Category Archives: saving

How much annual retirement income will you have?

Most people believe that their home is their most expensive thing they’ll ever pay for.  They’re wrong.  The most expensive thing people ever pay for is retirement. And they’ll pay for it after they quit working.

That’s why it’s important to have a clear idea of what you’re getting into before you decide to tell your employer that you’re leaving.

The typical retiree’s sources of income include Social Security.  They may have a pension, although fewer companies are offering them.  If there is a gap between those sources of income and their spending plans, the difference is made up by using their retirement savings.

Running out of money is the single biggest concern of retirees.  The big question is how long we will live and the amount we can draw from our savings before they are depleted.

For simplicity, let’s assume: You’re ready to retire today and plan to have your retirement savings last 25 years. You’ve moved your savings into investments that you believe are appropriate for your retirement portfolio. The investments will provide a constant 6% annual return. You’ll withdraw the same amount at the end of each year.

If you saved this amount Here’s how much you could withdraw annually for 25 years
$100,000  $7,823
$200,000 $14,645
$300,000 $23,468
$400,000 $31,291
$500,000 $39,113
$600,000 $46,936
$700,000 $54,759
$800,000 $62,581
$900,000 $70,404
$1,000,000 $78,227

Keep in mind that these examples don’t include factors such as inflation and volatility that can have a big impact on your purchasing power and account value.

For example, if inflation were 4% a year, a withdrawal of $31,291 25 years from now would only be worth $11,738 in today’s dollars.

Investment losses would decrease your account’s growth potential in subsequent years. To account for these factors, you might need to save even more.

Many experts estimate that you’ll need 80% or more of your final annual salary each year in retirement. Social Security may only provide around 40% of what you need. And don’t forget that retirees typically have different types of expenses compared to people still in the workforce, such as increased health care and travel costs.

This is why planning is so important.  A financial plan will provide you with answers to many of these questions.  Retirees also need to reduce the chances that their portfolio will experience major losses due to market volatility or taking too much risk.  This is where a Registered Investment Advisor who is also a Certified Financial Planner (CFP®) can help.  At Korving & Company we prepare retirement plans and, once you approve of your plan, we will manage your retirement assets to give you peace of mind.

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Would You Prefer to Have $1 Million Cash Right Now or a Penny that Doubles Every Day for 30 Days?

Albert Einstein is credited with saying “compound interest is the eighth wonder of the world.”

To get back to the original question, would you prefer to have $1 million today or one cent that will double every day for 30 days?  If you chose the million dollars, you would leave millions on the table.

If you chose the penny and passed up the million dollars, on the second day your penny would be worth two cents, on day three it would be four cents, on the fourth day it would be 8 cents.  By day 18 the penny will have grown to $1,310.72.  By day 28 it will be worth over a million dollars:  $1,342,177.  On the 30th day it would be worth an astounding $5,368,709!

If the penny were to be allowed to double for another 30 days, the penny would grow to over $5 quadrillion (five thousand trillion!) dollars.

One of the things this illustrates is that compound growth takes time to make a dramatic difference.  For the person who wants to have enough money to retire in comfort, starting early is the key to success, even if the starting amount is small.

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Slow and steady wins the race

Tortoise-and-the-Hare

 

We have all heard Aesop’s Fable about the race between the tortoise and the hare.  The hare, convinced that he was much faster than the tortoise, took time out for a meal and a nap.   When he woke up he realized his mistake but the tortoise crossed the finish line first.

It seems that this fable is especially true about how people grow rich when investing.   There are some spectacularly wealth people who got that way virtually over night – we have all read about them – but the vast majority of the “High Net Worth” (HNW) people –  those with at least $3 million in investable assets – did it the tortoise way.

The interesting thing about these HNW people is that they rose from the poor and the middle class; they did not inherit their wealth.

A study by Bank of America and U.S. Trust found that 77% – more than three quarters – of their clients grew their wealth slowly.  83% said that they grew rich by making small wins rather than taking large risks.  They grew their wealth by careful investing and avoiding major losses.

In our practice we have met quite a few people who managed to turn modest incomes into multi-million dollar portfolios.  We have also spoken with people who took big investment risks only to fail, and have to continue to work long after they planned to retire.

It’s up to each one of us to decide what race we wish to run.  But keep in mind that the odds favor the tortoise over the hare.  And if you have a problem with the slow-but-steady approach to wealth, get a good RIA who will guide you.

 

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Four “Hidden” Ways We Help Our Clients Save Money

We often tell clients that our long term investment objective is to provide them with a fair rate of return over time while working to minimize the amount of risk they take.  Part of that objective is achieved by finding ways to save them money.

Buying the right mutual funds can save clients a lot of money.  Many mutual fund families offer the exact same fund in several different “share classes.”  The primary difference between each share class is the expenses the fund charges the client.  After deciding which fund we want to buy, we choose the least expensive version of that fund.  This means that our clients keep a bigger share of the fund’s returns.

