate of your future Social Security benefits is to use the benefit calculators available on the Social Security Administration’s website, www.ssa.gov. You can also sign up for a my Social Security account so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor’s, and disability benefits.)
What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?
Do you or your spouse expect to work part-time in retirement?

For college:

How many years until your child starts college?
Will your child attend a public or private college? What’s the expected cost?
Do you have more than one child whom you’ll be saving for?
Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
Do you expect your child to qualify for financial aid?

Many on-line calculators are available to help you predict your retirement income needs and your child’s college funding needs.

Though college is certainly an important goal, you should probably focus on your retirement if you have limited funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you’ll miss out on years of potential tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there’s no such thing as a retirement loan!

Figure out what you can afford to put aside each month

After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you’ll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you’ve come up with a dollar amount, you’ll need to decide how to divvy up your funds.

If possible, save for your retirement and your child’s college at the same time

Ideally, you’ll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child’s college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8% annually, you’d have $18,415 in your child’s college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment. Investment returns will fluctuate and cannot be guaranteed.)

If you’re unsure about how to allocate your funds between retirement and college, a professional financial planner may be able to help. This person can also help you select appropriate investments for each goal. Remember, just because you’re pursuing both goals at the same time doesn’t necessarily mean that the same investments will be suitable. It may be appropriate to treat each goal independently.

Help! I can’t meet both goals

If the numbers say that you can’t afford to educate your child or retire with the lifestyle you expected, you’ll probably have to make some sacrifices. Here are some suggestions:

Defer retirement: The longer you work, the more money you’ll earn and the later you’ll need to dip into your retirement savings.
Work part-time during retirement.
Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.
Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.
Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss). Note that no investment strategy can guarantee success.
Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don’t feel guilty — a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.

If you have several years until retirement or college, you might be able to earn more money by investing more aggressively.

Can retirement accounts be used to save for college?

Yes. Should they be? That depends on your family’s circumstances. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child’s college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to. With IRAs, you can withdraw money penalty free for college expenses, even if you’re under age 59½ (though there may be income tax consequences for the money you withdraw). But with an employer-sponsored retirement plan like a 401(k) or 403(b), you’ll generally pay a 10% penalty on any withdrawals made before you reach age 59½ (age 55 or 50 in some cases), even if the money is used for college expenses. There may be income tax consequences, as well. (Check with your plan administrator to see what withdrawal options are available to you in your employer-sponsored retirement plan.)

What You Should Do If You Gain Sudden Wealth

Evaluate your new financial position

Just how wealthy are you? You’ll want to figure that out before you make any major life decisions. Your first impulse may be to go out and buy things, but that may not be in your best interest. Even if you’re used to handling your own finances, now’s the time to watch your spending habits carefully. Sudden wealth can turn even the most cautious person into an impulse buyer. Of course, you’ll want your current wealth to last, so you’ll need to consider your future needs, not just your current desires.

Remember, there’s no rush. You can put your funds in an accessible interest-bearing account such as a savings account, money market account, or short-term certificate of deposit until you have time to plan and think things through.

Once you’ve taken care of the basics, set aside some money to treat yourself to something you wouldn’t have bought or done before, It’s OK to have fun with some of your new money!

It’s important not to deprive yourself entirely of any enjoyment. You’ll want to build the occasional reward into your budget.

Answering these questions may help you evaluate your short- and long-term needs and goals:

• Do you have outstanding debt that you’d like to pay off?
• Do you need more current income?
• Do you plan to pay for your children’s education?
• Do you need to bolster your retirement savings?
• Are you planning to buy a first or second home?
• Are you considering giving to loved ones or a favorite charity?
• Are there ways to minimize any upcoming income and estate taxes?

Note: Experts are available to help you with all of your planning needs, and guide you through this new experience.

Impact on insurance

It’s sad to say, but being wealthy may make you more vulnerable to lawsuits. Although you may be able to pay for any damage (to yourself or others) that you cause, you may want to re-evaluate your current insurance policies and consider purchasing an umbrella liability policy. If you plan on buying expensive items such as jewelry or artwork, you may need more property/casualty insurance to cover these items in case of loss or theft. Finally, it may be the right time to re-examine your life insurance needs. More life insurance may be necessary to cover your estate tax bill so your beneficiaries receive more of your estate after taxes.

Impact on estate planning

Now that your wealth has increased, it’s time to re-evaluate your estate plan. Estate planning involves conserving your money and putting it to work so that it best fulfills your goals. It also means minimizing your taxes and creating financial security for your family.

Is your will up to date? A will is the document that determines how your worldly possessions will be distributed after your death. You’ll want to make sure that your current will accurately reflects your wishes. If your newfound wealth is significant, you should meet with your attorney as soon as possible. You may want to make a new will and destroy the old one instead of simply making changes by adding a codicil.

Carefully consider whether the beneficiaries of your estate are capable of managing the inheritance on their own. For instance, if you have minor children, you should consider setting up a trust to protect their interests and control the age at which they receive their funds.

It’s probably also a good idea to consult a tax attorney or financial professional to look into the amount of federal estate tax and state death taxes that your estate may have to pay upon your death; if necessary, discuss ways to minimize them.

Giving it all away — or maybe just some of it

Is gift giving part of your overall plan? You may want to give gifts of cash or property to your loved ones or to your favorite charities. It’s a good idea to wait until you’ve come up with a financial plan before giving or lending money to anyone, even family members. If you decide to give or lend any money, put everything in writing. This will protect your rights and avoid hurt feelings down the road. In particular, keep in mind that:

If you forgive a debt owed by a family member, you may owe gift tax on the transaction
You can make individual gifts of up to $15,000 (2020 limit) each calendar year without incurring any gift tax liability ($30,000 for 2020 if you are married, and you and your spouse can split the gift)
If you pay the school directly, you can give an unlimited amount to pay for someone’s education without having to pay gift tax (you can do the same with medical bills)
If you make a gift to charity during your lifetime, you may be able to deduct the amount of the gift on your income tax return, within certain limits, based on your adjusted gross income

Note: Because the tax implications are complex, you should consult a tax professional for more information before making sizable gifts.