Everyone can use some passive income

Passive income is looked at as the holy grail of finance and investing.  When you think of it who wouldn’t want $100,000 or $1,000,000 of income coming in each year without having to spend an hour at the office.  It gives you more freedom, flexibility and can help you achieve financial independence.  Most people think that having passive income is something that is unachievable, but it can be done by setting a goal, putting together an action plan, and executing that action plan.

Outside of putting their kids through college and not running out of money in retirement, passive income one of the most popular financial goals I hear from my clients.  But even after reading books like Rich Dad / Poor Dad or The 4 Hour Week that emphasize the importance of passive income , you’ll probably still wonder what you have to do to achieve it.

Set a Passive Income Goal

The first step is to set a goal for how much passive income you would like.  Everybody has a different level of income that will bring maximum happiness due to different desires, needs, and living arrangements.  It’s up to you to find out your optimum income level.  Some people shoot for enough passive income to achieve financial independence and the ability to cover all of their expenses.  You do not need stop at $100,000 though, maybe you want $1 million or $5 million a year in passive income.  This is the time to dream, and dream big!

Put Together an Action Plan

Goals are great, but they come to life when you put an action plan together that shows how to achieve that goal.  Passive income starts with savings.  Without a healthy amount of savings, nothing works.  You must create a system where you are saving X amount of money every month, investing Y amount every month, and working on Z project until completion. Things will be slow going at first, but once you save a little bit of money you will start to build momentum.

We’ll look at a simple example that shows how you can achieve that $100,000 a year in income goal using real estate.  Let’s say if you need $50,000 of cash to put a down payment and purchase a $200,000 investment property that produces $20,000 of net income each year.  You would have to save and allocate $50,000 in 5 buckets over a period of time to purchase the 5 properties.  Let’s say you can save $25,000 a year.  You would be able to purchase a new property every 2 years and in 10 years you would have the 5 properties producing $100,000 a year in income.  I am simplifying things a little. In reality, once you started purchasing a couple of properties, you could start using the equity in each property to purchase additional properties. Your yearly net income would go up each year also as you are raising rents.  On the downside a property that cost $200,000 today will most likely cost more in the future so you will need more than $50,000 to purchase each property.  Also increasing would be things like property taxes and other expenses.

Real estate is not the only thing that produces passive income and I recommend having different sources added to your mix.  Things like dividends payments from stocks or interest from acting as a bank and lending out money are other examples that work.  Another example is royalties from things like authoring a book or writing or recording music.

 Force Yourself to Start

Starting is the hardest part, but also the most important.  Circle a date to get started and push aside any distractions.  Once you get started you can use a thermometer to track your goal and ensure you are progressing as you had planned.

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Small Business Retirement Plans

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The vast majority of businesses in the U.S employ fewer than 100 workers, yet these employees have less access to things like retirement planning vehicles and other benefits than those who work for larger companies.  Here’s an overview of all the major features of each kind of retirement plan, including SIMPLE, SEP, 401(k), defined-benefit, and profit-sharing plans.  In choosing the right plan, it pays to have a working familiarity with the different kinds of retirement options.

Below, I’ve compiled the major features of each type of plan, along with an overview of benefits

SIMPLIFIED EMPLOYEE PENSION (SEP)

A SEP will allow you to set up a type of IRA for yourself and each of your employees.  You must contribute a uniform percentage of pay for each employee, although you won’t have to make contributions every year.  SEPs have low start-up and operating costs and can be established using a two-page form.  As a small employer, you can also decide how much to put into a SEP each year, offering flexibility when business conditions vary.

Key Advantage: Easy to set up and maintain

Employer’s role: Set up plan for selecting a plan sponsor and completing IRS Form 5305-SEP.  No annual filing requirements for employer

Contributors to the plan: Employer contributions only; 100% tax-deductible

Date to set up new plan: By due date of tax return (including extensions)

Maximum annual contribution (per participant): Up to 25% of W-2 wages or 20% of net adjusted self-employment income for a maximum of $52,000 in 2014

Contributor’s options: Employer can decide whether to make contributions year-to-year

Minimum employee coverage requirements: Must be offered to all employees who are at least 21 years of age, were employed by the employer for 3 of the last 5 years and had earned income of more than $550

Participant Loans: Not allowed

401(k) PLAN

401(k) plans – both traditional and Roth – have become a widely accepted retirement savings vehicle for small businesses.  They can vary significantly in their complexity

Key advantage: Permits higher level of salary deferrals by employees

Employer eligibility: Any employer with one or more employees

Employer’s role: No model form available. Advice from financial institution or employee benefit advisor may be necessary. Annual filing of Form 5500 is required. Also may require annual nondiscrimination testing to ensure plan does not discriminate in favor of highly compensated employees.

