Springtime is a great time to review your finances so you can work toward financial independence. While many are organizing their closets and cleaning out drawers and garages, instead, clean up your finances using these ten tips:
1. Freshen up your budget- Your monthly budget may help you work toward your financial goals and can be revised as your expenses change so you can track your spending. However, your budget shouldn’t be so restrictive that it doesn’t bring you joy; remember to budget for things you desire too!
2. Review your debt- Take inventory of your debts this spring, so you understand how much you owe. Write down each account, the unpaid balance, and the monthly payment required. Don't forget to include overdue small bills, as any unpaid debt obligation can hinder your finances. Once you have your debt inventory, consider using one of these debt reduction strategies:
3. Revisit your financial plan- Spring is a great time to schedule an annual investment strategy review or update your financial plan. If it’s been more than a year, reach out to your financial professional to get your review on the calendar.
4. Increase your retirement savings contributions- Increasing or maximizing your pre-tax and after-tax retirement savings contributions helps in two ways. First, it helps you accumulate more retirement savings over time. Second, contributions into pre-tax retirement savings accounts help to lower your taxable income in the year the contributions are made.
5. Boost your emergency fund- An emergency fund is an account used during financial stress to help improve economic security. An emergency fund differs from a savings fund because it provides cash for emergencies, whereas a savings fund is a nest egg for a specific purpose. If you haven’t set up an emergency fund, you should do so this spring. If you have an emergency fund, increase your monthly contribution to save 6-12 months of expenses.
6. Check your credit report- It’s important to check your credit report at least once per year to check for inaccurate information or accounts that may not be yours. Your credit report impacts how much you will pay to borrow or for renewals on contracts such as car insurance. Federal law allows you to access your credit report from a credit reporting agency once per year at no cost.
7. Sign up for paperless statements and bills- Enrolling in electronic delivery of your statements and bills helps reduce clutter and paper waste while providing secured access to your account information.
8. Use mobile apps- Mobile apps help you stay connected to your accounts to monitor your spending and savings. Many banking apps provide budgeting features that categorize your spending and can inform you of your budget progress. Alert features can also inform you about charges and debits to help ensure it was you versus account fraud.
9. Sign up for automatic bill payments- Automatic bill payments help ensure that you are never late or forget to pay a bill, which can cost you more money. If you haven’t signed up for automatic bill payments for utilities, etc., consider signing up this spring.
10. Close unused credit accounts- Consider closing accounts you rarely use since you may forget about them or risk losing the card. Credit card companies often close accounts not used as a security measure.
You may assume that you must rollover your 401(k) when leaving your employer into another retirement savings plan. However, depending on the 401(k) plan document and if a rollover is appropriate for your situation, it may be optional.
A rollover is when you direct your 401(k) transfer to a new retirement plan or an IRA when you leave your employer. This transfer process can be done electronically or by check from custodian to custodian, or from one Investment Company to another, without you receiving the check for your 401(k)'s value.
Here are the options available for your 401(k), and you may initiate more than one option depending on your situation:
Option #1- Leave the 401(k) in the former employer's plan- If permitted by the 401(k) plan documents, a former employee can leave their 401(k) in the employer's plan when they terminate their employment. Here's what to check:
Why would an employee choose this option?
Option #2- 401(k) portability- Rolling your old 401(k) into your new employer's 401(k) plan may be possible if the new plan accepts rollovers. Be sure to evaluate your new employer's 401(k) plan before making your decision by examining the following:
Option #3- Rollover your 401(k) assets into an IRA- You have a few options with a direct rollover:
401(k) into an IRA- You can roll over your 401(k) into your existing IRA or open a new IRA and initiate transfer paperwork with the help of your former retirement plan administrator, HR department, and financial professional.
401(k) Roth into a Roth IRA- You can roll your 401(k) Roth into an existing Roth IRA or open a new one. No taxes are due when the money moves, and any recent earnings accumulate tax deferred. Earnings are eligible for tax-free withdrawal once the Roth IRA has been open for at least five years and you are at least 59 1/2.
401(k) into a Roth IRA- If your 401(k) plan permits rollovers into a Roth IRA, you can initiate the rollover into your Roth IRA or open a new one. Be aware that you will need to pay taxes at the time of the rollover transfer, so you must consult your tax professional before converting your 401(k) to a Roth IRA.
Earnings on the Roth IRA that accumulate after the rollover will be eligible for tax-free withdrawal when the Roth IRA has been open for at least five years and you are at least 59½.
What to consider
before rolling over your 401(k) to an IRA or Roth IRA:
Option #4- Rollover your 401(k) to an annuity- An annuity is a contract with an insurance company to provide an income stream during retirement for a specified period or the remainder of the annuitant's life. Annuities help address the risk of outliving their retirement savings and are purchased with monthly premiums or a lump-sum payment, such as when you roll over your 401(k).
