Issue: #  61   JANUARY 2014
Bautis Financial
Dear ,
 

Welcome to January 2014 issue of The Wealth Chronicle!

 

3 Financial Resolutions Everyone Should Make

Not only did we get hit with the Polar Vertex at the start of the year, but as we see every year, New Years ushered in the people making new years resolutions.  Almost anyone that makes a resolution falls into three categories: they want to lose weight, improve their finances, or stop smoking.  It's great that people want to better themselves however by now almost 75% of the people who have made resolutions have already given up on them.

 

We are going to focus on the popular resolution of improving your finances and what three basic areas to focus on to achieve improvement.

 

Contribute to a retirement account

There are two benefits that you get when you save for your retirement.  The first is that you will build up assets so that one day you can stop working.  Social Security is nice, but not enough to live on.  Pensions are being cut at both the private and public levels.  What you sock away during your working years is what will be used to build your income stream once you start working.  There are three things that will determine how much money you will accumulate.  When you start saving, how much you save, and what returns you see on your investment. Surprisingly when you start saving is a huge factor to how much money you will have 

 

The second reason for contributing to a retirement account is the tax benefit.  If you contribute to a 401k, Traditional or SEP IRA, or Profit Sharing Plan, you are able to deduct your contributions.  That means if you earn $100,000 in salary this year and are in a 25% tax bracket you would have to pay $25,000 in taxes.  If you contribute $5,000 to your retirement plan when it comes time to pay taxes, you would pay on $95,000 and not $100,000.  Your tax on $95,000 if you fall into that same 25% tax bracket would be $23,750.  If you contribute more or are in a higher tax bracket the savings by contributing is even greater.  The other tax benefit you see in a retirement account is that you are allowed to defer paying tax every year on any gains in the account.  If you saved money in a bank or regular investment account, every year you will receive a statement showing how much interest, dividends and/or capital gains the account earned.  You then have to include that in your tax return.  In a retirement account you are allowed to reinvest the interest, dividends, and gains back into the account to grow.  Don't believe me on the power of tax deferral check out this article which does a great job explaining it <<power of tax deferral>>

 

How to simplify it - Automate your savings.  Along with the company match the other good thing (maybe the only other good thing about a 401k is that it allows you to set what percentage to have taken out of your pay to contribute to your 401k.  You set it and forget it.  A lot of people don't even realize that they are building up a chunk of retirement savings.  You can do the same thing with your IRA.  Most financial institutions will allow you to link your bank account or even direct deposit into a retirement account

 

Prepare or a catastrophe

What does you and your family's security mean to you?  Everything, right?  You wouldn't think twice about buying a policy to protect against damage to your house or insuring yourself against an auto accident.  What about health insurance for you and your family?  Only the best!  But so many forget, or choose not to protect their income.  Your income is arguably your biggest asset.  

 

A university graduate starting a career with a $45,000 annual salary, assuming raises and promotions over time, may grow his or her salary by 4 percent annually.  This translates into more than $4.25-million of total earnings over a 40-year career! Over time, part of your take-home pay is slowly converted into tangible assets and investments, although during your younger years your future potential income is one of the most important aspects of your financial well-being.  It could be crippling to both you and your family if something unforeseen were to happen that prevents you from being able to earn an income.

 

Unless you are Kenny Rogers and like to gamble there are a couple of things it makes sense to start an emergency fund and purchase Life and Disability insurance.

 

Insurance prices have come down over the years and it is often cheaper than people think.  The process to getting insurance is pretty straightforward:  Determine how much insurance you need Get a quote for that amount of coverage Take a medical exam Obtain coverage

 

Protecting your paycheck is a great step to prevent a financial catastrophe, the other financial action to do is create an emergency fund.  Have 3-6 months worth of income readily available should an emergency occur. The emergencies we are preparing for here are the ones that are devastating  to your finances.  Examples include a loss of your job or no income.   Or a medical emergency not covered by insurance.  Without preparation these types of emergencies could result in having to declare bankruptcy or losing your residence. 