We also pay attention to the tax consequences of our investment strategy and work to minimize the taxes that our clients pay at the end of the year.  Occasionally we will sell some losing investments to offset gains in other investments.  At the end of the day, this allows our clients to keep more of their money.

We help clients understand how much they need to save for retirement.

For example, we might tell them that buying the new luxury car that they really want every three years will mean they have to work for another five years to meet their stated retirement goals. This helps them with their decision making.

 Making sure our clients understand how much they can safely spend and where they should take the money for their goals is a key value-added service that we provide.

 

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Retirement Plan Contribution Limits for 2016

One of the most common questions we get from clients throughout the year has to do with retirement plan contribution limits.  We put together this quick-reference chart, which shows the limits for most people:

2016 IRS Retirement Plan Contribution Limits

Not much has changed from 2015, except that the income limits for Roth IRA contributions have increased by $1,000.

For the official IRS announcement, click this link to the IRS website.

If you want more clarification on what all of the above means for you, contact us.

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What the tortoise knows about financial security.

Remember the race between the tortoise and the hare? The tortoise won because he kept plugging along while the hare took a nap. Everyone would like to get rich quick; it’s the reason that people buy lottery tickets. But the chances of actually striking it rich are astronomical.

The way to get financially well-off is within the reach of almost anyone, even people who start out poor. What it takes is following a few simple rules.

  • Avoid destructive behavior.
  • Get an education and acquire a skill.
  • Spend less than you earn.
  • Start saving early.

The temptation to parlay a small bundle of cash into a fortune is what gets most people into trouble. Consistent saving over time is much more likely to pay off than strategies such as timing the market. Risk-the-farm investing strategies have a high probability of failure, but saving and prudent investing always wins.

Getting rich slowly is the primary way that most people achieve their financial dreams. The advantage of saving 10% or more of your income cannot be overemphasized. Do that and then let compounding go to work for you.

Compounding does a lot of the heavy lifting for investors. But it needs time to work. That means starting the process as early as possible and staying with it as long as possible. Waiting until you’re in your 40s or 50s means that you have given up twenty to thirty years of financial growth that you will never get back.

Want to have a million dollars by the time you’re 65? If you begin when you’re 25 with $25,000, save $3000 a year and invest the money to get a 7% return you’ll have $1 million when you’re 65. Of course as you get older and make more money you’ll be able to increase your savings rate, and end up with more than a million.

Finally, control your emotions or – better yet – hire an investment manager who will help control your emotions for you. Markets don’t go in one direction forever and that’s a good thing to keep in mind when the inevitable correction happens. An investment portfolio that lets you sleep well at night helps to cushion the blow of a decline and avoid the temptation to “bail out” at exactly the wrong time. In fact, investing more when the market’s “on sale” is a way to increase your wealth.

This is New Year‘s Eve; 2016 starts at midnight. It’s a great time to start if you have not done so already.

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Virginia Pre-Paid Tuition: What You Need to Know

Virginia offers a prepaid tuition program to residents looking to save for future college educational costs, called Virginia529 prePAID.  The plan allows you to prepay future tuition and mandatory fees for Virginia colleges or universities.  However, there are several catches that you must be aware of that make this college savings option somewhat tricky to plan around.

You can only open accounts during a limited enrollment period each year.  Either the account owner or beneficiary must be a Virginia resident when opening the account.  This is not a big hurdle, but it is something that you should know.

You purchase the credits in semester increments, and this is where things really start to get confusing.

  • First, you can only buy the credits from the child’s birth through the time they complete the ninth grade.  After the beneficiary has completed the ninth grade, you can no longer purchase any more prepaid tuition credits for them.
  • Next, when purchasing semester credits, you can purchase either Tier1 or Tier2 credits.  Tier1 credits cover one semester of tuition at a Virginia public four-year college, where Tier2 credits cover one semester of tuition at a Virginia two-year or community college.  Applying a Tier1 credit to a Tier2 school will cover more than a semester of tuition, while applying a Tier2 credit to a Tier1 school will cover less than a semester of tuition.
  • Furthermore, if you apply either Tier1 or Tier2 credits to an out-of-state college or a private college (even a Virginia private college), the credits do not necessarily transfer one-for-one and your pre-paid tuition might be worth less than what you thought it would be.

Those things, in our opinion, make planning around the Virginia pre-paid tuition plan very difficult.  Before the ninth grade, college planning is a distant goal.  Narrowing down college choices is something that probably very few people sit around and do with their 4th grader.  Knowing where that child will eventually decide to go to school, or even whether your family will still live in-state when that 4th grader eventually heads off to college, is a wild guess for most.  Even if your child loves one particular school, knowing whether they will eventually be able to make it into that school is a whole other issue.

