Major stock market averages the S&P 500 and the Dow Jones Industrial Average finished at all-time high levels today. The S&P 500 flirted with 5,000 reaching that mark briefly, but settling just below that level at the close. At some point we are bound to see a stock market correction of some magnitude, hopefully not on the order of the 2008-09 financial crisis. As someone saving for retirement, what should you do now?

Review and rebalance 

During the financial crisis there were many stories about how our 401(k) accounts had become “201(k)s.” The PBS Frontline special The Retirement Gamble put much of the blame on Wall Street and they are right to an extent, especially as it pertains to the overall market drop.

However, some of the folks who experienced losses well in excess of the market averages were victims of their own over-allocation to stocks. This might have been their own doing or the result of poor financial advice.

This is the time to review your portfolio allocation and rebalance if needed.  For example, your plan might call for a 60% allocation to stocks but with the gains that stocks have experienced you might now be at 70% or more.  This is great as long as the market continues to rise, but you are at increased risk should the market head down.  It may be time to consider paring equities back to target allocation levels and to implement a strategy for doing this.

Financial Planning is vital

If you don’t have a financial plan in place, or if the last one you’ve done is old and outdated, this is a great time to review your situation and to get an up-to-date plan in place.. Do it yourself if you’re comfortable or hire a fee-only financial advisor to help you.

If you have a financial plan this is an ideal time to review it and see where you are relative to your goals. Has the market rally accelerated the amount you’ve accumulated for retirement relative to where you had thought you’d be at this point? If so, this is a good time to revisit your asset allocation and perhaps reduce your overall risk.

Learn from the past 

It is said that fear and greed are the two main drivers of the stock market. Some of the experts on the financial news shows seem to feel that the market still has some upside. Maybe they’re right. However, don’t get carried away and let greed guide your investing decisions.

Manage your portfolio with an eye towards downside risk. This doesn’t mean the markets won’t keep going up or that you should sell everything and go to cash. What it does mean is that you need to use your good common sense and keep your portfolio allocated in a fashion that is consistent with your retirement goals, your time horizon and your risk tolerance.

Manage your portfolio with and eye towards downside risk.
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Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. 

Photo credit:  Phillip Taylor PT

Stock Market Highs and Your Retirement is a post from: The Chicago Financial Planner

With the start of a new year, many people resolve to get their finances in order. A part of this process might include hiring a financial advisor or hiring a new financial advisor if you have decided to move on from your current advisor. Hiring the right advisor for your needs is critical.  Here are six questions to ask when choosing a financial advisor: 

How do you get paid?

Fee-only advisors receive no compensation from the sale of investment or insurance products. When selecting a financial advisor, ask yourself whether you feel that a financial advisor who receives a significant portion of their compensation from the sale of financial products can really be counted on to recommend solutions that are in your best interest.

Where will my money be housed?

One of the tactics used by Bernard Madoff to perpetrate his fraud was to send clients his own statements instead of statements generated by a third-party custodian like Charles Schwab, Fidelity, TD Ameritrade, and others.  A third-party custodian provides periodic (monthly or at least quarterly) statements independent of any reports provided by the advisor.  You should never give your investment dollars directly to a financial advisor, they should always be sent directly to the custodian.

This is critical if the advisor will be providing on-going investment advice.  In fact it is a deal-killer if this is not the arrangement. If the advisor says something like “… we send out our own statements to our clients…”  end the conversation and find another advisor.

Are we the exception or the norm for you?

Ask your financial advisor about their client base. If you are a corporate employee looking for help planning for the exercise of your stock options, you should ask the adviser about their knowledge and experience in dealing with clients like you.  A financial advisor who deals primarily with teachers or public sector employees might not be the right choice for you. Likewise if the advisor’s typical client has a minimum of $1 million to invest and your portfolio is more modest, this advisor might not be a good fit for you.

What can you do for me?

If the advisor’s primary service is focused in an area like constructing bond portfolios for their clients and you are looking for a financial planner to construct a comprehensive financial plan for you, this advisor may not be a good match.  Make sure to find someone who offers the types of services and advice that you are seeking.

