It isn't how much you make
. . .It's how much you keep!
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Everyone approaches their finances differently, but there are common mistakes that certain money personalities make. The following highlights five different money personalities, the mistakes they make, and how they can improve their financial picture.
Entrepreneur
Because they put all their financial resources and energy into their business, entrepreneurs may make mistakes such as cashing out their retirement plans to fund their business, holding too much debt, or even getting behind on self-employment taxes.
Entrepreneurs would be best served by developing a business plan with income and expense projections to ensure they use debt wisely to fund their business. They should also make contributions to a retirement plan annually, even if it’s only a few thousand dollars. And finally, entrepreneurs should work with a tax professional to help reduce their taxes as much as possible,
while making sure quarterly tax payments are made.
The Saver
This is the person who follows all the rules and does it just right. They fully fund their retirement
accounts each year, don’t carry much debt, and have plenty of savings in the bank for any unexpected expenses. While this money personality may get to retire early, they may want to stop and smell the roses once in a while.
The High-Income Earner
Professionals, such as doctors and lawyers, fall into two groups: savers and spenders. Those who
fund a large lifestyle may find they have trouble funding their retirement because they’ve spent too much.
Big earners need to develop a financial plan so they understand how much money they will need
to fund their retirement based on the lifestyle they want to live. They should also pay themselves first with a predetermined amount to
saving, before buying nicer cars or bigger houses, as well as considering setting monthly spending limits.
I Need to Save?
This money personality spends their paycheck as soon as it hits their account, and in some cases, live beyond their means. They have no savings if an unexpected emergency comes up, and they are likely carrying too much debt. To be able to retire, this person needs a financial plan with a strict budget to help pay down debt and develop both long- and short-term savings.
Doing Fine and Enjoying Life
This person saves and spends. They want to enjoy life experiences along the way to retirement, such as vacations, maybe a boat or
cabin. While they contribute to their 401(k) plan, they may not have a financial plan that includes short-term financial goals and how much they need to save for retirement.
While it is great that this money personality saves, they need to ensure that their spending isn’t outpacing their savings. By developing a solid financial plan, this money personality can create a more balanced approach to saving and
spending.
What’s Your Money Personality?
You should determine where you fall on the spectrum of money personalities so you can develop a financial plan that suits your personality, but also helps you secure your future.
Please call if you’d like to discuss this topic in more detail.
To make sure you’re on track for retirement, you should have an idea of how much you need to set aside to reach your retirement goal.
Know Your Limits — Before you come up with an annual savings target, it’s important to understand how much you’re allowed to contribute to a 401(k) plan. In 2021, workers younger than 50 can save $19,500 in a 401(k), 403(b), or similar plan, while those age 50 and older can save $26,000 annually, an extra $6,500 per year.
Contribution limits usually go up slightly every year; if you’re an aggressive saver, you’ll also want to pay attention to that and adjust accordingly.
At a Minimum, Get Your Match — The first rule of 401(k) plans is to save enough to get your full employer match. You’ve probably heard it before, but not contributing enough to get your employer’s matching contributions
is like leaving free money on the table. Even if you’re not impressed with your company’s 401(k) plan and would prefer to save in some other way, it still makes sense to at least get that free money.
But How Much Do I Really Need? — So you know how much the government will let you save and that you should be contributing enough to get your employer match. But how much should you be setting aside to prepare yourself for a comfortable retirement? That’s the ultimate question.
Unfortunately, there’s no magic number because every individual situation is different. People have different tolerances for risk, market performance varies over time, and everyone has their own idea of an ideal retirement. That’s why it’s best to talk to a financial advisor who can help you determine how much you need. But in the meantime, there are a few rules of thumb that may help you get a sense of where you stand.
One guideline suggests saving a certain percentage of your salary every year for retirement. Between 10% and 15% is usually the recommended number. If you started saving when you were young, your target savings percentage is usually lower, but if you procrastinated, you’re more likely to be looking at having to save 15% or even 20% of your pay to get you on track to a comfortable retirement. The good news is that your employer match counts in that number, so if your goal is to save 10% and your employer match is 5%, you only need to save 5% of your pay.
A clear financial plan helps you prepare for the future, brace yourself for the unexpected, and positions you to pursue your goals. Below are six signs
it may be time for you to get a financial plan.
You’re planning (or just had) a big life change.
New job. New baby. New house. All of those milestones and more are signs you should take a big picture look at your finances. When your life changes in big ways, it often brings with it changes in how you approach money.
You’re worried about your finances — and your future.
If money worries keep you up at night, a financial plan can help ease your mind. Whether you have immediate worries or are just feeling uneasy about what tomorrow may hold, you can regain control over your life by having a clear direction.
You’re making good money, but you’re not sure where it goes.
If you want to turn today’s income into tomorrow’s wealth, you need a financial plan. That way, you’ll be able to take the money you’re bringing in today and use it to create a secure future for yourself and your family.
You have financial goals, but you’re not sure how to make them a reality.