The benefit to the plan, and its allure, is that you can lock in the future tuition and fee payments now so that you will not have to worry about whether tuition prices continue their rapid increase.  However, you should at least be aware of some of the potential pitfalls involved with the plan before jumping in.  For more information, visit the Virginia prePAID plan website, or feel free to contact us.

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8 Things Every Parent Should Know About 529 College Savings Plans

We often are asked by parents (or grandparents) of young children about college savings plans.  529 college savings plans offer tax-advantaged ways to save for the various costs of higher education.  While these plans have a lot of name recognition, many people still have questions about the details.  Since it is the first day of school for most kids here in Virginia, it seemed an appropriate time for us to share these eight things you should know about 529 college savings plans:

  1. Earnings on 529s are tax-free, as are withdrawals, as long as you use the money for qualified educational expenses.  Qualified expenses include tuition and fees, books, room and board, supplies, and even computer-related expenses.
  2. There are no income restrictions to open and contribute to a 529 account.  Even high-income earners can open and fund college savings plans.
  3. The money in a 529 account can be used towards in-state or out-of-state schools, both public and private.
  4. The contribution amounts are very high: you can contribute up to $350,000 per beneficiary into a 529 account.  (Keep in mind that you will need to get a little deeper into gift tax rules if you intend to contribute more than $14,000 to a 529 account in any one calendar year.  You can do it, but you should know the rules first.)
  5. The beneficiary is portable.  If your child decides they want to do something else instead of going to college, you can name someone else the beneficiary (sibling, first cousin, grandparent, aunt, uncle, or yourself).  You do not need to decide on a new beneficiary the moment that your child decides not to go to college.  For instance, you could hold onto it and eventually name your grandchildren the beneficiaries.
  6. Charitable family members can contribute to an existing 529 account that you own or set up their own 529 and name your child as beneficiary.
  7. In Virginia, putting money into a 529 plan has the added bonus of providing a state tax deduction for contributions up to $4,000.  Thirty-three other states also offer state tax deductions for contributing to a 529.
  8. If your child gets a scholarship, you will not lose the money.  You can use the plan to cover expenses that the scholarship does not, such as books, room and board, or other supplies.  You can keep the plan open in case your child goes on to graduate school.  You can change the beneficiary and name another college-bound relative.  A final option would be to simply cash out the plan.  Doing so would subject you to income tax and a 10% penalty on the earnings.  If you were feeling generous, you could name your child the owner and let them cash it out at their (presumably) lower tax rate.

If you have questions, or are interested in finding out how to start a 529 plan, please let us know!

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8 Common Reasons for Retirement Failure

1. Overspending.

-You won’t spend less in retirement.  The old saw that retirees only spend 80% of their pre-retirement income is a myth.

2. Elder Fraud.

-Seniors are becoming the favored victims of swindlers.

3. Health care.

-As we age the cost of medical care goes up.  Medicare is covering less and premiums are going up.

4. Starting a business.

-Investing capital in a business that fails can devastate retirement finances.

5. Adult children.

-Helping your children through a “rough patch” can become is one of the most common ways of ending up broke.

6. Second homes.

-The cost of maintaining that vacation home when you’re no longer working can drain your resources when your income drops.

7. Divorce.

-Couples sometimes wait until the children leave home to divorce.  When assets are split 50/50, retirement becomes a problem for both parties.

8. Investment mistakes.

-Making poor investment choices is one of the most common ways of ruining your retirement lifestyle.

If you are nearing retirement, don’t enter into it without a plan.

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The Real vs. the Ideal (Sometimes Life Happens)

The latest issue of Investment News reminded me of an article I saw recently about Marco Rubio, a Senator seeking the Republican Presidential nomination. It seems that he cashed in a 401k to buy a refrigerator, an air conditioner, pay some college costs for his children and cover some campaign expenses.

Financial planners always tell their clients that they need to put money aside for retirement and to never, ever take money out of retirement plans before age 59 ½ because the taxes and penalties can take nearly half of the money that you withdraw.

The article goes on to say that:

“Unfortunately, many middle-class Americans aren’t saving enough for retirement and some, like Mr. Rubio, even pull money out of their retirement plans prematurely.”

Our advice regarding the timing of withdrawals from retirement accounts is, of course, exactly right. And it will be followed if you are rich enough. Unfortunately, as John Lennon once said, “life is what happens when you’re making other plans.”

Most people have finite resources. Not everyone has the money to fully fund their IRA, 401k, 529 college savings plan, health savings account, life insurance and long-term care insurance policies. Life is about making choices between have-to-have and nice-to-have.

We realize that, and provide our clients with the trade-offs they often need to make. Some goals are achievable and others may not be. And sometimes it’s worthwhile cashing in a 401k if it means that later on you can become President.

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