Contributors to the plan:  Employee salary reduction contributions and/or employer contributions

Maximum annual contribution (per participant): Employee: $17,500 ($23,000 for participants 50+) in 2014.

Employer/employee combined: The lesser of 100% of compensation or $52,000 ($57,500 including catch-up contributions for 50+) in 2014.

Contributor’s options: Employee can elect how much to contribute pursuant to a salary reduction agreement. The employee can make additional contributions, including possible matching contributions, as set by plan terms.

Minimum employee coverage requirements:  Generally, must be offered to all employees at least 21 years of age who have completed a year of service with the employer

Vesting: Employee salary deferrals are immediately 100% vested. Employer contributions may vest over time according to plan terms.

Participant loans: Plan may permit loans and hardship withdrawals.

Withdrawals:  Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination). Early withdrawals subject to tax penalty

DEFINED BENEFIT

Provide a fixed, pre-established benefit for employees.  This traditional type of pension plan is often viewed as having more value by employees and may provide a greater benefit at retirement than any other type of plan.  However, defined plans are more complex and therefore costlier to establish and maintain than other types of plans.

Key advantage: Provides a fixed, pre-established benefit for employees; allows higher tax-deductible contribution for older employees

Employer eligibility: Any employer with one or more employees

Employer’s role: No model form available. Advice from financial institution or employee benefit advisor may be necessary. Annual filing of Form 5500 is required. An actuary must determine annual contributions.

Contributors to the plan: Primarily funded by employer

Maximum annual contribution (per participant): Actuarially determined

Maximum annual benefit: The maximum annual benefit at retirement is the lesser of $210,000 or 100% of final average pay

Contributor’s options Employer generally required to make contribution as set by plan terms

Minimum employee coverage requirements: Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year

Vesting: Rights to benefits may vest over time according to plan terms

Participant loans: Plan may permit loans

PROFIT – SHARING

Your contributions as an employer to a profit-sharing plan are discretionary.  Depending on the plan terms, there is often no set amount that an employer needs to contribute each year.  As with 401(k) plans, profit-sharing plans can vary greatly in their complexity.

Key advantage: Permits employer to make large contributions for employees

Employer eligibility: Any employer with one or more employees

Employer’s role: No model form available. Advice from financial institution or employee benefit advisor may be necessary. Annual filing of Form 5500 is required.

Contributors to the plan: Annual employer contribution is discretionary.  Date to set up new plan By year end (generally Dec. 31)

Date contributions are due:  Due date of tax return, including extensions

Maximum annual contribution (per participant):  The lesser of 100% of compensation or $52,000 in 2014. Employer can deduct amounts that do not exceed 25% of aggregate compensation for all participants.

Contributor’s options: Employer makes contribution as set by plan terms. Employee contributions, if allowed, are set by plan terms.

Minimum employee coverage requirements: Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year.

Vesting: Employee salary reduction contributions and most employer contributions are immediately 100% vested. Employer contributions may vest over time according to plan terms (5-year cliff or 3-7 year graded, or 2-6 year graded if top-heavy)

Participant loans: Plan may permit loans

Withdrawals: Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination). Early withdrawals subject to tax penalty.

SIMPLE IRA

SIMPLE (Savings Incentive Match Programs for Employees of Small Employers) plans are usually set up as IRAs. They are easy to establish and inexpensive to administer. Your contributions as an employer are flexible: you can either match employee contributions dollar for dollar—up to 3% of an employee’s compensation—or make a fixed contribution of 2% of compensation for all eligible employees.

Key advantage: Employers who set up a new plan may be eligible for a tax credit of up to $500 a year for the first 3 years to help defray the costs of starting the plan. File IRS Form 8881

Employer eligibility: Any employer with 100 or fewer employees that does not currently maintain another retirement plan

Employer’s role: Set up plan by completing IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE. No annual filing requirements for employer. Bank or financial institution processes most of the paperwork.

Contributors to the plan: Employee salary reduction contributions and employer contributions

Date to set up new plan: Generally by 10/1 of the year before the start of the plan

Date contributions are due: Due date of tax return, including extensions; elective deferrals by participants due 30 days after the last day of the month for which contributions are made

Maximum annual contribution (per participant): Employee: Up to $12,000 in 2014 ($14,500 if age 50+). Employer: Either match employee contributions 100% of first 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 years); or contribute 2% of each eligible employee’s compensation (up to $260,000 of compensation in 2014).

Contributor’s options: Employee can decide how much to contribute. Employer must make matching contributions or contribute 2% of each employee’s compensation (up to $260,000 of compensation in 2014).

