A Review of the CalSavers Retirement Savings Program

A Review of the CalSavers Retirement Savings Program

If you’ve been following the California legislative process at all, or if you own a business that employs people in California, you may have heard of the CalSavers Retirement Savings Program.  In 2016, Governor Jerry Brown signed Bill 1234, requiring development of a workplace retirement savings program for private sector workers without access to one.  The resulting program is known as CalSavers.

Basically, the program forces employers with more than 5 employees to defer a portion of their employees’ paychecks into a state run Roth IRA.  These contributions are invested in default target date retirement funds, unless the employee directs their investments otherwise.  Employees may also opt out entirely, if they choose.

The benefit of such a program is easy access to a retirement savings account.  Employees could contribute to one on their own, of course, but that would require opening an account at a brokerage firm & making investment decisions.  CalSavers greases the wheels by providing a “done for you” program that employees are defaulted into.

The positive spin here is that the program will certainly result in more retirement savings for many thousands of employees.  The negative side of the story comes from the business community.  Businesses without retirement plans will be forced to take the time to open a plan, enroll their employees, and deposit their contributions.

CalSavers isn’t at all unprecedented.  At this point 21 states have enacted similar legislation.  The law is taking a good amount of “heat” though.  Several industry groups are suing the state treasurer in an attempt to derail the rule.  Some plaintiffs don’t care for the state government telling them what to do, while others in the financial industry probably see the program as a competitive threat.

Whatever your take on the matter, businesses will be required to comply beginning in June of 2020 as the law stands today.  This post will provide a quick overview of the program, including its benefits and shortcomings.

 

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How to Evaluate Real Estate Investments

How to Evaluate a Real Estate Investment

The concept of acquiring rental properties as a means to build passive income has become exceptionally popular recently.  In fact, it’s difficult to peruse the internet for content on personal finance without bumping into videos/podcasts/blogs/courses on how to build passive income through real estate investing.

My take on real estate investing is that it can indeed be a wonderful complement to your investment portfolio.  But the conditions need to be just right.  And given how quickly housing prices have risen since the depths of the financial crisis in 2009, the circumstances today are rarely compelling.

As you can imagine, this is a conversation I have with clients frequently.  Some have an existing property we need to evaluate.  Others fall in love with the idea of putting in sweat equity now & building an empire of properties that kick off income over time.  This sounds nice in theory, but in my experience rarely pencils out.  (At least of the opportunities I’ve seen recently in California & Oregon).

This post will explore how to evaluate real estate investing opportunities.  We’ll cover cash flow, return on investment, and go through a real life scenario of a property I pulled from Zillow.com.

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72(t) Distributions: The Ultimate Guide to Early Retirement

72t Distributions: The Ultimate Guide to Early Retirement

What’s the most common piece of retirement advice you’ve ever heard?  I bet it has something to do with tax advantaged retirement savings.  Most people are inundated with voices telling them to start saving early and take advantage of tax deferrals.  It’s solid advice.  Saving tax deferred money through IRAs, 401(k) plans, and other retirement vehicles is a wonderful way to grow your wealth over time.

The downside?  Those pesky withdrawal penalties.  The IRS will typically ding you 10% if you withdraw from these accounts before turning 59 1/2.  This can pose a problem if you’re considering an early retirement.  Fortunately there are a few loopholes.  eight of them, in fact:

  1. Roll withdrawals into another IRA or qualified account within 60 days
  2. Use withdrawals to pay qualified higher education expenses
  3. Take withdrawals due to disability
  4. Take withdrawals due to death
  5. Use withdrawals for a qualified first-time home purchase up to a lifetime max of $10,000
  6. Use withdrawals to pay medical expenses in excess of 7.5% of adjusted gross income
  7. As an unemployed person, take withdrawals for the payment of health insurance premiums
  8. Take substantially equal periodic payments pursuant to rule 72t

For those of you interested in an early retirement, the final loophole is likely the most interesting to you.

According to rule 72t, you may take withdrawals from your qualified retirement accounts and IRAs free of penalty, IF you take them in “substantially equal period payments”.

This post explores how.

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Case Study: Retiring With $1,000,000

Case Study: Retiring With $1,000,000

Those of you who know me know that I’m a massive baseball fan.  And when it comes to famous quotes from baseball players, one person comes to mind more than any other: Yogi Berra.

Yogi Berra was a long time catcher for the Yankees and had an incredible hall of fame career.  He was equally known for his head-scratching quotes, which the world has affectionately termed “Yogi-isms.”  Yogi didn’t comment often on financial topics, but he does have one quote that applies nicely to retirement planning:

“A nickel ain’t worth a dime anymore.”

