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Good Retirement Savings Habits Before Age 40

 Some early financial behaviors that may promote a comfortable future.  

 

Provided by MidAmerica Financial Resources

 

You know you should start saving for retirement before you turn 40. What can you start doing today to make that effort more productive, to improve your chances of ending up with more retirement money, rather than less?

  

Structure your budget with the future in mind. Live within your means and assign a portion of what you earn to retirement savings. How much? Well, any percentage is better than nothing – but, ideally, you pour 10% or more of what you earn into your retirement fund. If that seems excessive, consider this: you are at risk of living 25-30% of your lifetime with no paycheck except for Social Security. (That is, assuming Social Security is still around when you retire.)

 

Saving and investing 10-15% of what you earn for retirement can really make an impact over time. For example, say you set aside $4,000 for retirement in your thirtieth year, in an investment account that earns a consistent (albeit hypothetical) 6% a year. Even if you never made a contribution to that retirement account again, that $4,000 would grow to $30,744 by age 65. If you supplant that initial $4,000 with monthly contributions of $400, that retirement fund mushrooms to $565,631 at 65.1 

  

Avoid cashing out workplace retirement plan accounts. Learn from the terrible retirement saving mistake too many baby boomers and Gen Xers have made. It may be tempting to just take the cash when you leave a job, especially when the account balance is small. Resist the temptation. One recent study (conducted by behavioral finance analytics firm Boston Research Technologies) found that 53% of baby boomers who had drained a workplace retirement plan account regretted their decision. So did 46% of the Gen Xers who had cashed out.2

 

Instead, arrange a rollover of that money to an IRA, or to your new employer’s retirement plan if that employer allows. That way, the money can stay invested and retain the opportunity for growth. If the money loses that opportunity, you will pay an opportunity cost when it comes to retirement savings. As an example, say you cash out a $5,000 balance in a retirement plan when you are 25. If that $5,000 stays invested and yields 5% interest a year, it becomes $35,200 some 40 years later. So today’s $5,000 retirement account drawdown could amount to robbing yourself of $35,000 (or more) for retirement.3

   

Save enough to get a match. Some employers will match your retirement contributions to some degree. You may have to work at least 2-3 years for an employer for this to apply, but the match may be offered to you sooner than that. The match is often 50 cents for every dollar the employee puts into the account, up to 6% of his or her salary. With the exception of an inheritance, an employer match is the closest thing to free money you will ever see as you save for the future. That is why you should strive to save at a level to get it, if at all possible.4

 

Saving enough to get the match in your workplace retirement plan may make your overall retirement savings effort a bit easier. Say your goal is to save 10% of your income for retirement. If the employer match is 50 cents to the dollar and you direct 6% of your income into that savings plan, your employer contributes the equivalent of 3% of your income. You are almost to that 10% goal right there.4

   

Think about going Roth. The younger you are, the more attractive Roth retirement accounts (such as Roth IRAs) may look. The downside of a Roth account? Contributions are not tax-deductible. On the other hand, there is plenty of upside. You get tax-deferred growth of the invested assets, you may withdraw account contributions tax-free, and you get to withdraw account earnings tax-free once you are 59½ or older and have owned the account for at least five years. Having a tax-free retirement fund is pretty nice.4

 

To have a Roth IRA in 2016, your modified adjusted gross income must be less than $132,000 (single taxpayer) or $194,000 (married and filing taxes jointly).4

   

Set it & forget it. Saving consistently becomes easier when you have an automated direct deposit or salary deferral arrangement set up for you. You can gradually increase the monthly amount that goes into your accounts with time, as you earn more.

 

Invest for growth. Much wealth has been built through long-term investment in equities. Wall Street has good years and bad years, but the good years have outnumbered the bad. Early investment in equities may assist your retirement savings effort more than any other factor, except time.

 

Time is of the essence. Start saving and investing for retirement today, and you may find yourself way ahead of your peers financially by the time you reach 40 or 50.

   

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com.

www.mid-america.us

 

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.

   

Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser.
MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to NPC.

 

To qualify for the tax free penalty free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 1/2 or due to death, disability, or a first time home purchase (up to $10,000 lifetime maximum). Before taking any specific action, be sure to consult with your tax professional.

