The Power of Consistent Saving and Compound Interest

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Everyone is told to save for retirement early. Everyone is told to save consistently. You may wonder: just what kind of difference might an early start and ongoing account contributions make?

Let’s take a look some eye-opening numbers

(You can verify these numbers simply by using the compound interest calculator at investor.gov, the Securities and Exchange Commission’s website).

Scenario #1

If you are 30 years old and contribute $200 a month to a tax-deferred retirement account (initial investment of $200, then $200 per month thereafter), you will have $333,903.82 by age 65, if that account consistently returns 7% a year. (This is with annual compounding.)

Scenario #2

If you change one variable in the above scenario – you start saving and investing at 25 years old instead of 30 – you will have $482,119.16 by age 65.

Scenario #3

Start at 20 years old and you will have $689,998.84 by age 65.

An early start really matters.

It gives you a few more years of compounding – and the larger the account balance, the greater difference compounding makes.

These are simple scenarios, but the impact of consistent saving and investing is undeniable. Over time, it may help you build a retirement account that could become a significant part of your retirement savings.

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▲Benefit of saving and investing early

Investors should make saving for retirement a priority by investing early and often. This graph illustrates the savings and investing behavior of four people who start saving the same annual amount at different times in their lives, for different durations and with different investment choices. Consistent Chloe saves and invests consistently over time and reaches 65 with more than double the amount of the other investors. Quitter Quincy starts early but stops after 10 years, just as Late Lyla starts saving. Despite saving one-third as much as Lyla, the power of long-term compounding on money invested early helps Quincy end up with almost the same wealth at retirement. Nervous Noah saves as much and as often as Chloe, but chooses not to invest his money so he accumulates less than half of Chloe’s final amount.

Are you saving enough?

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▲ Annual savings needed if starting today

What is the rule of thumb for the percentage of your income you need to save for retirement? Some say 10%, some say higher or lower. The real answer is that it depends—on what you earn, the “lifestyle you become accustomed to” and when you start saving. This chart shows the percentage of gross income someone would need to start saving at the ages in the left column to be able to afford the typical lifestyle associated with the household income amounts in the top row. Starting at age 25, the annual savings required ranges from 7% to 10%: achievable, but well above what most Americans save. By contrast, someone thinking about waiting until age 50 to focus on retirement should see how unrealistic that may be, with required savings of between 31% and 47% of their gross income. The sooner investors start, the better chance they may have of steadily winning the retirement savings race.

Sources

  1. https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator
  2. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What’s the Difference Between a Mutual Fund and an ETF?

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An investment company creates a new company, into which it moves a block of shares to pursue a specific investment objective. For example, an investment company may move a block of shares to track performance of the Standard & Poor’s 500. The investment company then sells shares in this new company. ETFs trade like stocks and are listed on stock exchanges and sold by broker-dealers.

Mutual Funds

Mutual funds, on the other hand, are not listed on stock exchanges and can be bought and sold through a variety of other channels — including financial advisors, brokerage firms, and directly from fund companies.

The price of an ETF is determined continuously throughout the day.

It fluctuates based on investor interest in the security, and may trade at a “premium” or a “discount” to the underlying assets that comprise the ETF. Most mutual funds are priced at the end of the trading day. So, no matter when you buy a share during the trading day, its price will be determined when most U.S. stock exchanges typically close.

Tax Differences.

There are tax differences as well. Since most mutual funds are allowed to trade securities, the fund may incur a capital gain or loss and generate dividend or interest income for its shareholders. With an ETF, you may only owe taxes on any capital gains when you sell the security. (An ETF also may distribute a capital gain if the makeup of the underlying assets is adjusted.)

Determining whether an ETF or a mutual fund is appropriate for your portfolio may require an in-depth knowledge of how both investments operate. In fact, you may benefit from including both investment tools in your portfolio.

Amounts in mutual funds and ETFs are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost.

At a glance.

Mutual funds and exchange-traded funds have similarities — and many differences. The lists below give a quick rundown.

Mutual funds:

  • Bought and sold through many channels
  • Not listed on stock exchanges.
  • Priced to the end of the trading day.
  • Capital gains within the funds distributed to shareholders.
  • Dividends may be automatically reinvested.

Exchange-traded funds:

  • Bought and sold through broker-dealers.
  • Listed on stock exchanges.
  • Price continuously determined during the trading day.
  • Capital gains within the ETF reinvested, and the ETF may distribute a capital gain if the make-up of the underlying assets is adjusted.
  • Dividends generally distributed to brokerage account.

Source

  1. ici.org/pdf/2018_factbook.pdf

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Mutual funds and exchange-traded funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

The Standard & Poor’s 500 Composite Index is an unmanaged index that is generally considered representative of the U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index.