Minimum employee coverage requirements:  Must be offered to all employees who have earned income of at least $5,000 in any prior 2 years and are reasonably expected to earn at least $5,000 in the current year

Vesting: Employer and employee contributions are immediately vested 100%

Participant loans: None allowed

Withdrawals:  Can occur any time after contribution is made, but 25% penalty if withdrawal occurs during 2-year period beginning on the first day of participation

2014 Last Chance Financial Planning

Take the 2014 Last Chance Financial Planning Challenge and determine if you need to take any actions before the end of the year to get your financial house in order.

It’s a simple checklist that covers only those areas that need attention at year end – taxes, retirement savings, investments, insurance, and medical. It might take you five minutes, tops.

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Variable Annuities – Love Them or Loathe Them

Fixed income annuity contracts have gained popularity with conservative investors as a safe means of growing their money on a tax-deferred basis.  In the bull markets of the ’80s, a new type of annuity contract allowed investors to participate in the debt and equity markets and enjoy the benefits of annuities at the same time. These vehicles are known as variable annuities because of the variability of the returns realized.  Not many investments have a love/hate relationship from both investors and financial professionals as variable annuities.  Let’s explore why there is controversy with these vehicles.

An immediate annuity is where you exchange your lump sum of money for an income stream paid out to you for as long as you.  With a deferred annuity, your money either earns interest (fixed) or is invested in mutual fund-like sub-accounts (variable annuity) until you either withdraw it or annuitize it (described below).   There are only two ways to receive a lifetime income stream using annuities; annuitization and drawdown.

Annuitization – This is the original design for receiving lifetime income payments from an annuity. You hand the insurance company a lump sum of the money and the insurance company pays you a monthly stream of income for the rest of your life.  The size of that monthly stream is based on how big the lump sum you give the insurance company, your age, and what the interest rates are at the time you annuitize.   If you choose to annuitize, you may want to consider structuring the  policy as “Life with Installment Refund” or “Life with Cash Refund” so that you guarantee a lifetime income stream, but also guarantee that 100% of your money will go to your listed beneficiaries if you die early in the contract. Below are some of the positive and negative points to consider when it comes to annuitization.

Drawdown – This strategy is used when you attach an income rider to a deferred annuity contract like a variable annuity or a fixed-indexed annuity.  Income riders should be used for income planning at a specific date down the road, or target date. Drawdown really means subtraction, so when you start receiving your lifetime income payments, that amount is subtracted from your contract totals.

Positives

  • Flexibility — Income riders allow you to start and stop your lifetime income stream, and you can also change your initially planned start date if desired.
  • Target Date Planning — Drawdown strategies using income riders work best when you need your lifetime payments to start two years or more in the future.
  • Hybrid Benefits — Deferred annuities with attached income riders can also have additional guarantees like death benefits, confinement care benefits, or growth strategies that allow you to possibly accomplish more than one goal with one annuity.

Negatives

  • Low actuarial payout — Income rider drawdowns always have a lower actuarial payout % than if you annuitized. Having the flexibility that an income rider provides equals a lower payout.
  • Rigid contract rules — This one is really scary. A vast majority of variable annuity policies with income riders have very strict rules about how to properly access the contract for lifetime income. With some, if you take out more than the policy allows, it completely destroys the contractual guarantees. There will be some true horror stories in the near future concerning this issue.
  • Rider growth can’t be taken lump sum — Income riders used for target date income planning sometimes have annual guaranteed growth rates as high as 6% to 8% during the deferral years. It’s important to know that this amount cannot be accessed in a lump sum and can only be taken in lifetime payments, and that annual growth % stops when you begin your payments.

Fees and Expenses – Along with the potential to make a lot of money, you’ll also deal with several fees and expenses on either an annual, quarterly, or monthly basis.

  • Contingent-Deferred Surrender Charges. Like fixed and indexed annuities, variable annuities usually have a declining sales charge schedule that reaches zero after several years. You may have to pay an 8% penalty to liquidate the contract in the first year, a 7% penalty the next year, and so on until the schedule expires.
  • Contract Maintenance Fee. To (presumably) cover the administrative and record keeping costs of the contract, this fee typically ranges from $25 to $100 per year, although it is often waived for larger contracts, such as those worth at least $100,000.
  • Mortality and Expense Fees. These cover many other expenses incurred by the insurer, such as marketing and commissions. This fee can run anywhere from 1% to 1.5% per year; the industry average is about 1.15%.
  • Cost of Riders. Most variable annuity contracts offer several different types of living and death benefit riders that you can purchase inside the contract. These riders provide some additional guarantees, but each rider usually costs 1% to 2% of the contract value.