When we think about retirement planning, many people consider $1,000,000 as kind of a “golden threshold.”  They think of a million dollars as the minimum nest egg they’ll need in order to retire comfortably.  But as Yogi pointed out, being a millionaire doesn’t amount to what it used to.

So is it even possible to retire with $1,000,000 these days?

Let’s find out.  In this post we’ll explore a hypothetical couple named John and Jane.  They’ve saved $1,000,000 and want to retire, which is a very common situation for many Americans.

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What Everyone Ought to Know About Long Term Care Insurance

What Everyone Ought to Know About Long Term Care Insurance

You’ve seen the stats.  Long term care is expensive, and we’re all likely to need it at some point in our lives.  The cost of spending time in a nursing home or assisted living facility adds up quickly, which is why many retirees choose to insure against it through a long term care insurance policy.

Problem is, since there’s a high likelihood of requiring long term care, insurance is an expensive proposition in its own right.  Plus, there’s no guarantee that the premium costs of a policy today don’t rise in the future.  Genworth, one of the biggest underwriters in the long term care insurance, received approval in the Q1 of 2019 to raise premiums an average of 58%.  (Insurance companies must receive approval on a state to state basis).  That’s also after the company raised costs an average of 45% in 2018, and 28% in both 2017 and 2016.  Ouch.

Are you better off crossing your fingers and hoping you don’t need expensive care for a long period of time?  Or is it better to cover this risk through an insurance policy that will cost you an arm and a leg anyway?

This post will cover the essentials of long term care insurance, including exactly how to decide whether picking up a policy is a good decision for you and your family.

 

Long Term Care: The Stats

So here’s the big question.  What are the chances you’ll ever need long term care?  According to longtermcare.gov, about 70% of people turning 65 will need long term care services at some point in their lives.  With the average annual cost of a nursing home totaling around $100,000 these days (depending on where you live), this can be a scary proposition.

The stats can be misleading, though.  Many people who need long term care services only need them for short periods of time.  And since most long term care policies have elimination periods (the waiting period before the policy starts paying out) of around 90 days, many people won’t even need care long enough for their coverage to kick in.

What Everyone Ought to Know About Long Term Care Insurance

What Everyone Ought to Know About Long Term Care Insurance

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How to Calculate Solo 401(k) Contribution Limits

How To Calculate Solo 401k Contribution Limits

Solo 401k plans have many aliases: solo-k, uni-k, and one-participant-k, among others.  Whatever you want to call it, the retirement plan is one of my very favorite for small business owners without eligible participants.  They’re easy to set up, inexpensive to operate, and simple to maintain.

One of the few downsides of solo 401k’s is that they do have one murky intricacy: determining the maximum amount you can contribute in a given year.

This post will cover how to calculate solo 401k contribution limits.  We’ll cover the contribution calculations, the deadlines, and everything else you need to know about the accounts.

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A Beginner's Guide to Cash Balance Plans

A Beginner’s Guide to Cash Balance Plans

In my financial planning practice I work with a good number of business owners who want to make aggressive contributions to their tax deferred retirement accounts.  This helps put them on strong footing for retirement, but also provides a generous tax deduction.  While the 401k plan is the primary retirement plan most business owners are familiar with, a cash balance plans is one I often recommend in addition.  In fact, cash balance plans can actually allow for far greater contributions & tax advantages.

A cash balance plan could be a good fit if you’d like to contribute over $50,000 per year to a tax advantaged retirement plan.  They don’t come without their nuances though.  This guide will explain how cash balance plans work and whether they might be a good fit for you.

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Should Your Portfolio Change After You Retire?

Should Your Portfolio Change After You Retire?

One question that’s come up several times over the last couple months centers on whether your portfolio should change after you retire.  In fact, one person I’ve spoken with recently assumed that once he retired, his advisor would by default sell all the stock funds in his accounts and replace them with income producing bonds.

Typically the longer your time horizon, the more risk you have the capacity to take in your investment portfolio.  Most people in their 20s and 30s have a high capacity to take risk, since they have a long time until they’ll need to live off their savings.  A significant portfolio loss won’t impact their life, and they have a long time to recover.  Because of that, many choose to hold mostly equities in their retirement accounts since they’ll provide the greatest long term returns.

The closer you get to retirement, the lower your capacity to take risk.  Prudent investors tend to shift their asset allocations more and more toward bonds as this progression evolves.  But for most people it should level out at some point.  Most of us will need some growth out of our portfolios in retirement if our assets are going to last the rest of our lives, meaning that we probably don’t want to be 100% in bonds.