Retiring Within the Next 5 Years? Here Are 5 Things You Should Be Focusing On

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You can prepare for your retirement transition years before it occurs.

In doing so, you can do your best to avoid the kind of financial surprises that tend to upset an unsuspecting new retiree.

1. How much monthly income will you need?

Look at your monthly expenses and add them up. (Consider also the trips, adventures and pursuits you have in mind in the near term.) You may end up living on less; that may be acceptable, as your monthly expenses may decline. If your retirement income strategy was conceived a few years ago, revisit it to see if it needs adjusting. As a test, you can even try living on your projected monthly income for 2-3 months prior to retiring.

2. Should you downsize or relocate?

Moving into a smaller home may reduce your monthly expenses. If you will still be paying off your home loan in retirement, realize that your monthly income might be lower as you do so.

3. How should your portfolio be constructed?

In planning for retirement, the top priority is to build investments; within retirement, the top priority is generating consistent, sufficient income. With that in mind, portfolio assets may be adjusted or reallocated with respect to time, risk tolerance, and goals: it may be wise to have some risk-averse investments that can provide income in the next few years as well as growth investments geared to income or savings objectives on the long-term horizon.

4. How will you live?

There are people who wrap up their careers without much idea of what their day-to-day life will be like once they retire. Some picture an endless Saturday. Others wonder if they will lose their sense of purpose (and self) away from work. Remember that retirement is a beginning. Ask yourself what you would like to begin doing. Think about how to structure your days to do it, and how your day-to-day life could change for the better with the gift of more free time.

5. How will you take care of yourself?

What kind of health insurance do you have right now? If you retire prior to age 65, Medicare will not be there for you. Check and see if your group health plan will extend certain benefits to you when you retire; it may or may not. If you can stay enrolled in it, great; if not, you may have to find new coverage at presumably higher premiums.

Even if you retire at 65 or later, Medicare is no panacea. Your out-of-pocket health care expenses could still be substantial with Medicare in place. Extended care is another consideration – if you think you (or your spouse) will need it, should it be funded through existing assets or some form of LTC insurance?

Give your retirement strategy a second look as the transition approaches.

Review it in the company of the financial professional who helped you create and refine it. An adjustment or two before retirement may be necessary due to life or financial events.

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▲ Income replacement needs vary by household income

Income replacement needs in retirement vary by household income due to different levels of pre-retirement savings and changes in sp¹ending and income taxes. Based on J.P. Morgan research, this chart shows the percentage of pre-retirement income that may be needed to provide a comparable lifestyle through retirement. It also shows what percentage of that total income amount is estimated to come from Social Security to determine what amount will need to be covered by private sources, which include employer-provided retirement plans, IRAs, mutual funds, annuities and other investments.¹

Sources

  1. https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. Investments seeking to achieve higher rate of return also involve a higher degree of risk.

Facts vs. Fiction: How Much Do You Really Know About Long-Term Care?

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Separating some eldercare facts from some eldercare myths.

How much does eldercare cost, and how do you arrange it when it is needed?

The average person might have difficulty answering those two questions, for the answers are not widely known. For clarification, here are some facts to dispel some myths.

True or false: Medicare will pay for your mom or dad’s nursing home care.

FALSE, because Medicare is not long-term care insurance. (1)

Part A of Medicare will pay the bill for up to 20 days of skilled nursing facility care – but after that, you or your parents may have to pay some costs out-of-pocket. After 100 days, Medicare will not pay a penny of nursing home costs – it will all have to be paid out-of-pocket, unless the patient can somehow go without skilled nursing care for 60 days or 30 days including a 3-day hospital stay. In those instances, Medicare’s “clock” resets. (2)

True or false: a semi-private room in a nursing home costs about $35,000 a year.

FALSE. According to Genworth Financial’s most recent Cost of Care Survey, the median cost is now $85,775. A semi-private room in an assisted living facility has a median annual cost of $45,000 annually. A home health aide? $49,192 yearly. Even if you just need someone to help mom or dad with eating, bathing, or getting dressed, the median hourly expense is not cheap: non-medical home aides, according to Genworth, run about $21 per hour, which at 10 hours a week means nearly $11,000 a year. (3,4)

True or false: about 40% of today’s 65-year-olds will eventually need long-term care.

FALSE. The Department of Health and Human Services estimates that close to 70% will. About a third of 65-year-olds may never need such care, but one-fifth are projected to require it for more than five years. (5)

True or false: the earlier you buy long-term care insurance, the less expensive it is.

