A Banker’s Guide to Healthy Wealth Series – Save Money
When we think of resolutions, we often immediately think of how to better oneself; this stems from the mind to think about eating healthier, exercising more, and saving money. Ultimately all of those lifestyle changes refer back to living in the present. Saving money is often thought to solely benefit you in the coming future (or on the last drink at happy hour).
What happens when you reach retirement age and you want to stop working, move to Florida, and go to bed at 8:00pm every night? You may have heard the phrase “you only live once, so let’s live it well”, that also includes your future years when you want to live carefree. So as we dive into the different opportunities on how we can stay fiscally responsible while saving up for years of no responsibilities, we hope you enjoy this installment of the series.
Saving more money (37% of personal resolutions) - While intuition tells me that these 37% were probably referring to saving for a vacation or large expense, my professional opinion is we need to be more concerned with retirement. Money can be a big stressor as indicated by Northwest Mutual’s 2018 Planning & Progress Study that showed 78% of Americans say they are ‘extremely’ or ‘somewhat’ concerned about not having enough money for retirement. The same study found that 21% of Americans have nothing at all saved for the future, and another 10% had less than $5,000 saved for their golden years!
Even worse, according to the Social Security Administration, almost half of unmarried persons rely on Social Security for 90% of their income. It has also been well documented that the estimated depletion date for Social Security’s reserve fund is 2034, a mere 16 years away. While social security will continue to get income from payroll taxes, benefits will have to be cut if there is no government intervention between now and then.
How long do you want to work?
Unless you want to work forever, it is important that you choose a retirement vessel that fits best for you and your employees. Self-employed individuals can take advantage of the fact that they are considered both employer and employee. For small businesses there are 6 plans that range from easy to complicated. Please note if over the age of 50, you will have higher limits provided due to the IRS’ catch up rules.
MyRA - Roth IRA that invests in government bonds with a return equal to that of the “G” fund in the government’s Thrift Savings Plan, currently at 2.375% (as of the posting date). Contribution limits of $6,000 for each employee.
SEP-IRAs - All contributions for Simplified Employee Pension plans, or SEPs, are made by the employer. You can’t exclude any employee and contributions have to be made for everyone. It’s all for one and one for all. The maximum contribution cannot exceed the lessor of 25% of total compensation or $55,000 for 2018.
SIMPLE IRA - Employees may choose to contribute, but the employer must contribute annually. Employee is limited to $13,000 in contributions, however matching contributions up to 3% or non-elective contributions count. Matching contributions can be cut to 1% for 2 out of 5 years if the employer has a below average year.
SIMPLE 401(k) - Contributions are limited to $13,000 per employee and limited for companies with less than 100 workers. Employees can take loans from the SIMPLE 401(k) which is attractive to some business owners.
Solo 401(k) - Plan is for self-employed, owner-only businesses and partnerships. Spouses may also participate. As both employer and employee the business owner can contribute elective deferrals up to 100% of earned income up to the annual contribution limit ($18,500 for 2018, $19,000 for 2019.) the business owner can contribute 25% of compensation, defined by the IRS as net earnings from self-employment minus ½ of your self-employment tax and minus the contributions you make to your retirement plan. Overall contributions cannot exceed $56,000 for 2019.
Defined Benefit Plans - Provides a fixed benefit generally tied to tenure and salary for employees at retirement. The employer bears all investment risk. In general, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of: 100% of participants average compensation for his or her highest 3 consecutive calendar years or $225,000 for 2019. This provides a good way to take a lot of money from the business and shelter it from taxes. Generally these plans are for high earners, or income being earned that is not needed and being tax sheltered until retirement.
The future is inevitable, so why not plan to make it better than your neighbors. Like mentioned previously if you plan to work forever, hats off to you. However, if you want to break free from the desk and take advantage of the benefits offered, the six tips above provide many opportunities for wealth management. If you are thinking about going on a cruise now, think about how amazing it would walking off the dock with no responsibilities and a sun hat that has a button of your grandchildren on it. The variation of different plans gives you many different options to choose from, and they can all be further explained to you by a financial professional - like the ones you’ll find right here. Contact us today if you’ve got questions and we’re happy to help ensure you’re on the right track!