But how should our investment strategy change when transitioning from the accumulation to the distribution phases of our lives, and should it change at all?  This post will explore the issues, and what you might consider when making the transition yourself.

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What You Need to Know About the SECURE Act Retirement Bill

What You Should Know About the SECURE Act Retirement Bill

Every now and then, lawmakers in Washington make noise about changing various sections of the tax advantaged retirement accounts I’m so fond of recommending to my clients.  Now that we’re living substantially longer, and a greater portion of our lives is actually spent in retirement, there’s a good argument that we should increase age limits, mandatory distributions, and other rules governing IRAs, 401(k)s and other types of accounts.

I usually don’t pay much attention to this speculation until there’s a bill on the floor that has a strong chance of becoming law.  The majority of the legislation drafted in this area doesn’t get far, and often doesn’t even get out of committee.

Nevertheless, the house and senate have both recently introduced bills that would change how retirement accounts work.  I’m no political expert, and don’t have the foggiest idea what the chances are of one of these bills passing.  But from what I’m reading there’s more momentum for retirement reform now than there’s been in the last several years.  Plus, more than one client asked my thoughts on the subject recently so I felt a summary post would be appropriate.  This post will cover what happened & why it might be important to you.

 

Pending Legislation

In February the senate introduced a bill called the “Retirement Enhancement and Savings Act” (or RESA), aimed at fixing America’s retirement savings problems – both in the public and private sectors.  This isn’t the first bill on retirement reform that’s been introduced recently.  Multiple versions containing similar provisions have been introduced since 2016, which speaks to the growing interest in helping Americans save for retirement.

Meanwhile, the house passed the SECURE Retirement bill (Setting Every Community Up for Retirement Enhancement Act) about a week and a half ago in a 417-3 vote.  This bill contains many of the same provisions as RESA, and the bipartisan support on both sides of congress could mean one of the bills may actually make it into law sometime soon.

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Setting Up a 401(k) to Take Advantage of the 'Mega' Back Door Roth Conversion

Setting Up a 401(k) to Take Advantage of the ‘Mega’ Back Door Roth Conversion

If you’re a personal finance nut you may have heard of a strategy called the “back door Roth IRA conversion.”  This maneuver essentially allows you to contribute money to a Roth IRA, even if your income is otherwise to high to make a direct contribution.  You make a non-deductible contribution to a traditional IRA, convert those funds to a Roth IRA, and presto!  You have cash in the Roth that won’t ever be taxed again.  While it seems like this is a glaring loophole in the tax code, Congress has endorsed the strategy in a conference committee report from the Tax Cut & Jobs Act.

But as great as it is to take advantage of Roth IRAs while you’re in high tax brackets, you’re still limited to the annual IRA contribution maximums of $6,000 per year (or $7,000 if you’re 50 or older).  The “Mega” back door Roth conversion is a similar strategy, but allows for up to $37,000 per year in additional Roth contributions using a 401(k) plan.

 

Why the “Mega” Back Door Roth Conversion Strategy Works

 

The Three Types of 401(k) Contributions

To start, let’s review the three types of contributions you could make to a 401(k) plan.  The first is the most common: your employee deferrals.  You can instruct your employee to defer funds from your paycheck and deposit them on your behalf into the company’s 401(k) plan.  Some plans allow you to make these deferrals on a Roth basis, and the limit in 2019 is $19,000 per year.

The second type of contribution is an employer contribution.  This is anything your employer puts into the plan on your behalf, and includes matching contributions, or contributions based on a percentage of your compensation or company profitability.  It may be subject to a vesting schedule, and is always made on a pre-tax basis.

The third, and widely unknown type of contribution is an after-tax deferral.  Some 401(k) plans allow you to make additional contributions beyond your employee deferral on an after-tax basis, once you’ve reached the $19,000 annual limit.  Note here that 401(k) plans are not required to allow this feature, and not all do.

There are two limitations to annual 401(k) contributions.  The first is the $19,000 limit on employee contributions ($25,000 if you’re over 50 years old).  The second is on the total amount contributed to the plan on your behalf.  This limit is $56,000 in 2019, and consists of the three contribution types listed above.

So, to determine how much you could contribute in after-tax deferrals, you’d need to subtract $19,000 (again, $25,000 if you’re over 50) and the total amount of your employer contributions from $56,000.

Theoretically you could make up $37,000 per year in additional Roth IRA contributions using this maneuver ($56,000 – $19,000).  You’d need to be under 50 though, and you couldn’t receive any contributions from your employer.

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