Does retirement seem like a distant dream? Do you wish you could upgrade to a bigger home, send your kids to college without taking on debt, or start a
business? With a financial plan, you’ll know what you need to do financially to make those dreams a reality.
You and your partner are fighting about money.
If you and your partner can’t see eye-to-eye on money issues, a financial plan might be part of the solution. Meeting with an objective third party can help you both recognize where you stand when it comes to your finances, and then negotiate a path forward that works for both of you.
Your investments and finances are getting so complicated, it’s difficult for you to keep track of everything.
Many people start out managing their investments and finances on their own. That often works for a time, but as your money and life get more complex, it can be difficult to manage all the details without help.
If you would like more information or to discuss your financial concerns
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in December 2019 as part of a larger federal spending package, included a provision that warrants special attention from those who own high-value IRAs. Specifically, the “stretch” IRA provision — which permitted non-spouse beneficiaries who inherited IRAs to spread distributions over their lifetimes — has been substantially restricted. IRA owners may want to revisit their estate planning strategies to help prevent their heirs from getting hit with higher-than-expected tax bills.
The old “stretch” rules
Under the old rules, a nonspouse beneficiary who inherited IRA assets was required to begin minimum distributions within a certain time frame. Annual distributions could be calculated based on the beneficiary’s life expectancy. This ability to spread out taxable distributions over a lifetime helped minimize the annual tax burden on the beneficiary. In the past, individuals could use this stretch IRA strategy to allow large IRAs to continue benefiting from potential tax-deferred growth for possibly decades.
Example: Consider the hypothetical case of Margaret, a single, 52-year-old banking executive who inherited a million-dollar IRA from her 85-year-old father. Margaret had to begin taking required minimum distributions (RMDs) from her father’s IRA by December 31 of the year following her father’s death. She was able to base the annual distribution amount on her life expectancy of 32.3 years. Since she didn’t really need the money, she took only the minimum amount required each year, allowing the account to continue growing. Upon Margaret’s death at age 70, the remaining assets passed to her 40-year-old son, who then continued taking distributions over the remaining 13.3 years of Margaret’s life expectancy. The account was able to continue growing for many years.
The new rules
As of January 2020, the rules for inherited IRAs changed dramatically for most nonspouse beneficiaries.1 Now they generally are required to liquidate the account within 10 years of the account owner’s death. This shorter distribution period could result in unanticipated and potentially large tax bills for high-value inherited IRAs.
Example: Under the new rules, Margaret would have to empty the account, in whatever amounts she chooses, within 10 years. Since she stands to earn her highest-ever salaries during that time frame, the distributions could push her into the highest tax bracket at both the federal and state levels. Because the account funds would be depleted after 10 years, they would not eventually pass to her son, and her tax obligations in the decade leading up to her retirement would be much higher than she anticipated.
Notable exceptions
The new rule specifically affects most nonspouse designated beneficiaries who are more than 10 years younger than the original account owner. However, key exceptions apply to those who are known as “eligible designated beneficiaries” — a spouse or minor child of the account owner; those who are not more than 10 years younger than the account owner (such as a close-in-age sibling or other relative); and disabled and chronically ill individuals, as defined by the IRS. The 10-year distribution rule will also apply once a child beneficiary reaches the age of majority and when a successor beneficiary inherits account funds from an initial eligible designated beneficiary.
A word about trusts
In the past, individuals with high-value IRAs have often used what’s known as conduit — or “pass-through” — trusts to manage the distribution of inherited IRA assets. The trusts helped protect the assets from creditors and helped ensure that beneficiaries didn’t spend down their inheritances too quickly. However, conduit trusts are now subject to the same 10-year liquidation requirements, so the new rules may render null and void some of the original reasons the trusts were established.
What can IRA account owners do?
IRA account owners should review their beneficiary designations with their financial or tax professional and consider how the new rules may affect inheritances and taxes. Any strategies that include trusts as beneficiaries should be considered especially carefully. Other strategies account owners may want to consider include converting traditional IRAs to Roths; bringing life insurance, charitable remainder trusts, or accumulation trusts into the mix; and planning for qualified charitable distributions.
1For account owners who died prior to December 31, 2019, the old rules apply to the initial beneficiary only (i.e., successor beneficiaries will be subject to the 10-year rule).
If you have questions or would like more information
please contact Frank
Representatives are registered through, and securities are sold through Nationwide Planning Associates, Inc., Member FINRA/SIPC, located at 115 West Century Road, Suite 360, Paramus, NJ 07652. Investment advisory services are offered through NPA Asset Management, LLC. Insurance sold through licensed NPA Insurance Agency, Inc. agents. Nationwide Planning Associates, Inc. and Frankly Financial are non-affiliated entities.
This communication is strictly intended for individuals residing in the state(s) of CO, CT, FL, NJ, NY, NC, OH, PA and RI. No offers may be made or accepted from any resident outside the specific states referenced.
Prepared by Broadridge Advisor Solutions Copyright 2020.