What are your conflicts of interest?

Financial advisors who are registered representatives will often be incentivized to sell insurance or annuity products promoted by their broker dealer or employer.  Ask how they select the financial and investment products they recommend to clients. Ask them directly about ALL forms of compensation they will receive from working with you, and if they will disclose this information on an ongoing basis. Ask them if there are any restrictions regarding the products they can recommend.

Understand a financial advisor’s potential conflicts of interest before hiring them.
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Do you act in a fiduciary capacity towards your clients?

In layman’s terms, you are asking if the adviser is obligated to put your interests first. The brokerage industry uses the suitability standard, but in my opinion this falls far short of a true Fiduciary Standard. This argument continues in the financial services industry as the regulators work through this issue.

The questions listed above are just a few of the many questions you should ask when choosing a new financial advisor or even to ask of an advisor with whom you currently have a relationship. As an investor, it is ultimately up to you to select the right financial advisor. Do your homework and due diligence. Your financial future could depend on your choice.

Choosing A Financial Advisor? – Ask These 6 Questions is a post from: The Chicago Financial Planner

It’s Super Bowl time and once again my beloved Packers are not playing for the thirteenth consecutive year. They did, however, have an encouraging season and made the playoffs. The play of quarterback Jordan Love was especially encouraging. I did make it to a game at my beloved  Lambeau Field, a win on a “balmy” November day against the Chargers.

Every year the Super Bowl Indicator is resurrected as a forecasting tool for the stock market.

The indicator says that a win by a team from the old pre-merger NFL is bullish for the stock market, while a win by a team from the old AFL is a bad sign for the markets. Looking at this year’s game, San Francisco is an original NFL team while Kansas City is an original AFL team. Clearly investors should be rooting for the 49ers this year.

How has the Super Bowl Indicator done?

While in 2021 the indicator held true to form, it clearly did not in 2022 or 2023. The LA Rams, an original NFL team, won the 2022 game but the stock market had its worst year since 2008 with the S&P 500 dropping by over 18%. The Chiefs won last year’s game, yet the markets ended the year with gains.

The indicator has failed to predict the direction of the stock market in seven of the past eight years. Kansas City won the 2020 game and the market had an up year in spite of the impact of COVID-19. New England won the 2019 game and it was also an up year for the markets. Overall the indicator has held true for 41 of the 57 prior Super Bowls.

Quoted in a Wall Street Journal article before the 2016 game, respected Wall Street analyst Robert Stoval said, “There is no intellectual backing for this sort of thing, except that it works.”

Some notable misses for the indicator include:

• St. Louis (an old NFL team that was formerly and is now again the L.A. Rams) won in 2000 and the market dropped.
• Baltimore (an old NFL team that was formerly the original Cleveland Browns) won in 2001 and the market dropped. Perhaps the markets were confused since the Browns became an AFC team (along with the Steelers and the Colts) as part of the 1970 merger.
• The New York Giants (an old NFL team) won in 2008 and the market tanked in what was the start of the financial crisis.
• In 1970 the Kansas City Chiefs shocked the Minnesota Vikings and the Dow Jones Average ended the year up slightly.

Is this a valid investment strategy?

As far as your investments, I think you’ll agree that the outcome of the game should not dictate your strategy. Rather I suggest an investment strategy that incorporates some basic blocking and tackling:

• A financial plan should be the basis of your strategy. Any investment strategy that does not incorporate your goals, time horizon, and risk tolerance is flawed.
• Take stock of where you are. What impact did the decline in both stocks and bonds in 2022 followed by gains in 2023 have on your portfolio? Perhaps it’s time to rebalance and to rethink your ongoing asset allocation.
• Costs matter.  Low cost index mutual funds and ETFs can be great core holdings. Solid, well-managed active funds can also contribute to a well-diversified portfolio. In all cases make sure you are in the lowest cost share classes available to you.