Taxes – Fixed, indexed, and variable annuities all get taxed the same way. Any growth in the contract is taxable, and getting your principal back is not. Each payment will reflect the ratio of growth to principal on your contract. If you doubled your money, then half of each disbursement will be taxable. For example, if a distribution is taken from a $300,000 contract for which $150,000 was originally contributed, then the ratio of principal to gain is 50/50. Therefore, half of each distribution is counted as a tax-free return of principal. And don’t forget, as with most other plans, any money you withdraw before you’re 59.5 is subject to a 10% early withdrawal penalty from the IRS.

Variable annuities can provide great returns, but they’re the riskiest type of annuity contract you can buy. Unlike fixed and equity indexed annuities, variable annuities do not guarantee your principal investment, interest, or other gains.

Only after you truly understand your own situation can you honestly evaluate variable annuities as a suitable investment alternative for you. It’s also important to know that the universe of variable annuity products is vast, and that their features and expenses vary widely, so it would be difficult to form a judgment based on any one product.

Estate Planning Using Roth IRAs and Life Insurance

Both Roth IRAs and cash value life insurance policies offer compelling tax benefits for the right people.  Life insurance and Roth IRAs have a lot in common. They are both often used as wealth transfer tools to help facilitate an efficient transfer of assets from one generation to the next. Despite their many similarities, however, Roth IRAs and life insurance are very different and the rules that apply to one don’t always apply to the other.

Advantages of a Roth IRA – Roth IRAs are simply a type of investment account that provides tax advantages to the stocks, bonds, funds or other assets held within them. Roth IRAs give the account holder a tremendous amount of flexibility when it comes to choosing investments. Expenses in stock mutual funds and direct investment in exchange-traded funds, stocks and bonds are frequently lower than with cash value life insurance — especially in the short term. This is due to the cost of insurance itself, as well as to the commission structure of life insurance products:  You don’t write the check, but if you buy a permanent life insurance contract, you will usually have less cash value than you contributed to the policy in the early years of the contract, unless you are transferring a lump sum.

Advantages of Life Insurance – Life insurance is unique among investment or savings vehicles in that the life insurance company will provide a large tax-free death benefit to the beneficiary in the event the insured dies. This is the primary reason to buy life insurance.  Life insurance cash values also don’t impose a 10 percent penalty on withdrawals. You can access your cash value in a policy penalty-free, at any time, and for any reason.

Differences between a Roth IRA and Life Insurance

Life Insurance Protection – Cash-value life insurance combines an insurance policy with an investment account. This means that if you die while investing money in life insurance, your heirs will receive a sizable death benefit that will be much more than the money you paid into your account. A Roth IRA is only an investment account. If you die with this account, your heirs only receive the money you’ve invested. 

Rate of Return – Investments in a Roth IRA will grow faster than the same investments in life insurance solely because in a Roth IRA you do not have to pay for that life insurance expense.

 Health Exam – To qualify for life insurance, you need to pass a health exam. The insurance company might check your health records, send over a nurse to give you a physical or ask you to get a checkup with a doctor. If your health is too poor, you could get a rated, more expensive policy that would hurt your investment return. It’s possible to get denied insurance altogether. Because a Roth IRA is just an investment account, no health exam is needed to use this plan.

Contribution Restrictions – There are some restrictions on investing money into a Roth IRA. As of 2014, you can only invest up to $5,500 a year into a Roth IRA if you are younger than 50 and up to $6,500 a year if you are 50 and older. In addition, if you earn over a certain amount of income the amount of your contribution may be reduced or you may not be able to contribute at all.  There are no contribution restrictions on life insurance. You can invest as much money per year as you want, and your annual income doesn’t matter. 

Early Withdrawals – The investment gains in a Roth IRA are only tax-free if you take them out when you are 59 1/2 or older. If you take your gains out earlier, the IRS charges income tax plus a 10 percent penalty. With life insurance, you can take out your money through a loan whenever you want. This makes it a better choice for early retirement.

 Reasons why whole life insurance is not like a Roth IRA

No Interest Free Withdrawals – The reason some people fall for this scheme is that the money in a whole life insurance policy does grow in a tax-protected manner, and when you borrow the money from the policy later in life (remember you can’t withdraw the money, because that’s taxable, so you borrow it), it comes out tax-free “just like a Roth IRA.”  However, it is not interest-free.  Just like when you borrow from a bank, when you borrow from an insurance policy you have to pay interest.  It doesn’t seem fair, I know, but that’s the way life insurance works.  You have to pay interest to borrow your own money.  When you withdraw from your Roth IRA, you owe neither taxes nor interest.