The three types of annuities widely used in financial planning are fixed, indexed, and variable annuities. Like any financial product, each type of annuity has costs, pros, and cons. Annuities are not without risk, and due diligence should take precedence before purchasing one for your retirement portfolio.
Option #5- Cash out the 401(k)- Cashing out a 401(k) becomes a taxable event since the contributions and accumulation are taxable, regardless of the employee's age. Here's what you need to consider:
Some exceptions exist for 401ks and other qualified plans, so you must consult your plan administrator.
Now that you understand your options for your 401(k), you have the decision to make; either keep your 401(k) where it is, roll it over into another 401(k), IRA, Roth IRA, or an Annuity, or cash it out.
The Old Age and Survivors Insurance (OASI) benefits, known as Social Security, pay retirement and survivors benefits through The Social Security Trust Fund.
The U.S. Social Security Administration oversees this fund. Social Security (SS) taxes and other income are deposited into the trust fund accounts, and SS benefits payout from them. The only purpose for which these trust funds are used is to pay benefits and program administrative costs.
The Trust Fund’s
Problem
The fund faces insolvency with fewer SS payroll taxes collected due to a declining workforce and longer life expectancy. With less collected, The Social Security Administration has been spending more on benefits than bringing in from payroll taxes.
Initially designed for retired workers and survivors, the program's funds depletion date is 2035. For Americans that will retire after 2035, the future of receiving their projected full retirement monthly benefit looks bleak. The Social Security Administration estimates the ability to pay 77% of promised benefits at that time. Here is Social Security's present situation:
The Social Security Administration continues to sell Treasury bonds to keep the fund afloat. However, the fund will significantly deplete in the next twelve years. Some proposed solutions from the fund's board of trustees include:
The 2023 OASDI tax rate is 6.2% each for employers and employees; self-employed individuals pay the full 12.4% themselves. The tax is collected on wages up to $160,200.
A poll conducted by Gallup found that 38 percent of working U.S.
adults thought Social Security would be a significant source of their income. Today,
57 percent of retirees rely on Social Security as their primary source of
income. Here are additional
strategies to help you get the most out of your Social Security Retirement
Benefits:
Those retiring after 2035 must rely more on other retirement savings and less on their Social Security benefits. Here are some ways to help you save for retirement:
Whether Social Security retirement benefits are available at the current levels or not, planning for your future is essential.
In 2022 The Fed raised interest rates seven times, with the possibility of raising interest rates again in 2023 as they pursue cooling inflation. While a potential interest rate may occur or plateau, raising rates can take a toll on consumers.
Here are five signs that may signal an interest rate increase is on the horizon:
Mortgage rates start to increase- The 30-year fixed mortgage interest rate is based on the long-term outlook for interest rates. When rates increase, prospective buyers will see their costs rise. Homeowners with fixed-rate mortgages will be spared, but those with adjustable-rate mortgages may want to consider locking in their loan's interest rate.
Credit card rates rise- All credit cards have adjustable rates, and when interest rates rise, so do credit card interest rates. There is no federal law that limits the interest rate that a credit card company can charge. Therefore, consumers carrying balances may want to initiate a plan to pay off their debt or look for zero-interest rate balance transfer offers and transfer their debt. But read the fine print, as the offer may charge back interest if the balance isn't paid in full by the offer's balance payoff deadline.
Bond markets fall- Bond markets tend to decline as interest rates rise. In May 2022, Fed Chair Jerome Powell announced that the central bank would start to reduce its $9 trillion in Treasury bonds and mortgage-backed securities to reduce market liquidity further. Investors using bond strategies in their portfolio may want to monitor their portfolio and adjust holdings if appropriate as they continue to watch interest rates throughout 2023.
Personal loan rates increase- Personal loan rates may increase as the Fed Funds rate rises as banks borrow at a higher rate and pass that rate along with their markup to consumers. It will become more expensive to finance a car, college education, or consolidate debt. Home equity loan rates also increase as interest rates rise.
Bank deposit product rates increase- Money market accounts, savings and checking accounts, and CD rates rise. Banks often raise interest rates on these products to attract new customers or bring in more money. Consumers with lower-rate CDs or money market accounts may want to consider laddering- staging CDs to come due at different times to help accumulate more interest during rising rates versus being locked in at a lower rate. Also, determine if cashing out a CD, paying the penalty, and reinvesting in a new CD is appropriate for their situation.
While there is uncertainty if and when interest rates will go up, there are things you can do to help lessen the effect, such as:
Contact our office for a portfolio review today if you
have concerns about rising interest rates and your portfolio.
Investment advisory services are offered through Wealth Watch Advisors, an SEC-registered investment advisor. Neither Wealth Watch Advisors or J. Martin Wealth Management, LLC are endorsed by the Social Security Administration or any other governmental organization. Note, registration with the SEC does not denote a certain skill level or guarantee the success of an investment strategy. Wealth Watch Advisors and J. Martin Wealth Management, LLC are independent of one another.