Consider your personal investment horizon and income tax brackets, both current and anticipated when making an investment decision. Changes in tax rates and tax treatment of investment earnings may further impact investment results.

   

Citations.

1 - investor.gov/tools/calculators/compound-interest-calculator [7/7/16]

2 - marketwatch.com/story/millennials-can-save-more-for-retirement-by-learning-from-baby-boomers-mistakes-2016-06-30 [6/30/16]

3 - thefiscaltimes.com/2015/11/20/7-Ways-Millennials-Are-Getting-Retirement-Saving-Wrong [11/20/15]

4 - kiplinger.com/article/retirement/T001-C006-S001-retire-rich-saving-for-retirement-in-your-20s-30s.html [2/4/16]


The Rise of the Fee-Based Financial Professional

 A huge shift is underway, with the client in mind.  

 

Provided by MidAmerica Financial Resources

 

A wave of change is transforming the financial services profession. The shift has been gradual, but noticeable. Increasingly, financial professionals are choosing to be compensated, partly or wholly, through fees rather than through commissions.

  

This is a real change from the old status quo. In the days before the Internet and gourmet coffee on every corner, compensation usually resulted from product sales. A client opened up an investment, and the broker who “sold” that investment received a commission as an outcome. 

   

The more informed an investor was, the more he or she tended to be cynical about this arrangement. It was all too easy for a client to regard the registered representative on the other side of the table as a salesperson, rather than a consultant or an advisor.

 

The presence of commissions also raised the potential for conflicts of interest. While ethical standards demanded that the representative suggest or present investments suitable for the client, certain suitable investments could mean a larger commission for the representative than others.

 

Before going further, it must be noted that this is not as simple as “fees good, commissions bad.” In some cases, an investor may be better served when a financial professional is compensated largely through commissions, or a mix of fees and commissions. In terms of services rendered, that kind of arrangement may be more cost-effective for the client. 

 

On the whole, though, the profession is moving toward a fee-based business model. In this compensation structure, a representative is paid mostly in fees that equal a small percentage of client assets under management. In addition, he or she may charge hourly or per-project fees. 

 

A new retirement account rule is encouraging the shift. The Department of Labor is implementing a fiduciary standard for financial professionals who consult IRA owners or participants in workplace retirement plans. Beginning in 2017 (2018, for IRAs), financial professionals and their firms will be asked to commit to that standard (with certain exceptions).1

 

Many fee-only and fee-based financial practitioners already abide by a fiduciary standard. Registered Investment Advisors (RIAs) and others who work under this standard have an ethical and legal obligation to put the client’s interests ahead of their own.2

 

For decades, many registered representatives have made thoughtful and conscientious investment recommendations under the suitability standard, by which any suggested investment must be suitable for a client’s needs and objectives. It is no longer an argument of which standard is better, however; the Department of Labor will soon require fiduciary care for all retirement accounts.

  

Many more financial professionals could soon be fee-based. A small percentage are actually fee-only now, meaning that they earn 100% of their income in fees. The DoL rule change is helping to push the industry in this direction, as well as a priority on client relationships.

 

Decades ago, an inherent problem plagued the traditional, commission-driven brokerage compensation model: the broker did not profit unless the client bought something. That reality affected the client relationship. Even now, traces of this longstanding structural problem linger.

 

In a fee-based or fee-only relationship, the emphasis is on financial guidance and investment management rather than product sales. Investment management fees are typically based on account values, and both the client and the financial practitioner want the account to grow. Their interests are closely aligned; they can see each other as partners in the effort to build and sustain the client’s invested assets under management.  

 

This business is relationship-oriented; it must be for mutual success. Increasingly, financial services industry professionals are operating fee-based or fee-only practices with the goal of enhancing existing client relationships and forging new ones. 

   

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com.

www.mid-america.us

 

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.

 

Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser.
MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to NPC.

   

Citations.

1 - money.usnews.com/money/blogs/planning-to-retire/articles/2016-04-08/the-new-retirement-account-fiduciary-standard [4/8/16]

2 - forbes.com/sites/peterlazaroff/2016/04/06/the-difference-between-fiduciary-and-suitability-standards/print/ [4/6/16]

 





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