TRUE. As with life insurance, younger policyholders pay lower premiums. Premiums climb notably for those who wait until their mid-sixties to buy coverage. The American Association for Long-Term Care Insurance’s 2018 price index notes that a 60-year-old couple will pay an average of $3,490 a year for a policy with an initial daily benefit of $150 for up to three years and a 90-day elimination period. A 65-year-old couple pays an average of $4,675 annually for the same coverage. This is a 34% difference. (6)

True or false: Medicaid can pay nursing home costs.

TRUE. The question is, do you really want that to happen? While Medicaid rules vary per state, in most instances a person may only qualify for Medicaid if they have no more than $2,000 in “countable” assets ($3,000 for a couple). Countable assets include bank accounts, equity investments, certificates of deposit, rental or vacation homes, investment real estate, and even second cars owned by a household (assets held within certain trusts may be exempt). A homeowner can even be disqualified from Medicaid for having too much home equity. A primary residence, a primary motor vehicle, personal property and household items, burial funds of less than $1,500, and tiny life insurance policies with face value of less than $1,500 are not countable. So yes, at the brink of poverty, Medicaid may end up paying long-term care expenses. (4,7)

Sadly, many Americans seem to think that the government will ride to the rescue when they or their loved ones need nursing home care or assisted living. Two-thirds of people polled in another Genworth Financial survey about eldercare held this expectation. (4)

In reality, government programs do not help the average household pay for any sustained eldercare expenses. The financial responsibility largely falls on you.

A little planning now could make a big difference in the years to come. Call or email an insurance professional today to learn more about ways to pay for long-term care and to discuss your options. You need to find a way to address this concern, as it could seriously threaten your net worth and your retirement savings.

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▲ Long-term care planning

At age 65, the lifetime likelihood of needing at least some care is nearly 70%. Most often, care will be at home although it may progress to other settings. Duration of care needs vary widely, with about 5 in 10 men and 4 in 10 women requiring significant care for zero – 90 days and 1 in 10 men and nearly 2 in 10 women needing significant care for 5 years or more. When planning for long-term care consider multiple solutions that may be utilized including family assistance, income, savings, home equity, life insurance for a surviving spouse, and insurance options that range from traditional long-term care insurance to combination products. (7)

Sources:

  1. medicare.gov/coverage/long-term-care.html
  2. fool.com/retirement/2018/05/24/the-1-retirement-expense-were-still-not-preparing.aspx
  3. forbes.com/sites/nextavenue/2017/09/26/the-staggering-prices-of-long-term-care-2017/
  4. longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html
  5. fool.com/retirement/2018/02/02/your-2018-guide-to-long-term-care-insurance.aspx
  6. longtermcare.acl.gov/medicare-medicaid-more/medicaid/medicaid-eligibility/financial-requirements-assets.html
  7. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What’s the Difference Between an IRA and a 401(k) for Retirement Savings?

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Comparing their features, merits, and demerits.

How do you save for retirement?

Two options probably come to mind right away: the IRA and the 401(k). Both offer you relatively easy ways to build a retirement fund. Here is a look at the features, merits, and demerits of each account, starting with what they have in common.

SIMILARITIES:

1. Taxes are deferred on money held within IRAs and 401(k)s.

That opens the door for tax-free compounding of those invested dollars – a major plus for any retirement saver. (1)

2. IRAs and 401(k)s also offer you another big tax break.

It varies depending on whether the account is traditional or Roth in nature. When you have a traditional IRA or 401(k), your account contributions are tax deductible, but when you eventually withdraw the money for retirement, it will be taxed as regular income. When you have a Roth IRA or 401(k), your account contributions are not tax deductible, but if you follow Internal Revenue Service rules, your withdrawals from the account in retirement are tax free. (1)

3. Generally, the I.R.S. penalizes withdrawals from these accounts before age 59½.

Distributions from traditional IRAs and 401(k)s prior to that age usually trigger a 10% federal tax penalty, on top of income tax on the withdrawn amount. Roth IRAs and Roth 401(k)s allow you to withdraw a sum equivalent to your account contributions at any time without taxes or penalties, but early distributions of the account earnings are taxable and may also be hit with the 10% early withdrawal penalty. (1)

4. You must make annual withdrawals from 401(k)s and traditional IRAs after age 70½.

Annual withdrawals from a Roth IRA are not required during the owner’s lifetime, only after his or her death. Even Roth 401(k)s require annual withdrawals after age 70½. (2)

DIFFERENCES:

1.Annual contribution limits for IRAs and 401(k)s differ greatly.