View all accounts as part of a total portfolio. This means IRAs, your 401(k), taxable accounts, mutual funds, individual stocks and bonds, etc. Each individual holding should serve a purpose in terms of your overall strategy.

The Super Bowl Indicator is another fun piece of Super Bowl hype. Your investment strategy should be guided by your goals, your time horizon for the money and your tolerance for risk, not the outcome of a football game.

Not sure if your investments are right for your situation? Concerned about stock market volatility? Approaching retirement and want another opinion on where you stand? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit:  Flickr

The Super Bowl and Your Investments is a post from: The Chicago Financial Planner

In today’s world of early or semi-retirement, many people wonder when they should begin taking their Social Security benefits. The combination of Social Security and working can complicate matters a bit. You can begin taking your benefit as early as age 62, but that is not always the best choice for many retirees. If you are working either at a job where you are employed or some sort of self-employment, you need to analyze the pros and cons based on your situation.

Full retirement age

 Your full retirement age or FRA is the age at which you become eligible for a full, unreduced retirement benefit. FRA is an important piece in understanding the potential implications of working on your Social Security benefit.

Your FRA depends on when you born:

• If you were born from 1943 -1954 your full retirement age is 66
• If you were born in 1955 your FRA is 66 and two months
• If you were born in 1956 your FRA is 66 and four months
• If you were born in 1957 your FRA is 66 and six months
• If you were born in 1958 your FRA is 66 and eight months
• If you were born in 1959 your FRA is 66 and ten months
• If you were born in 1960 or later your FRA is 67

Source: Social Security

Social Security and working

If you are working, collecting a Social Security benefit and younger than your FRA your benefits will be reduced by $1 for every $2 that your earned income exceeds the annual limit which is $22,320 for 2024. Earned income is defined as income from employment or self-employment. Income from sources like a pension, veteran’s benefits, investment income, interest income or government and military retirement benefits are not included as earned income.

During the year in which you reach your full retirement age the annual limit is increased. For 2024 this increased limit is $59,520. The benefit reduction is reduced to $1 for every $3 of earnings over the limit.

This chart shows the monthly reduction of benefits at three levels of earned income for 2021.

                                         Reduction of Benefits – 2024

Source: Social Security

Working can reduce your Social Security benefits.
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Temporary loss of benefits

The loss of benefits is temporary versus permanent. Any benefit reduction due to earnings above the threshold will be recovered once you reach your FRA on a gradual basis over a number of years. Additionally, if your earnings during these extra years of work rank among your 35 highest earning years, this will serve to increase your benefit calculation and will result in an increased benefit amount.

A one-time do-over 

Everyone is allowed a one-time do-over to withdraw their benefit within one year of the start date of receiving their initial benefit. This is allowed once during your lifetime. This is called withdrawing your benefit.

One reason you might consider this is going back to work and earning more than you had initially anticipated. This is a way to avoid having your benefit reduced. You would reapply later when you’ve reached your FRA, or your earned income is under the limit. Your benefit would increase due to your age and any cost-of-living increases that might occur during this time.

If you do take advantage of this one-time do-over, you must pay back any benefits received. This includes not only any Social Security benefits that you received, but also:

• Any benefits paid based upon your earnings record such as spousal or dependent benefits.
• Any money that may have been withheld from your benefits such as taxes or Medicare premiums.

Social Security and income taxes 

Regardless of your age or the source of your income, Social Security benefits can be taxed based upon your income level. This could certainly be impacted from income earned from employment or self-employment, but it also includes other sources of taxable income such as pension or investment income.

The amount of the benefit that is subject to taxes is based upon your combined income, which is defined as: adjusted gross income + non-taxable interest income (typically from municipal bonds) + ½ of your Social Security benefit.

The tax levels are:

Source: Social Security

Your Social Security benefits may be subject to taxes.
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The Bottom Line 

The decision when to take your Social Security benefit depends on many factors. If you are working or self-employed you will want to consider the impact that your earned income will have on your benefit.