Excessive Fees Lower Returns – Roth IRAs can be extremely inexpensive.  There is no fee at all to open one at Vanguard.  They also have no closing fees.  The expense ratio for investments can be as low as 0.05% a year.  Try comparing that to the typical whole life policy.  The insurance policy not only has a number of “garbage fees,”  The more you pay in fees, the less that goes toward the investment, and the lower your returns.

You Cannot Stop “Investing” – With a Roth IRA, if you make less in any given year or just decide you want to blow your money on a boat, you can do that.  Not so with a life insurance policy.  If you don’t pay the premiums, the policy will lapse.    You could argue that this is a pro or con for a life insurance policy.  It is a negative because you do not have flexibility that you do with other investment vehicles but it does serve as a forced savings plan which some people need.

Different Asset Protection And Estate Planning Treatment – Roth IRAs and whole life insurance may be treated very differently when it comes to asset protection and estate planning issues.  Depending on the state, some or all of your Roth IRA may be protected from creditors.  The same goes for the cash value in a whole life insurance policy.  In some states one is protected more than the other, and vice versa in other states.  In some states neither receives much protection, and in other states both are completely protected.  The point is they aren’t substitutes for each other.  The same goes with estate planning issues.  A Roth IRA passes to heirs income tax-free but subject to any possible estate taxes.  It can be “stretched” to allow for additional years of tax-free growth for heirs.  The cash value of a whole life insurance policy disappears when you die, and your heirs are paid the death benefit (minus any money you borrowed out of the policy) without having to pay income or estate taxes on it.  Any additional earnings on that money, of course, would be fully taxable to the heirs.  The money in both a Roth IRA and whole life insurance passes to heirs outside of probate.  Both have their positive aspects, but they are very different.

If you’re looking to leave a legacy to your heirs when you die, there are many tools to consider. Life insurance and Roth IRAs are but two of the many options we’ve chosen to contrast here today. In some cases, life insurance may not be available due to poor health. In other cases, such as when your beneficiaries will be in a lower bracket than you are now, there may be a greater net benefit by leaving them larger amounts of tax-deferred accounts, like IRAs instead of a smaller amount of Roth IRAs. The bottom line is that every situation is different and there’s no one-size-fits-all solution. Do your homework, seek competent advice and give yourself the best opportunity possible to achieve your goals.

Tax filing statuses

Your tax filing status has a major impact on what you’ll pay in taxes for the year. There are five official filing statuses, and the one you pick determines whether you can take certain tax deductions or exemptions that could lower your final tax bill.

Single – This applies to never-married, unmarried and divorced taxpayers. You are considered single for the whole year if you were legally single on the last day of the year.

Married filing jointly – You are considered married for the whole tax year as long as you were married on the last day of the tax year.  Same-sex marriages are now recognized for federal purposes, including tax filing, even if their home state does not accept such marriages as legal. When you file jointly, both spouses report all their income on one Form 1040. Both filers may be held responsible for any tax (or subsequent penalty and interest) due.

Married filing separately – Here couples segregate their income, deductions and exemptions and file two individual returns. This might be advisable in cases where, for example, one spouse had large medical expenses. Because these costs must exceed a percentage of the filer’s income before they are deductible, using only the eligible spouse’s earnings by filing separately might make that deduction threshold more attainable.

Most people find that filing jointly is the best way to go, but there are instances when filing separately is more prudent.

Reasons to File Jointly

  • More deductions and credits are available. Filing jointly gives you access to more credits, including the child and dependent care, earned income, and the elderly and disabled credits. You can also take advantage of deductions for college tuition and student loan interest. Generally, these are not available if you file separately. Consult the IRS website for a full list of available deductions and credits for married couples filing jointly.
  • You can deduct IRA contributions or contribute to a Roth. As long as you meet income requirements for married filing jointly status, you can deduct traditional IRA contributions or contribute to a Roth. On the other hand, if you file separately, you may lose the ability to deduct or contribute because income requirements are much more strict.ü  You may pay less in taxes. The taxes you’ll pay when filing jointly are usually lower than if you combine the taxes due on two separate returns.
  • It’s easier if you itemize. If you itemize, filing jointly is often your best option. If you file separately and one spouse itemizes, then the other needs to also, even if the itemized deductions are less than the standard deduction.
  • It’s more convenient. It’s faster to simply file one, unified return. Unless other reasons are very compelling, you will likely want to file jointly.