You may direct up to $18,500 into a 401(k) in 2018; $24,500, if you are 50 or older. In contrast, the maximum 2018 IRA contribution is $5,500; $6,500, if you are 50 or older. (1)

2. Your employer may provide you with matching 401(k) contributions.

This is free money coming your way. The match is usually partial, but certainly nothing to disregard – it might be a portion of the dollars you contribute up to 6% of your annual salary, for example. Do these employer contributions count toward your personal yearly 401(k) contribution limit? No, they do not. Contribute enough to get the match if your company offers you one.1

3. An IRA permits a wide variety of investments, in contrast to a 401(k).

The typical 401(k) offers only about 20 investment options, and you have no control over what investments are chosen. With an IRA, you have a vast range of potential investment choices. (1,3)

4. You can contribute to a 401(k) no matter how much you earn.

Your income may limit your eligibility to contribute to a Roth IRA; at certain income levels, you may be prohibited from contributing the full amount, or any amount. (1)

5. If you leave your job, you cannot take your 401(k) with you.

It stays in the hands of the retirement plan administrator that your employer has selected. The money remains invested, but you may have less control over it than you once did. You do have choices: you can withdraw the money from the old 401(k), which will likely result in a tax penalty; you can leave it where it is; you can possibly transfer it to a 401(k) at your new job; or, you can roll it over into an IRA. (4,5)

6. You cannot control 401(k) fees.

Some 401(k)s have high annual account and administrative fees that effectively eat into their annual investment returns. The plan administrator sets such costs. The annual fees on your IRA may not nearly be so expensive. (1)

All this said, contributing to an IRA or a 401(k) is an excellent idea.

In fact, many pre-retirees contribute to both 401(k)s and IRAs at once. Today, investing in these accounts seems all but necessary to pursue retirement savings and income goals.

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▲The power of tax-deferred compounding

Deferring the tax on investment earnings, such as dividends, interest or capital gains, may help accumulate more after-tax wealth over time than earning the same return in a taxable account. This is known as tax-deferred compounding. This chart shows an initial $100,000 after-tax investment in either a taxable or tax-deferred account that earns a 6% return (assumed to be subject to ordinary income taxes). Assuming an income tax rate of 24%, the value of the tax-deferred account (net of taxes owed) after 30 years accumulates over $79,000 more than if the investment return had been taxed 24% each year. (6)

Sources:

  1. nerdwallet.com/article/ira-vs-401k-retirement-accounts
  2. irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions
  3. tinyurl.com/y77cjtfz
  4. finance.zacks.com/tax-penalty-moving-401k-ira-3585.html
  5. cnbc.com/2018/04/26/what-to-do-with-your-401k-when-you-change-jobs.html
  6. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

How Working Past 65 Can Help Improve a Women’s Retirement Prospects

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Why striving to stay in the workforce a little longer may make financial sense.

The median retirement age for an American woman is 62.

The Federal Reserve says so in its most recent Survey of Household Economics and Decisionmaking (2017). Sixty-two, of course, is the age when seniors first become eligible for Social Security retirement benefits. This factoid seems to convey a message: a fair amount of American women are retiring and claiming Social Security as soon as they can. (1)

What if more women worked into their mid-sixties?

Could that benefit them, financially? While health issues and caregiving demands sometimes force women to retire early, it appears many women are willing to stay on the job longer. Fifty-three percent of the women surveyed in a new Transamerica Center for Retirement Studies poll on retirement said that they planned to work past age 65. (2)

Staying in the workforce longer may improve a woman’s retirement prospects.

If that seems paradoxical, consider the following positives that could result from working past 65:

1. More years at work leaves fewer years of retirement to fund.

Many women are worried about whether they have saved enough for the future. Two or three more years of income from work means two or three years of not having to draw down retirement savings.

2. Retirement accounts have additional time to grow and compound.

Tax-deferred compounding is one of the greatest components of wealth building. The longer a tax-deferred retirement account has existed, the more compounding counts.

Suppose a woman directs $500 a month into such a tax-favored account for decades, with the investments returning 7% a year. For simplicity’s sake, we will say that she starts with an initial contribution of $1,000 at age 25. Thirty-seven years later, she is 62 years old, and that retirement account contains $974,278. (3)

If she lets it grow and compound for just one more year, she is looking at $1,048,445. Two more years? $1,127,837. If she retires at age 65 after 40 years of contributions and compounded annual growth, the account will contain $1,212,785. By waiting just three years longer, she leaves work with a retirement account that is 24.4% larger than it was when she was 62. (3)

A longer career also offers a chance to improve Social Security benefit calculations.

Social Security figures retirement benefits according to a formula. The prime factor in that formula is a worker’s average indexed monthly earnings, or AIME. AIME is calculated based on that worker’s 35 highest-earning years. But what if a woman stays in the workforce for less than 35 years? (4)

Some women interrupt their careers to raise children or care for family members or relatives.