You should also understand that your benefits can be subject to taxes at any age over certain levels of combined income, regardless of the source of that income.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo by Sharon McCutcheon on Unsplash

Social Security and Working – What You Need to Know is a post from: The Chicago Financial Planner

Contrary to what some politicians might say, your Social Security benefits are not an entitlement. You’ve paid Social Security taxes over the course of your working life and you’ve earned these benefits.

Many retirees and others collecting Social Security wonder about the tax treatment of their benefit. The answer to the question in the title is that your Social Security benefits may be subject to taxes.

How do taxes on Social Security work? 

According to estimates by the Social Security Administration (SSA), about 56% of the people who receive Social Security pay taxes on their benefits.

The formula for the taxation of benefits works as follows:

For those who file as single:

• If your combined income is between $25,000 and $34,000, up to 50% of your benefits might be subject to taxes.
• If your combined income is over $34,000, up to 85% of your benefits might be subject to taxes.

For those who file a joint return:

• If your combined income is between $32,000 and $44,000, up to 50% of your benefits might be subject to taxes.
• If your combined income is over $44,000, up to 85% of your benefits might be subject to taxes.

According to the SSA, if you are married but file as single your benefit will likely be subject to taxes.

Source: Social Security Administration

What is combined income?

SSA defines your combined income as:

Your adjusted gross income (from your tax return) 

+ non-taxable interest (from a municipal bond fund for example) 

+ one-half of your Social Security Benefit

For example, if your situation looked like this:

• Adjusted gross income $60,000
• Non-taxable interest income of $1,500
• Social Security benefit of $35,000

Your combined income would be: $60,000 + $1,500 + $17,500 (1/2 of your Social Security benefit) or $79,000. Whether single or married filing jointly, $29,750 (85%) of your Social Security benefit would be subject to taxes.

What this means is that $29,750 would be considered as taxable income along with the rest of the taxable income you earned in that year, this amount would be part of the calculation of your overall tax liability.

Is my Social Security subject to taxes once I reach my full retirement age? 

Your full retirement age (FRA) is a key number for many aspects of Social Security. For those born from 1943 to 1954 your FRA is 66. For those born in 1955 through 1959 your FRA increases by two months for each successive birth year. Your FRA is 67 for those born in 1960 or later. There is no reduction in your Social Security benefit for earned income once you reach your FRA. 

As far as the taxation of your Social Security benefit, age doesn’t play a role. Your benefit will potentially be subject to taxes based on your combined income, regardless of your age. Taxes can be paid via quarterly payments or you can have taxes withheld from your Social Security benefit payments. You will receive a Social Security Benefit Statement or form SSA-1099 each January listing your benefits for the prior year. This is similar to a 1099 form that you might receive for services rendered to a client if you are self-employed.

Related to this, if you are working into retirement your wages or self-employment income are subject to FICA and Medicare taxes regardless of your age.

Is Social Security subject to state income taxes? 

Eleven states currently tax Social Security benefits. These states are:

1. Colorado
2. Connecticut
3. Kansas
4. Minnesota
5. Missouri
6. Montana
7. Nebraska
8. New Mexico
9. Rhode Island
10. Utah
11. Vermont

The rate and method of taxing your benefits will vary by state, if you live in one of these states check with your state’s taxing authority or a knowledgeable tax professional for the details.

The Bottom Line 

Social Security represents a significant portion of retirement income for many Americans. Its important to understand how Social Security works, including any tax implications. This is part of the bigger picture of taxes in retirement. Its important for retirees to understand how taxes will impact their retirement finances and to include this in their retirement financial planning.

Note the information above is a review of the basics of how Social Security benefits are taxed and should not be considered to be advice. Your situation may differ. You should consult with the Social Security Administration, or a tax or financial advisor who is well-versed on Social Security regarding your specific situation.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo by NeONBRAND on Unsplash

Will my Social Security be Taxed? is a post from: The Chicago Financial Planner

One of the best tax deductions for a small business owner is funding a retirement plan. Beyond any tax deduction you are saving for your own retirement.  As a fellow small businessperson, I know how hard you work.  You deserve a comfortable retirement. If you don’t plan for your own retirement who will? Two popular small business retirement plans are the SEP-IRA and Solo 401(k).