 

Just like contributing to a retirement account, the easiest way to build up an emergency fund is to automate the saving of money into it. Here is a 3 step process to get your fund going:

 

Step 1 - Create a new account. You could do this at the current bank that you have your savings and checking account, or at a different institution

 

Step 2- Calculate a goal of how much you want your emergency account to have.  Lets say you earn on average $10,000 a month.  A good number to start with would be $40,000 (4 months worth of income)

 

Step 3 - In conjunction with establishing your spending plan above, you set aside $500 a month to build your emergency savings.  I recommend automating the contribution to that account by either having it directly deposited into the account or by having a monthly ACH payment made. 

 

A question I am frequently asked is do I have to keep $40,000 in a savings or checking account that earns no interest.  I usually recommend keeping half the amount in a checking or savings account and the other half in an investment account that contains liquid, conservative investments

 

Get a pulse on your spending habits

A lot of people think that budgets are only for people who have too much debt, are tired of never having money, have trouble paying the bills, or are blindsided by unexpected expenses.  That couldn't be further from the truth.  Everyone should have a handle on what they are spending. How can you know how much you should be saving for retirement, investing for your child's education, or have in an emergency fund if you do not have a handle on your cash flow.

 

Putting a budget together can be daunting.  Here are a couple of ways to simplify it.  The first way is that you can use an excel template <<template from RFC>> to create some high level buckets of spending that make sense for you.  Track your spending for 2-3 months to see where it is going.  The second way is to utilize the work that most credit cards and banks do for you.  Most financial institutions will categorize your spending and since there are three areas that most people spend from: credit/debit cards, checks, and cash, you can pretty easily import your data into a tool like Mint or YNAB to consolidate all three areas and get a great picture of where you money is going.  Here is an article on tools that people are using to budget.

 

Most people who make resolutions fail because of two things:  Knowledge and Time.  You can throw discipline in their as a third.  Instead of calling these resolutions because of the stigma associated with failed resolutions, maybe these should be known as 5 Financial Actions You Should Take.

Use This Strategy To Have More Money Saved For Retirement

 

Last month I wrote about the significance of timing in regards to when you start saving for retirement.  Not surprisingly, because of the concept of compounding, the earlier you start saving the better.  Makes sense, right?  This month I wanted illustrate further the importance and significance of timing as it relates to the amount of money you will have saved for retirement.  At what point during the year you make your contributions matters just as much as, if not more than, how much you a contributing.  Let me explain further. 

 

The IRS allows you to contribute to an IRA up to your tax filing date.  Therefore, not counting extensions, you have up until April 15th, 2014 to make a 2013 contribution to your IRA.  A lot of people will wait until April to make that contribution, however would it make sense to make that contribution as soon as possible?  So instead of waiting until April 15th, 2014, you could have made that 2013 contribution in January of 2013.   

 

Ed Slott, a nationally renowned IRA expert, hammers home the point that it makes sense to contribute to your IRA as early as possible in the year.  Making a 2014 IRA or Roth IRA contribution in early January 2013 compared to late in the year equates to over a $50,000 difference over 30 years based on $5,500 yearly contribution and 8% rate of return. Over 40 years, it equates to over $100,000 - wow!   If you are contributing more per year to a SEP, the difference is magnified more.

 

How do you end up with the additional $100,000?  By making earlier contributions your IRA, it has more time to compound (16 months), which is amplified by the fact that it is compounding tax-deferred over many years.

 

According to a study by Vanguard, only 10% of the people contribute in January, the earliest month contributions can be made.   There are some good reasons why people wait to contribute until it is close to their tax-filing deadline.  At that point taxpayers know how much they will be able to contribute if they are contributing to SEP-IRAs, or if they will have low enough income to be able to deduct their contribution.  But for some people the procrastination may be the result of investor laziness.  This investor laziness is similar to not ensuring that you get the maximum employer match from your 401k or not seeking retirement advice until after you have stopped working.