This is certainly work, but it does not factor into the AIME calculation. If a woman’s work record shows fewer than 35 years of taxable income, years without taxable income are counted as zeros. So, if a woman has only earned taxable income in 29 years of her life, six zero-income years are included in the AIME calculation, thereby dragging down the AIME. By staying at the office longer, a woman can replace one or more of those zeros with one or more years of taxable income. (4)

In addition, waiting to claim Social Security benefits after age 62 also results in larger monthly Social Security payments.

A woman’s monthly Social Security benefit will grow by approximately 8% for each year she delays filing for her own retirement benefits. This applies until age 70. (4)

Working longer might help a woman address major retirement concerns.

It is an option worth considering, and its potential financial benefits are worth exploring.

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▲ Older Americans in the workforce

The long-term trend is that more people are working at older ages, as seen in the top chart. Even so, with the large increase in the age 65+ population shown in the grey shading, there will be more people than ever stopping work in the coming years. The bottom chart shows the reasons for working in retirement, or after they typically have retired from their primary career. It indicates that the definition of retirement is changing, as more people are working due to positive reasons such as wanting to stay active and socially engaged more so than for financial reasons.

Sources

  1. dqydj.com/average-retirement-age-in-the-united-states/
  2. thestreet.com/retirement/18-facts-about-womens-retirement-14558073
  3. investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator
  4. fool.com/retirement/social-securitys-aime-what-is-it.aspx
  5. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

12 Tax Scams and Schemes To Watch Out For This Tax Season (And Throughout The Year)

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Year after year, certain taxpayers resort to schemes in an effort to put one over on the Internal Revenue Service (I.R.S.). These cons occur year-round, not just during tax season. In response to their frequency, the I.R.S. has listed the 12 biggest offenses – scams that you should recognize, schemes that warrant penalties and/or punishment.

1. Phishing

If you get an unsolicited email claiming to be from the I.R.S., it is a scam. The I.R.S. never reaches out via email, regardless of the situation. If such an email lands in your inbox, forward it to phishing@irs.gov. You should also be careful with sending personal information, including payroll or other financial information, via an email or website. (1,2)

2. Phone scams

Each year, criminals call taxpayers and allege that said taxpayers owe money to the I.R.S. The Treasury Inspector General for Tax Administration says that over the last five years, 12,000 victims have been identified, resulting in a cumulative loss of more than $63 million. Visual tricks can lend authenticity to the ruse: the caller ID may show a toll-free number. The caller may mention a phony I.R.S. employee badge number. New spins are constantly emerging, including threats of arrest, and even deportation. (1,2)

3. Identity theft

The I.R.S. warns that identity theft is a constant concern, but not just online. Thieves can steal your mail or rifle through your trash. While the I.R.S. has made headway in terms of identifying such scams when related to tax returns, and plays an active role in identifying lawbreakers, the best defense that remains is caution when your identity and information are concerned. (1,2)

4. Return preparer fraud

Almost 60% of American taxpayers use a professional tax preparer. Unfortunately, among the many honest professionals, there are also some con artists out there who aim to rip off personal information and grab phantom refunds, so be careful when making a selection. (1,2)

5. Fake charities

Some taxpayers claim that they are gathering funds for hurricane victims, an overseas relief effort, an outreach ministry, and so on. Be on the lookout for organizations that are using phony names to appear as legitimate charities. A specious charity may ask you for cash donations and/or your Social Security Number and banking information before offering a receipt. (1,2)

6. Inflated refund claims

In this scenario, the scammers do prepare and file 1040s, but they charge big fees up front or claim an exorbitant portion of your refund. The I.R.S. specifically warns against signing a blank return as well as preparers who charge based on the amount of your tax refund. (1,2)

7. Excessive claims for business credits

In their findings, the I.R.S. specifically notes abuses of the fuel tax credit and research credit. If you or your tax preparer claim these credits without meeting the correct requirements, you could be in for a nasty penalty. (1,2)

8. Falsely padding deductions on returns

Some taxpayers exaggerate or falsify deductions and expenses in pursuit of the Earned Income Tax Credit, the Child Tax Credit, and other federal tax perks. Resist the temptation to pad the numbers and avoid working with scammers who pressure you to do the same. (1,2)

9. Falsifying income to claim credits

Some credits, like the Earned Income Tax Credit, are reported by scammers claiming false income. You are responsible for what appears on your return, so a boosted income can lead to big penalties, interest, and back taxes. (1,2)