SEP-IRA vs. Solo 401(k)

Note the Solo 401(k) is also referred to as an Individual 401(k).

• While a SEP-IRA can be used with employees in reality this can become an expensive proposition as you will need to contribute the same percentage for your employees as you defer for yourself. I generally consider this a plan for the self-employed.
• Both plans allow for contributions up your tax filing date, including extensions for the prior tax year. Consult with your tax professional to determine when your employee contributions must be made. The Solo 401(k) plan must be established by the end of the calendar year.
• The SEP-IRA contribution is calculated as a percentage of compensation. If your compensation is variable the amount that you can contribute year-to year will vary as well. Even if you have the cash to do so, your contribution will be limited by your income for a given year.
• By contrast you can defer the lesser of $$22,500 and $30,000 (for those who are 50 or over) for 2023 into a Solo 401(k) plus the profit sharing contribution. This might be the better alternative for those with plenty of cash and a variable income.
• Loans are possible from Solo 401(k)s, but not with SEP-IRAs.
• A Roth feature is available for a Solo 401(k) if allowed by your plan document. Beginning in 2023 the ability to open and fund a Roth SEP-IRA is available as part of the recently passed Secure 2.0 rules. There will likely be some additional guidance on Roth SEPs from the IRS to come.
• Both plans require minimal administrative work, though once the balance in your Solo 401(k) account tops $250,000, the level of annual government paperwork increases a bit.
• Both plans can be opened at custodians such as Charles Schwab, Fidelity, Vanguard, T. Rowe Price, and others. For the Solo 401(k) you will generally use a prototype plan. If you want to contribute to a Roth account, for example, ensure that this is possible through the custodian you choose.
• Investment options for both plans generally run the full gamut of typical investment options available at your custodian such as mutual funds, individual stocks, ETFs, bonds, closed-end funds, etc. There are some statutory restrictions so check with your custodian.
• For those wishing to invest in alternative assets inside of their SEP or solo 401(k), a number of self-directed retirement plan custodians offer this option.

Both plans can offer a great way for you to save for retirement and to realize some tax savings in the process. Whether you go this route or with some other option I urge to start saving for your retirement today.  

Self-employed? You need to start a retirement plan today.
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Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit Flickr

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k) is a post from: The Chicago Financial Planner

For those of you who are self-employed it is important that you save for your own retirement. Building a business is hard work. For business owners who work solo, or who have a spouse and/or a partner in the business with them, a Solo 401(k) may be the right option. Here are five reasons to consider a Solo 401(k).

High maximum contributions 

For 2022 the maximum contribution limits are $61,000 and $67,500 for those who will be 50 or over in 2022. For 2023 these limits increase to $66,000 and $73,500. This includes the regular employee 401(k) contribution limits for 2022 of $20,500 and $27,000 for those 50 and over. For 2023 these contribution limits increase to $22.500 and $30,000, plus the employer-funded profit sharing component in both years.

The profit sharing portion can range up to 25% of income, though sole proprietors may be limited to 20% due to the nature of the calculation used to determine their contributions. Check with your financial or tax advisor as to how much you will be able to contribute.

Investment flexibility 

A Solo 401(k) can be opened at many popular custodians such as Schwab, Fidelity, Vanguard, T. Rowe Price, and many others. Some self-directed retirement account platforms allow Solo 401(k)s as well. Just like an IRA or a SEP-IRA, you can invest in a range of investment options such as mutual funds, ETFs, closed-end funds, individual stocks and bonds or any other investment vehicle that is offered by the custodian that isn’t prohibited by 401(k) rules.

Contribution flexibility 

While the high maximum contributions are an advantage for those self-employed individuals with the income and cash-flow to afford them, there is no requirement for you to make a contribution. You can skip a year if need be.

