Embed Size (px)
Citation preview
Implementing the Investment and Tax Pieces of Your Financial Puzzle
Lyons Township Adult & Community Education – October 31, 2019
Kirk A. Kreikemeier, CFP®, CFA, FSA4365 Lawn Avenue, Suite 5Western Springs, IL 60558
• Previous session identified major pieces of your financial puzzle
• Review big picture as refresher but only focus on two pieces here
• 1) asset allocation – diversify based on tolerance, not just stock picking
• 2) tax considerations – plan before, don’t curse the tax return after
• Leave with a deeper understanding of these two critical pieces
• Other pieces also worthy of further considerations but not covered here
Deep Dive Into Two Pieces of Financial Puzzle Agenda
Income• Employment• Other (non-investment)• Company Stock Options
Checking Account
Monthly Bills
Mortgage/Student Loans -
(good debt -appreciating
assets)
Outstanding Balances -
credit cards(bad debt -depreciating
assets)
Social Security / Medicare
401K / Pensions
IRA Account(Traditional and Roth)
Health Savings Account
529 Accounts
Taxable Accounts(including reserve funds)
Set Aside for Your Future
6.2% SS + 1.45% Medicare1
Future Goals
Taxes
Life Insurance / Annuities
Estate Planning(Wills, POAs, Trusts)
NOTES: 1. Employer also contribute 7.65%; extra 0.9% for income > $200k / $250K 2. Invest gains only taxed upon withdrawal
2
Financial Plan Big Picture
Working Years Save for Future Spend Later
1. Know what you have
2. Set goals and estimate costs
3. How do you react to market risk? How soon need the money? => Asset allocation
4. What accounts to open to back these goals and basics of investing
5. Understand key tax brackets and concepts
6. Save for retirement expenses – where to begin!
7. Save for portion of college you are paying – they grow quickly
8. Focus on basic features of insurance and annuities
9. Understand Social Security and Medicare
10. I’m retired! Where does my paycheck come from? Don’t forget taxes! How long last?
11. Pull it all together, stress test and monitor – especially near retirement
12. Leave your legacy by design, not default
Summary of key areas Checklist
1. Many people mistake investments for financial planning• An important piece, but not the only one
2. Many assume investing means 100% US equity and picking stocks• US equity is one of many asset classes• A single investment in fund can hold many individual stocks
3. Before construct portfolio, determine how much risk to take• Risk Tolerance – how do you react to uncertainty• Risk Capacity – how much saved already and how soon need funds• Risk Perception – part in tolerance but influenced by recent experience and education
Let’s invest your savings, but first talk risk#1 – Asset Allocation
Answer risk ?’s > convert to score > discuss#1 – Asset Allocation
Source: TOEWS FPA Presentation Sep 2019Source: FinametricaAlternatives are questionnaire from brokerage; Riskalyze, etc.