10. Frivolous tax arguments

There are seminar speakers and books claiming that federal taxes are illegal and unconstitutional and that Americans only have an implied obligation to pay them. These and other arguments crop up occasionally when people owe back taxes, and at present, they carry little weight in the courts and before the I.R.S. There’s also a $5,000 penalty for filing a frivolous tax return, so these fantasies are best ignored. (1,2)

11. Abusive tax shelters

If it sounds too good to be true, it usually is, and that’s especially true of complicated tax avoidance schemes, which attempt to hide assets through a web of pass-through companies. The I.R.S. suggests that a second opinion from another financial professional might help you avoid making a big mistake. (1,2)

12. Offshore tax avoidance

Not all taxpayers adequately report offshore income, and if you don’t, you are a lawbreaker, according to the I.R.S. You could be prosecuted or contend with fines and penalties. (1,2)

Watch out for these ploys – ultimately, you are the first defense against a scam that could cause you to run afoul of tax law.

Sources

  1. irs.gov/newsroom/irs-wraps-up-dirty-dozen-list-of-tax-scams-for-2018-encourages-taxpayers-to-remain-vigilant
  2. forbes.com/sites/kellyphillipserb/2018/03/22/irs-warns-on-dirty-dozen-tax-scams/

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

4 Important Questions You’ll Need to Answer Before Claiming Social Security

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Whether you want to leave work at 62, 67, or 70, claiming the retirement benefits you are entitled to by federal law is no casual decision. You will want to consider a few key factors first.

1. How long do you think you will live?

If you have a feeling you will live into your nineties, for example, it may be better to claim later. If you start receiving Social Security benefits at or after Full Retirement Age (which varies from age 66-67 for those born in 1943 or later), your monthly benefit will be larger than if you had claimed at 62. If you file for benefits at FRA or later, chances are you probably a) worked into your mid-sixties, b) are in fairly good health, c) have sizable retirement savings. (1)

If you sense you might not live into your eighties or you really need retirement income, then claiming at or close to 62 might make more sense. If you have an average lifespan, you will, theoretically, receive the average amount of lifetime benefits regardless of when you claim them; the choice comes down to more lifetime payments that are smaller or fewer lifetime payments that are larger. For the record, Social Security’s actuaries project the average 65-year-old man living 84.3 years and the average 65-year-old woman living 86.7 years. (2)

2. Will you keep working?

You might not want to work too much, for earning too much income can result in your Social Security being withheld or taxed.

Prior to Full Retirement Age, your benefits may be lessened if your income tops certain limits. In 2018, if you are 62-65 and receive Social Security, $1 of your benefits will be withheld for every $2 that you earn above $17,040. If you receive Social Security and turn 66 later this year, then $1 of your benefits will be withheld for every $3 that you earn above $45,360. (3)

Social Security income may also be taxed above the program’s “combined income” threshold. (“Combined income” = adjusted gross income + non-taxable interest + 50% of Social Security benefits.) Single filers who have combined incomes from $25,000-34,000 may have to pay federal income tax on up to 50% of their Social Security benefits, and that also applies to joint filers with combined incomes of $32,000-44,000. Single filers with combined incomes above $34,000 and joint filers whose combined incomes surpass $44,000 may have to pay federal income tax on up to 85% of their Social Security benefits. (3)

3. When does your spouse want to file?

Timing does matter, especially for two-income couples. If the lower-earning spouse collects Social Security benefits first, and then the higher-earning spouse collects them later, that may result in greater lifetime benefits for the household. (4)

4. How much in benefits might be coming your way?

Visit ssa.gov to find out, and keep in mind that Social Security calculates your monthly benefit using a formula based on your 35 highest-earning years. If you have worked for less than 35 years, Social Security fills in the “blank years” with zeros. If you have, say, just 33 years of work experience, working another couple of years might translate to slightly higher Social Security income. (1)

Your claiming decision may be one of the major financial decisions of your life. Your choices should be evaluated years in advance, with insight from the financial professional who has helped you plan for retirement.