Another form of contribution flexibility is the ability to make the employee contributions up to the maximum as long as you earn enough. Contrast this to a SEP-IRA where the contribution limit is a maximum of 25% of your income. Your contribution amount could be much lower in years when your self-employment income is lower than normal. As long as you have the cash to make the contribution, the Solo 401(k) would generally allow a larger contribution at lower levels of income than a SEP-IRA.

Easy to open and maintain 

Most major custodians and brokerage firms welcome these accounts and make the process of opening and funding your account easy. Generally these firms use a prototype plan and there are very few regulatory or administrative requirements until your account balance reaches the $250,000 level.

Roth options are available

Depending upon the custodian you select, a Solo Roth 401(k) option might be available to you. Just like a 401(k) plan with an employer, the Solo Roth 401(k) option allows larger Roth contributions than the Roth IRA limits. For those whose income is too high for a Roth IRA, the Roth Solo 401(k) can be a good option.

If you are interested in opening a Solo 401(k) here are a few things to keep in mind:

• In order to contribute to a Solo 401(k) for the current year the account must be opened by December 31. Contributions can generally be made up to the filing date, including extensions, for the business. It’s best to check with your tax or financial advisor regarding the latest date for contributions.
• A Solo 401(k) only works for you, a partner, and/or a spouse. If you have employees this is not the vehicle for you. Check with your financial advisor or prospective custodian for more on this.
• If you are interested in a Roth feature and/or the ability to take loans from your account, you will want to make sure that the custodian you are considering offers these features. You will also want to inquire about any and all account fees. Note that any trading fees or mutual fund purchase charges that apply to other accounts at the custodian will generally apply here as well.

The Solo 401(k) can be a great self-employed retirement plan. If you are self-employed you need to start saving for your retirement. You work too hard to put this off any longer and if you don’t save for your own retirement nobody else will do it for you.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit:  Flickr

5 Reasons to Consider a Solo 401(k) is a post from: The Chicago Financial Planner

Saving for retirement is a major undertaking for most of us. Increasing healthcare costs and longer life expectancies make the hill a bit steeper to climb each year. Health savings accounts (HSA) provide another vehicle to save for retirement.

Many of you have the option to enroll in high-deductible insurance plans that allow the use of a health savings account via your employer. An HSA can serve as an additional retirement savings vehicle on top of your IRA or 401(k) to help cover healthcare and other retirement expenses.

The rising cost of healthcare in retirement 

According to Fidelity an average couple aged 65 will need to have $315,000 accumulated to cover medical costs in retirement. This is up from prior year’s estimates including $285,000 in 2019, $275,000 in 2017 and from $220,000 in 2014. The estimate was $190,000 in their 2005 survey.

This is a significant amount even for retirees with a retirement nest egg in excess of $1 million.

High deductible health insurance plans 

Health insurance plans with an annual deductible of at least $1,4000 for a single person and $2,800 for a family qualify for use with HSAs in 2022, These limits increase to $1,500 and $3,000 for 2023. These types of plans are becoming more common with employers and are available privately as well. Premiums are generally less expensive than plans with lower deductibles. Out-of-pocket expenses for high deductible plans cannot exceed maximums of $7,050 for an individual and $14,100 for family coverage in 2022, increasing to $7,500 and $15,000 for 2023.

How the HSA works 

HSA accounts can only be used in conjunction with a high-deductible health insurance plan. The HSA will be a separate medical savings account into which the employee or private policy holder can contribute money during the year. The money goes into the account on a pre-tax basis much like a traditional 401(k) or IRA. This is a great opportunity for those who earn too much to make pre-tax contributions to a traditional IRA. Those who have made the maximum contributions to their 401(k) have another pre-tax savings option available to them as well.

The HSA contribution limits for 2022 are $3,650 for individuals and $7,300 for families. These limits increase to $3,850 and $7,750 for 2023. Those who will be 55 or older at any point during the year are eligible to contribute an extra $1,000 in 2022, this remains unchanged in 2023. Some employers may also make contributions to employee’s accounts.