Reasons to File Separately

  • You can deduct excessive unreimbursed medical expenses. Because you can only deduct medical expenses in excess of 7.5 percent of your adjusted gross income, filing separately can allow one spouse with heavy medical expenses to deduct more of them against their income only.
  • You can protect yourself from an unethical spouse. If your significant other tends to be more “creative,” so to speak, with their return and deductions, you might want to file separately to protect your own interests in the event of a tax audit.
  • Protect your refund against seizure for child support. If your spouse owes child support, filing separately will protect your tax return money from government seizure.
  • Protect your refund against seizure for back taxes. If your spouse owes the IRS for back taxes, filing separately will protect your tax refund money from being applied to this debt.
  • If you are legally separated. If this is the case, you are required to file separately by law.
  • Avoid complications if you are getting divorced. If you are in the process or know you will be getting a divorce soon, filing separately is a good idea to avoid any tax complications after it’s finalized. 

Head of household – This status applies to unmarried taxpayers who during the tax year provided more than half the cost of keeping up a home for the filer and a qualifying person who lived in the home for more than six months. Being financially responsible for a dependent — even a parent — could give you the option of filing Head of Household. Tax rates for qualified filers usually are more favorable than those in the single or married filing separately categories. Head of household filers also get a larger standard deduction amount than do single filers. In some cases, married persons who have not lived with their spouses may qualify for this status.

Qualifying widow or widower with a dependent child – You can still file a joint return for the tax year in which your spouse passed away. After that, you might be eligible to file as a qualifying widow or widower.  This filing option is available for two years following the year of a spouse’s death and basically applies the filing data afforded married joint filers. The key here is that the surviving spouse cared for a dependent child who lived with the adult for the full tax year. During that time, the taxpayer must have paid for more than half the cost of keeping up the home.

Below is a flow chart from LearnVest that can help with your decision on which filing status to use.

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So take the time to examine your personal situation and how it fits into the various filing status choices.

Always keep in mind that the IRS lets you file under the applicable status that offers you the best tax advantage. The tax savings you might get by selecting the correct status could make any extra trouble worthwhile.

Changing Jobs May Impact Your Retirement

There are many things to consider when deciding whether changing your job makes sense.  The obvious are whether you are getting paid more or doing something you might like better.  There may also be things to take into account like location and work-life balance.  One thing that few people consider is how changing your job may impact your retirement.

According to a study done by Fidelity one in four workers who left their job last year lost out on this valuable retirement savings.  On average, they left behind $1,710 in savings, found the analysis, which looked at 500,000 401k savers who left their jobs. Younger workers were by far the most frequent losers. More than a third of Millennials left behind an average 24% of their account balance after leaving their job. In contrast, only 11% of Baby Boomers left money behind.  Sometimes waiting another few months or a year can make a big difference in how much money you’ll take with you. The money you contributed yourself through salary reduction contributions is always 100% vested, but your company match usually vests over a period of several years, commonly three to five. Check your plan documents or ask your human resources department when you’ll be 100% vested. By changing employers before being fully vested, you’ll forfeit a portion of your employer’s match and any earnings on that match.

For example, let’s say that under your plan’s terms, you vest 20% a year for five years. You’ve been with your employer for a month shy of four years, so you’re 60% vested. Let’s say you earned $40,000 a year and contributed 15% of your salary, or $6,000 a year, to your 401(k) plan. Your employer matches 100% of your contribution, or another $6,000 a year. If you leave now, you’ll receive 60% of the employer match, or $14,400 ($6,000/yr x 4 yrs = $24,000 x 60%). If you stayed another month, you’d vest an additional 20% and receive an additional $4,800 of employer match. If you stayed another 13 months, you’d receive an additional $9,600 in employer match for the four years you’ve already been there, plus the $6,000 match for your fifth year, for a total of $15,600 BEFORE taking any earnings on the match over the five year period into consideration. Even if your employer’s match is much less than 100%, you can still see how you might be walking away from a big chunk of free money by not carefully timing your departure.

It’s not just 401k investors who may be impacted.  If you have a traditional pension plan, consider the impact on your pension benefits. Many plans have a five-year time frame for vesting into a benefit. You may find staying at your job a while longer will significantly increase your benefits.

Here’s how to make sure you’re not losing out:

Be aware: Take the time to read your employer’s vesting schedule for both 401(k) matches and profit-sharing contributions. They may be different.  If you only have to wait a few more months to take home thousands in savings, consider sticking with your company until you’ve hit the 100% mark.

Negotiate: If you get a great opportunity for a new job and you’re not fully vested in your 401(k), don’t be afraid to try and negotiate with your new employer.  Explain how much you’ll lose in savings. Some employers may be willing to compensate with a slightly higher salary or a signing bonus.

Save more: Try to sock away between 10% and 15% of your salary each year.  Many workers, especially younger ones, only get above that threshold with the help of an employer match. If you think you’ll likely leave your job before fully vesting, try to make up for it by saving at least 10% of your salary on your own.