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▲ Maximizing Social Security benefits

The age at which one claims Social Security greatly affects the amount of benefit received. Key claiming ages are 62, full retirement age (FRA is currently 66 and 4 months for today’s 62-year-olds) and 70, as shown in the row of ages in the middle of the slide. The top three graphs show the three most common ages an individual is likely to claim and the monthly benefit he or she would receive at those ages. Claiming at the latest age (70) provides the highest monthly amount but delays receipt of the benefit for 8 years. Claiming at Full Retirement Age, 66 and 4 months, or 62 years old provides lesser amounts at earlier ages. The grey shading between the bar charts represents the ages at which waiting until a later claim age results in greater cumulative benefits than the earlier age. This is called the breakeven age. The breakeven age between taking benefits at age 62 and FRA is age 76 and between FRA and 70 is 80. Not shown is the breakeven between 62 and 70, which is 79 (78 and 6 months). Along the bottom of the page, the percentages show the probability that a man, woman or one member of a married couple currently age 62 will reach the specified ages. Comparing these percentages against the breakeven ages will help a beneficiary make an informed decision about when to claim Social Security if maximizing the cumulative benefit received is a primary goal. Note that while the benefits shown are for a high-income earner who maxes out their Social Security taxes each year (income of $128,700 in 2018), the breakeven ages would hold true for those at other income levels.

Sources

  1. fool.com/investing/2018/07/07/4-frequently-asked-social-security-questions.aspx
  2. ssa.gov/planners/lifeexpectancy.html
  3. blackrock.com/investing/literature/investor-education/social-security-retirement-benefits-quick-reference-one-pager-va-us.pdf
  4. thebalance.com/social-security-for-married-couples-2389042
  5. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

8 Surprising Retirement and Lifestyle Facts for Pre-Retirees

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Photo by Tookapic on Pexels.com

Does your vision of retirement align with the facts? Here are some noteworthy financial and lifestyle facts about life after 50 that might surprise you.

Up to 85% of a retiree’s Social Security income can be taxed.

Some retirees are taken aback when they discover this. In addition to the Internal Revenue Service, 13 states levy taxes on some or all Social Security retirement benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. (It is worth mentioning that the I.R.S. offers free tax advice to people 60 and older through its Tax Counseling for the Elderly program.) (1)

Retirees get a slightly larger standard deduction on their federal taxes.

Actually, this is true for all taxpayers aged 65 and older, whether they are retired or not. Right now, the standard deduction for an individual taxpayer in this age bracket is $13,600, compared to $12,000 for those 64 or younger. (2)

Retirees can still use IRAs to save for retirement.

There is no age limit for contributing to a Roth IRA, just an inflation-adjusted income limit. So, a retiree can keep directing money into a Roth IRA for life, provided they are not earning too much. In fact, a senior can potentially contribute to a traditional IRA until the year they turn 70½. (1)

A significant percentage of retirees are carrying education and mortgage debt.

The Consumer Finance Protection Bureau says that throughout the U.S., the population of borrowers aged 60 and older who have outstanding student loans grew by at least 20% in every state between 2012 and 2017. In more than half of the 50 states, the increase was 45% or greater. Generations ago, seniors who lived in a home often owned it, free and clear; in this decade, that has not always been so. The Federal Reserve’s recent Survey of Consumer Finance found that more than a third of those aged 65-74 have outstanding home loans; nearly a quarter of Americans who are 75 and older are in the same situation. (1)

As retirement continues, seniors become less credit dependent.

GoBankingRates says that only slightly more than a quarter of Americans over age 75 have any credit card debt, compared to 42% of those aged 65-74. (1)

About one in three seniors who live independently also live alone.

In fact, the Institute on Aging notes that nearly half of women older than age 75 are on their own. Compared to male seniors, female seniors are nearly twice as likely to live without a spouse, partner, family member, or roommate. (1)

Around 64% of women say that they have no “Plan B” if forced to retire early.

That is, they would have to completely readjust and reassess their vision of retirement, and redetermine their sources of retirement income. The Transamerica Center for Retirement Studies learned this from its latest survey of more than 6,300 U.S. workers. (3)

Few older Americans budget for travel expenses.

While retirees certainly love to travel, Merril Lynch found that roughly two-thirds of people aged 50 and older admitted that they had never earmarked funds for their trips, and only 10% said they had planned their vacations extensively. (1)

What financial facts should you consider as you retire?

What monetary realities might you need to acknowledge as your retirement progresses from one phase to the next? The reality of retirement may surprise you. When it comes to retirement, the more information you have, the better.

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▲ Changes in lifestyle

As households transition into retirement, time that had been spent working now is available for other pursuits. Individuals often enter retirement having spent too little time determining how they plan to spend this time – and run the risk of spending time and money pursuing activities that may not prove to be as fulfilling as they had anticipated. “Practicing retirement” can be a good way for individuals to try out interests in advance so that they are more likely to use their time and resources wisely. Older individuals tend to spend more time caring for other adults in their household, volunteering and focusing on their finances.

Sources

  1. gobankingrates.com/retirement/planning/weird-things-about-retiring/
  2. fool.com/taxes/2018/04/15/2018-standard-deduction-how-much-it-is-and-why-you.aspx
  3. thestreet.com/retirement/18-facts-about-womens-retirement-14558073
  4. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

How Annuities Can Help Provide a Retirement Income Floor

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Here’s why many people choose annuities for for retirement income, and what prospective annuity holders should consider.