Maximize Your Social Security Paycheck

 

BMO Private Bank recently ran a study on retirees collecting Social Security benefits and concluded that 64% of retirees start collecting their benefit without considering how their benefits may be changed by waiting to file or by implementing various spousal benefit claiming strategies.  By failing to properly plan your Social Security strategy you could be leaving tens if not hundreds of thousands of dollars on the table.  Every year I partner with local libraries to host a workshop on the different strategies available for retirees and how they can maximize their benefits.  Below is a brief description of the workshop as well as some dates that I have already booked.

 

Seminar Description

After being told for years that Social Security is "going broke", baby boomers are realizing that it will soon be their turn to collect.  To help baby boomers better understand the Social Security system, this workshop will cover the following:

  • 5 factors to consider when deciding when to apply for benefits
  • When it makes sense to delay benefits - and when it does not
  • Why you should always check your earnings record for accuracy
  • How to estimate your benefits
  • How to coordinate benefits with your spouse
  • How to minimize taxes on Social Security benefits
  • How to coordinate Social Security with your other sources of retirement income

The decisions baby boomers make now can have a tremendous impact on the total amount of benefits they stand to receive over their lifetime.

 

I invite you to register for an upcoming seminar or pass on this information to friends or family members who may benefit:

 

Monday,  February 10th, 2014 at 6:30pm 
East Rutherford Memorial Library

143 Boiling Springs Ave, East Rutherford, NJ 07073  

Register Now!

 

Upcoming Dates and Locations

February 27th - Cresskill Library
March 16th - Leonia Library
March 23rd - Edgewater Library
March 25th - Maywood Library

 

 

 

Key Financial Data Cards

  

Here is a handy reference card to help with your finances for the rest of the year. It's called the 2014 Key Financial Data card and gives you many of the numbers investors need on Social Security, taxes, health savings, Medicare, retirement, college planning and more.

 

Of course, you can always call me when you have questions or concerns or want more detailed information, but this quick reference can be very helpful in checking an assumption or marshaling your facts.

 

Happy New Year and I look forward to another great year with you!

  

 

Download The 2014 Key Data Card 

 

Please contact me if you have any questions about the articles above or about your personal or business finances.

  

Sincerely,

Marc Bautis
Wealth Manager

 

office: 201-842-7655
cell:    201-221-6895
fax:     201-754-9760
Disclaimer:The information contained in this newsletter is for information purposes only and may not be suitable for your specific financial situation.  You should consult a financial advisor before making any investment decisions relating to the information contained in this newsletter

What's Inside?
3 Financial Resolutions Everyone Should Make
Use This Strategy To Have More Money For Retirement
Maximize Your Social Security Paycheck
Key Financial Data Card
Marc Headshow w Skyline, 9-2011
MEET MARC  

Marc Bautis is a Wealth Manager specializing in working with young families as well as retirees and those nearing retirement. He understands that everyone wants to not only protect their principal, but also be sure that their money lasts.  He is committed and proud to deliver independent advice, always in the interest of his clients.

Marc is the creator of the Retirement Fitness Challenge™,  a program designed to be sure his clients enjoy the retirement years as they have always envisioned them.  Marc's program is designed to prevent outliving your money but also to minimize expenses during retirement and find the best time to start taking Social Security benefits.   Marc is also the author of a recent book The Retirement Fitness Challenge: Shape Up Your Finances and Make Your Money Last a Lifetime, which is available on Amazon.com.

Marc is a graduate of Seton Hall University.  He is a Bergen County native, from Lyndhurst, where much of his extended family still resides. He currently lives in Hasbrouck Heights with his wife Katie, new daughter Charlotte and Old English Bulldog, Winnie.

 

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