Even small amounts of lost money can have a big effect come retirement due to decades of lost returns. By considering all of the implications discussed here, you can wisely evaluate the impact that changing jobs might have on your retirement savings, and make the most informed decision.

Top 6 mistakes that investors make

Investing can be complicated especially if you have no experience with the basics of personal finance.  Avoiding the following top 6 investing mistakes will help everyone from the new investor who is just learning to an experienced investor who needs a refresher, achieve success in the markets.

 Decisions made only by emotion can bring disastrous results, just as decisions made only from a computer program can also pose a problem. Emotional decisions are often tainted with biases.  For example the most common emotional investing decisions I see is when people try to time the market.  When the market rises people’s confidence increases and they want to invest more.  When the market declines investors like to pull money out and wait on the sidelines.  This activity promotes buying high and selling low.  We should take a page out of Warren Buffet’s book and increase our buying when the market declines and investments are on sale.

Focusing too much on historical returns – investors often get caught by relying too much on historical returns and not giving enough importance to future expectations.  The future investment situation is likely to be different from time-aged averages.  Past averages may have little bearing on the current environment and therefore the actual returns you receive.

Putting all your eggs in one basketis not the best idea.Over time a diversified portfolio provides the best combination of reasonable returns with bearable volatility.  There’s no such thing as the perfect investment. All stocks carry risks. Funds that bundle stocks can reduce the risk, mitigating harsh downturns but muting spikes as well. Bonds can counterbalance stock losses, but over long periods bond returns trail the returns of the stock market.Researchers at fund company T. Rowe Price compared the returns of portfolios that varied from 100 percent bonds to 100 percent stocks with various combinations of stocks, bonds and cash. From 1985 through 2012, a portfolio of 60 percent stocks, 30 percent bonds and 10 percent cash would have returned 9.8 percent annualized (about 93 percent of the return of an all-stock portfolio, but with just 62 percent of the risk).

Too Much Attention Given to Financial Media is actually wasting your time.There is almost nothing on financial news shows that can help you achieve your goals. Turn them off. There are few newsletters that can provide you with anything of value. If anyone really had profitable stock tips, trading advice or a secret formula to make big bucks, would they blab it on TV or sell it to you for $49 per month?  I think they’d keep their mouth shut, make their millions and not have to sell a newsletter to make a living. Spend less time watching financial shows on TV and reading newsletters. Spend more time creating – and sticking to – your investment plan.

Not Reviewing Your Portfolio Regularly – Even the best portfolios can go off-target over time.  Investments need to be reviewed often.  It may make sense to sell losers for tax purposes or sell some of your winners to move money into your laggards (rebalancing) This disciplined approach to investing helps ensure that you’re buying lower and selling higher, which certainly beats the buy-high-sell-low trap that snares many investors.

Impatience needs to be avoided since you require a great deal of patience when investing.  Making rash decisions, in any case, can be problematic. Most of us have been trained by society to expect “instant gratification.” The truth is, life doesn’t work that way and neither does investing. For example, there are numerous instances where an investment severely lagged for many years before it turned around and became a top performer. This is not at all unusual. Therefore, assuming you have chosen a quality investment, to maximize its return you need to be prepared to hold it through a complete cycle to allow the manager’s strategy to play itself out. How long is a complete cycle? This can only be answered after the fact. It’s the same with identifying the end of a recession. It’s normally several months after the fact before we realize a recession has actually ended.

Investors who recognize and avoid these common mistakes give themselves a great advantage in meeting their investment goals. Obviously, there are additional mistakes. In fact, we could probably go on and on, but these are some of the more common errors investors make.

Peer to Peer Lending

Alternative assets are a type of investment beyond the traditional stocks, bonds, mutual funds and cash.  They can include investing in things like racehorses, art, collectibles, commercial real estate, or private equity.  They are gaining in popularity as investors are nervous about a stock market correction, rising interest wreaking havoc on their bonds or they are tired on rates hovering around 1% on their savings accounts and CD’s.

Peer-to-peer lending (P2P) is one example of alternative investing that made a big leap in popularity in 2013.  It is the practice of lending money to unrelated individuals without going through a traditional financial intermediary such as a bank or a financial institution. This lending takes place online on peer-to-peer lending companies’ websites using various different lending platforms and credit checking tools matching individual borrowers or companies with savers willing to put money aside for longer, hunting for a good return.

As the banking middle-man is cut out, borrowers often get slightly lower rates, while savers get far improved headline rates, with the sites themselves profiting via a fee.  While it can work well if you’re able and willing to lock cash away, it’s important you understand the risks of this hybrid form of saving and investing before parting with your cash.