Money can be withdrawn tax-free from the HSA account to pay for a variety of qualified medical expenses. Withdrawals used to pay for non-qualified medical costs will be included in your gross income and included in your taxable income. Withdrawals for non-qualified expenses may also be subject to a penalty.

The real advantage is that money not used to cover eligible expenses can also be left in the account from year-to-year. This differs from a Flexible Spending Account (FSA) where all money must be used by the end of the year in conjunction with qualified medical expenses. Any unused dollars are lost to you.

The money in the HSA is portable when you leave an employer. Many banks and investment custodians offer HSA accounts, some with investment options that are similar to an IRA account. The investments chosen should reflect your risk tolerance and time horizon for the money. Just like an IRA account you should shop around for the HSA account that best meets your needs including investment options and fees.

Qualified medical expenses 

Examples of qualified medical expenses include:

• Health insurance coinsurance and deductibles
• Most medical and dental expenses
• Vision care
• Prescription drugs and insulin
• Medicare premiums
• A portion of the premiums for a tax-qualified long-term care policy

These are just some examples of qualified medical and related expenses for which HSA funds can be used on a tax-free basis.

Health Savings Accounts and retirement 

For those who can afford to cover some or all of their out-of-pocket medical costs from other sources while they are working, HSA contributions can serve as an excellent supplement to their other retirement savings in accounts like IRAs and 401(k)s.

Money in the HSA can be saved until retirement to cover qualified medical costs. This can make your retirement savings go farther. Remember the money comes out tax-free for qualified medical expenses.

Beyond medical expenses, once you reach age 65 the money can be withdrawn penalty-free for purposes other than paying for qualified medical expenses, though the withdrawals will be taxed as ordinary income rates like a traditional IRA account.

HSAs are not subject to required minimum distributions, allowing the HSA to continue to grow tax-free. If a spouse is named as the beneficiary of the account, he or she can inherit the money tax-free. Non-spousal beneficiaries will be taxed on the account’s fair market value.

Your HSA can be another leg on the retirement planning stool.
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The Bottom Line

With the cost of healthcare in retirement continuing to increase, the health savings account is increasingly being viewed as an additional retirement account. If you have access to one, consider funding an HSA account to help supplement your other retirement savings efforts.

Photo by Bill Oxford on Unsplash

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Health Savings Accounts – The Other Retirement Plan is a post from: The Chicago Financial Planner

After a strong finish in 2020 and very solid returns in 2021, we’ve seen a lot of market volatility so far in 2022. The S&P 500 index was down about 17.6% on a year-to-date basis as of Friday’s close. The combination of higher inflation, higher interest rates and the situation in Ukraine are all fueling this market volatility. Nobody can predict how long this will last. Regardless, here are five things you should do during a stock market correction.

Do nothing

Assuming that you have a financial plan with an investment strategy in place there is really nothing to do at this point. Ideally you’ve been rebalancing your portfolio along the way and your asset allocation is largely in line with your plan and your risk tolerance.  You should continue to monitor your portfolio and make these types of adjustments as needed. Making moves in reaction to a stock market correction (official or otherwise) is rarely a good idea.  At the very least wait until the dust settles.  As Aaron Rodgers told the fans in Green Bay after the Packers bad start in 2016, relax. They went on to win their division before losing in the NFC title game.  Sound advice for fans of the greatest team on the planet and investors as well.

Review your mutual fund holdings

I always look at rough market periods as a good time to take a look at the various mutual funds and ETFs in a portfolio. What I’m looking for is how did they hold up compared to their peers during the market downturn. For example during the 2008-2009 market debacle I looked at funds to see how they did in both the down market of 2008 and the up market of 2009. If a fund did worse than the majority of its peers in 2008 I would expect to see better than average performance in the up market of 2009. If there was under performance during both periods to me this was a huge red flag.

Don’t get caught up in the media hype

If you watch CNBC long enough you will find some expert to support just about any opinion about the stock market during any type of market situation. This can be especially dangerous for investors who might already feel a sense of fear when the markets are tanking.  I’m not discounting the great information CNBC and the rest of the financial media provides, but you need to take much of this with a grain of salt. This is a good time to lean on your financial plan and your investment strategy and use these tools as a guide.