Imagine an income stream you cannot outlive.

That sums up the appeal of an annuity. If you are interested in steady retirement income (and the potential to defer taxes), you might want to look at the potential offered by annuities. Before making the leap, however, you must understand how they work.

Just what is an annuity?

It is an income contract you arrange with an insurance company. You provide a lump sum or continuing contributions to fund the contract; in return, the insurer agrees to pay you a specific amount of money in the future, usually per month. If you are skittish about stocks and searching for a low-risk alternative, annuities may appear very attractive. While there are different kinds of annuities available with myriad riders and options that can be attached, the basic annuity choices are easily explained. (2)

Annuities can be either immediate or deferred.

With an immediate annuity, payments to you begin shortly after the inception of the income contract. With a deferred annuity, you make regular contributions to the annuity, which accumulate on a tax-deferred basis for a set number of years (called the accumulation phase) before the payments to you begin. (1,2)

Annuities can be fixed or variable.

Fixed annuities pay out a fixed amount on a recurring basis. With variable annuities, the payment can vary: these investments do essentially have a toe in the stock market. The insurer places some of the money that you direct into the annuity into Wall Street investments, attempting to capture some of the upside of the market, while promising to preserve your capital. Some variable annuities come with a guaranteed income benefit option: a pledge from the insurer to provide at least a certain level of income to you. (1,3)

In addition, some annuities are indexed.

These annuities can be either fixed or variable; they track the performance of a stock index (often, the S&P 500), and receive a credit linked to its performance. For example, if the linked index gains 8% in a year, the indexed annuity may return 4%. Why is the return less than the actual index return? It is because the insurer usually makes you a trade-off: it promises contractually that you will get at least a minimum guaranteed return during the early years of the annuity contract. (3)

Annuities require a long-term commitment.

Insurance companies expect annuity contracts to last for decades; they have built their business models with this presumption in mind. So, if you change your mind and decide to cancel an annuity contract a few years after it begins, you may have to pay a surrender charge – in effect, a penalty. (Most insurance companies will let you withdraw 10-15% of the money in your annuity without penalty in an emergency.) Federal tax law also discourages you from withdrawing money from an annuity – if the withdrawal happens before you are 59½, you are looking at a 10% early withdrawal penalty just like the ones for traditional IRAs and workplace retirement accounts. (1,3)

Annuities can have all kinds of “bells and whistles.”

Some offer options to help you pay for long-term care. Some set the length of the annuity contract, with a provision that if you die before the contract ends, the balance remaining in your annuity will go to your estate. In fact, some annuities work like joint-and-survivor pensions: when an annuity owner dies, payments continue to his or her spouse. (Generally, the more guarantees, riders, and options you attach to an annuity, the lower your income payments may be.) (1)

Deferred annuities offer you the potential for great tax savings.

The younger you are when you arrange a deferred annuity contract, the greater the possible tax savings. A deferred annuity has the quality of a tax shelter: its earnings grow without being taxed, they are only taxable once you draw an income stream from the annuity. If you start directing money into a deferred annuity when you are relatively young, that money can potentially enjoy many years of tax-free compounding. Also, your contributions to an annuity may lower your taxable income for the year(s) in which you make them. While annuity income is regular taxable income, you may find yourself in a lower tax bracket in retirement than when you worked. (1)

Please note that annuities come with minimums and fees.

The fee to create an annuity contract is often high when compared to the fees for establishing investment accounts – sometimes as high as 5-6%. Annuities typically call for a minimum investment of at least $5,000; realistically, an immediate annuity demands a five- or six-figure initial investment. (3)

No investment is risk free, but an annuity does offer an intriguing investment choice for the risk averse. If you are seeking an income-producing investment that attempts to either limit or minimize risk, annuities may be worth considering.

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▲Understanding annuities: Which annuity may be right for you?

Annuities come in all shapes and sizes, which can often confuse investors. This chart helps to identify the type of annuity that aligns to specific income needs and tolerance for investment risk, and provides information about how the annuity growth and payout amounts are determined, as well as other key characteristics to know.

Sources

  1. investopedia.com/articles/retirement/05/063005.asp
  2. forbes.com/sites/forbesfinancecouncil/2018/01/04/annuities-explained-in-plain-english/#626afc215bd6
  3. apps.suzeorman.com/igsbase/igstemplate.cfm?SRC=MD012&SRCN=aoedetails&GnavID=20&SnavID=29&TnavID&AreasofExpertiseID=107
  4. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.