Lending platforms like Lending Club and Prosper have quickly become popular and reliable ways of doing P2P lending. These websites simplify the process and do a lot of the work for you, like bookkeeping and transferring the funds in question, without charging as much as banks. After signing up with the website, borrowers essentially just select a loan amount and describe where this money is going before posting a listing to the website.

Investors, meanwhile, sort through these listings and invest in whatever they think will fetch the biggest returns while minimizing their risk that the borrower will default.  Borrowers make monthly payments, which investors receive a portion of.  Because loans are uninsured, default can be especially painful for investors. For some, this risk is worth it, as returns can be substantial.

Online platforms such as Lending Club and Prosper Marketplace match lenders with borrowers of varying credit risks, offering net annualized returns of around 8 to 20 percent. Investors usually take fractional shares of large numbers of notes to mitigate risk of defaults. Both platforms provide profiles of the creditworthiness of the borrowers and the performance characteristics over time of the notes they issue. The platforms then offer the notes in what is essentially an auction. Once a note attracts a sufficient number of investors, the loan is originated and serviced. Platforms charge borrowers a one-time fee and lenders a monthly service fee.

Background checks serve as a security blanket: websites like Lending Club and Prosper perform background checks on borrowers, which eliminate a lot of the mystery associated with lending money to someone you’ve never met before. You’ll know the credit score of whomever you are lending money to, along with other pertinent facts about their financial background.

The main risk involved in peer-to-peer lending is borrower default. In order to ensure borrowers can be trusted to repay their loans, a stringent process of underwriting is carried out for every application. This includes a full credit check, an affordability assessment and a thorough identity check. Every borrower must also submit to an anti-fraud background check against the CIFAS register.

While for many, it’s worked well, returns and indeed your capital are not guaranteed and the primary risk is, of course, not being repaid. Each peer-to-peer site has its own way to mitigate this risk – most work well, but it is still important to do your due diligence and consult with your advisor before jumping in.

Student Loans

Everyone has a finite amount of money that they can allocate to their financial goals.  One debate that always comes up in financial circles is should I pay off more of the principal on my mortgage or invest the extra money in hopes of earning a higher return than my home interest rate.  A less frequently asked, but just as important question is should I allocate additional money to my student loans or invest it.  The sooner you start investing, the more time your portfolio has to grow through the magic of compound interest. But if you wait to get started until your student loans have been totally paid off, you’ll miss out on a lot of that precious time.

Education Student loan payments are a financial challenge that will stare you in the face for decades to come and are a pressing debt that needs to be repaid. Missing a payment has the potential to tank your credit score. By no means should your student loans be deferred or put into forbearance in order for you to contribute to retirement because you’ll end up having to pay more later.

If you are struggling to make the minimum payments, and you’re okay with extending your repayment period, call your lender and see if there’s anything they can do to help reduce your monthly payments. Once you have that number, it can be a good idea to set up auto-payments so that you never miss one.

Let’s say you are a new grad with $30,000 in student loans debt (about average) and your student loans charge 3.86% interest (the current rate for federal undergraduate Stafford loans).

The minimum monthly payment, on the standard 10-year repayment plan, is $300. But let’s say you got a decent job and could put up to $500 per month toward debt repayment and savings combined.

We estimate a 7% return on your balanced investment portfolio. To keep the scenario simple, we don’t include taxes or rise in the model, and we assume you will retire in 40 years.

By paying $500/month on your loan, you will get rid of the debt in 5 years, 7 months. At the end of 40 years, if you continue to save $500/month, you’ll have a balance of $266,338 (adjusted for 3% inflation).

Say you pay the $300/month minimum on the loan and put the rest into your portfolio. Now, at the end of 40 years your portfolio is worth $274,385. Those five lost years of investing cost you a whopping $8000. You end up with more money in the end by paying off your loan slowly and investing early. It’s bet to hang onto your low-interest debt while you build your nest egg.

However, the flaw in this reasoning has to do with risk, by keeping your student loans around. You might lose your job and be unable to pay your loans, which would then go into default, rack up scads of penalties, and demolish your credit score. You should maintain an emergency fund in case you lose your job.

Your discretionary spending, or your larger fixed costs—think rent or utility bills—are probably better targets for downsizing before the money you’re investing in your future.

The bottom line is that while student loan payments must be made in full, it’s important not to let retirement savings fall by the wayside completely when money gets tight. You should calculate out how much you need to be saving to be on track for retirement, but keep in mind that if you can’t swing that amount right now, it’s better to start contributing something than nothing at all. Automate your contributions and when you get a raise, it’s the perfect time to consider accelerating your retirement savings.