Focus on risk

Use stock market corrections and downturns to assess your portfolio’s risk and more importantly your risk tolerance. Assess whether your portfolio has held up in line with your expectations. If not perhaps you are taking more risk than you had planned.  Also assess your feelings about your portfolio’s performance. If you find yourself feeling unduly fearful about what is going on perhaps it is time to revisit your allocation and your financial plan once things settle down.

Look for bargains

If you had your eye on a particular stock, ETF, or mutual fund before the market dropped perhaps this is the time to make an investment. I don’t advocate market timing but buying a good long-term investment is even more attractive when it’s on sale so to speak.

Markets will always correct at some point.  Smart investors factor this into their plans and don’t overreact. Be a smart investor.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo by Austin Distel on Unsplash

Five Things to do During a Stock Market Correction is a post from: The Chicago Financial Planner

Whether you work as an employee or you are self-employed you work hard for your money. In spite of what was said on PBS Frontline The Retirement Gamble and elsewhere in the press, in my opinion 401(k) plans are one of the best retirement savings vehicles available. Here are 4 steps to make sure that your 401(k) plan is working hard for your retirement.

Get started 

This might seem basic, but you can’t benefit from your employer’s 401(k) plan unless you are participating. If you haven’t started deferring a portion of your salary into the plan this is great time to start. Look at your budget, determine how much you can afford to defer each pay period and get started. You may be able to do everything online, otherwise contact the plan administrator at your company.

Are you self-employed? There are a number of retirement plan options to consider. If you don’t have a retirement plan in place for yourself, do this today.  You work way too hard not to be putting something away for retirement.

Increase your contributions 

This is a great time to review the amount of your salary deferral and look to increase it if you are not already maxing out your contributions.  For 2022 the maximum contribution is $20,500 if you are under 50 and $27,000 if are 50 or over at any point during the year. For those 50 and over you can still make the full $6,500 catch-up contribution even if your contributions are otherwise limited to an amount below the maximum due to your plan failing its testing. This situation can occur for highly compensated employees and often occurs with smaller plans.

If you were enrolled into your employer’s plan under an automatic enrollment scenario the amount you are deferring is likely inadequate to meet your retirement needs, you need to revisit this and take affirmative step both in terms of the amount deferred and the investment options to which those salary deferrals are directed.

It’s often popular to urge 401(k) participants to contribute at least enough to receive the full amount of any company match. I agree that it makes sense to go for the full match, but the key words here are at least. The quality of each plan is different, but if your plan offers a solid investment menu and reasonable expenses, consider increasing your contributions beyond the minimum required to receive the full company match. Automatic salary deferrals are an easy, painless way to invest and simplicity in saving for your retirement should not be pooh-poohed.

Take charge of your investments, don’t just default 

Target Date Funds are offered by many 401(k) plans and are often the default option for those participants who do not make an investment election. While TDFs may be fine for younger participants, I’m not a huge fan for those of you within say 15-20 years of retirement. If you are in this situation, look at an allocation that is more tailored to your overall situation. At the very least if you are going to use the Target Date Fund option offered by your plan take a hard look at how the fund will invest your money, how this fits with investments you may have outside of the plan, and the fund’s expenses.

Plan for your retirement 

While contributing to your 401(k) plan is a great step, it is just that, a step. Your 401(k) is an important tool in planning for retirement, but the keyword is planning.  Many 401(k) plan providers offer retirement planning tools on their websites.  They may also offer advice in some format.  Consider taking advantage.

If you work with a financial advisor make sure that they consider your 401(k) and all investments when helping you plan for your retirement.  I find it amazing every time that I hear of some brokerage firm that forbids its registered reps from providing clients advice on investing their 401(k) account because the plan is not offered by their firm.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo source:  Annie Spratt via Upsplash

4 Steps to Make Your 401(k) Work as Hard as You Do is a post from: The Chicago Financial Planner