1. Separate funds needed for different time horizons• Emergency fund – safe investments, even if aggressive tolerance• College savings or other shorter-term – need to shift to safer more quickly• Retirement savings – more time to withstand market moves, if comfortable
2. Have a diversified portfolio, not US equity only• Historically used 60/40 US stocks/bonds• Now add international, refine stocks/bonds classes, alternatives
3. Familiar with ingredients in a recipe; adjust if want more spicy• Asset classes are ingredients; what % in each determines spiciness• Different portfolios have same asset classes but % in asset class varies by investor
Given time and risk tolerance, construct a portfolio#1 – Asset Allocation
Look at major asset classes, consider risk, blend#1 – Asset Allocation
• Familiar with “cost/benefit” analysis; this is similar “risk/reward” analysis• Also consider how asset classes interact, called correlation (not covered here)• ‘Prepared meal’ funds also exist – target-date (retirement) and age-based (529s)
Find ETFs/mutual funds to fill the asset class bucket#1 – Asset Allocation
Know what asset classes the fund owns Funds, ETFs, Individual Stocks
• Below is output from Morningstar X-Ray on 6 funds; not all covered Source: Blackrock
Depending on mix, portfolio values more stable#1 – Asset Allocation
Growth of $100 9/30/99–9/30/19 Source: Morningstar, PVWM Research
Recent blog post – https://www.pvwealthmgt.com/blog/risk-how-do-you-define-and-use-it-part-1-investments
1. Payroll Tax (FICA – Federal Insurance Contributions Act)• Tax on gross paycheck for Social Security (6.2%) and Medicare (1.45%)• Employer also pays in same %’s; employee extra 0.90% if > $200k S / $250k MFJ
2. Ordinary income
• Wage income is most common ‘ordinary’; also different business income, IRAs• Capital gains from holdings < 365 days also considered ordinary
3. Capital gains/qualified dividends
• Capital gains tax depends on time held; if > 365 days then long-term => lower rate• Most stock dividends are qualified; REITs and bond income non-qualified => ordinary
4. Federal and State tax rates; also Estate tax (not covered here)• Federal tax rates have brackets, even for capital gains• State tax can vary from 0% to flat rate (4.95% in IL) to brackets (like IA)
Taxes – many different types#2 – Tax
Considerations
Tax brackets, marginal v. effective, deductions#2 – Tax
Considerations
1. Effective rate
• Average tax rate pay on all income
2. Marginal rate
• Tax rate impacting next $ of income or deduction
3. Capital Gains rate
• Can be 0%; extra 3.8% Medicare tax higher income
• Have $1,000 to save; what will it be used for?
• What marginal tax bracket known when saving?
• What marginal tax bracket expected when withdraw?
• Will tax rates change before withdraw?
• Will you be living in same state?
• If retirement savings in IRAs, account for taxes
Savings vehicles tax seed, growth, harvest; NONE#2 – Tax
Considerations
401K/403B IRAs HSA Single HSA Family FSA
Annual Limit $19,000 $6,000 $3,500 $7,000 $2,700
Catch Up $25,000>=50
$7,000>=50
$4,500>=55
$8,000>=55
N/A
• AGI components - impacts deductions, credits, Medicare premium surcharge (IRMAA)
• Tax brackets apply after deductions; if using standard look at charitable; SS 25/32-50%, 34/44-85%
• See recent blog post – https://www.pvwealthmgt.com/blog/decoder-ring-new-tax-forms
Understand tax return, AGI, deductions#2 – Tax
Considerations
Control how and when income is recognized#2 – Tax
Considerations
2 Months – 1 Year 1 Year and beyond – Long-term Portfolio
Social Security
During retirement years, control realized income to the extent possible
• What if delay SS and take IRA withdrawals while lower tax bracket?
• What if make charitable from IRA after age 70.5?
• What if fill cash bucket from long-term capital gains vs. high yield bond income?
• What tax bracket jump to if one spouse passes and begin filing single v. joint return?
• Assume IRAs inherited from parent in year 11 at age 50
• Current law allows RMD stretched over life of beneficiary
• Note Traditional IRA is ordinary income; Roth tax-free
• SECURE ACT would require RMD as short as 5 years
• Note large increase in ordinary income even with 10yr
• IF SECURE moves forward, consider tax bracket of parent and beneficiary to see if partial Roth conversion makes sense
Potential impact of SECURE act on taxable income#2 – Tax
Considerations
Contact information and additional resources Appendix
• Upcoming Talk -“What is a Financial Plan? Putting Together the Pieces of Your Financial Puzzle”Thursday, February 13th 7:00 – 9:00pm North Campus Rm TBD
• Sign up for monthly newsletter – see sheet
• See website for blog and other resources: http://www.pvwealthmgt.com/
• Kirk A. Kreikemeier, CFP®, CFA, FSA and Bre Robinson, FPQP™ 4365 Lawn Avenue, Suite 5Western Springs, IL 60558708-246-2366 | [email protected] | [email protected]
