Owning private property has long been a vision in American society. Since WWII, home ownership has been dubbed “the American Dream.” Our entire way of life evolved from the original agrarian economy, crossing through the industrialization era, eventually arriving in our current information age.
Prior to industrialization, Americans were focused on feeding their families, for the most part, to the exclusion of building wealth. Personal home ownership may have been a dream, but it didn’t yet qualify as “the American Dream.” Our economy was attuned more to survival than to upward mobility.
The arrival of the post-WWII economy freed citizens and resources to engage in “other-than-survival” pursuits. Agriculture became more efficient and mechanized, requiring an ever-shrinking workforce. Industrialization that had ramped up for wartime production shifted to a more consumer orientation.
Today, about 65% of Americans reside in homes that they own (supported by the massive mortgage industry). In most cases, these Americans are experiencing increasing wealth, both from mortgage pay-down and property appreciation. Proponents of home-buying favor the argument that making rent payments to a landlord is tossing money down the drain. How true is that argument? Let’s look at some considerations.
Rent payments may be considerably lower than mortgage payments for a similar property. This is common, and especially so in times of high interest rates. For potential buyers with heavy demands on their paychecks, monthly dollars not spent on a mortgage may be critical to lifestyle and comfort.
Just how much equity might be gained by these people if they could achieve ownership? First, down payments and closing costs are often a strain on current financial assets, to be made up slowly over time. Buyers paying less than 20% down at closing will have to pay expensive PMI (Private Mortgage Insurance). PMI does not benefit the buyer – it protects the lender, but at the buyer’s expense. Talk about money down the drain!
Home maintenance costs are currently averaging about $9,000 annually ($750/month) for a median-priced home. A $250,000 mortgage (based on 30 years, fixed at 6%), includes payments to the mortgage principal (equity) of about $250/month. The additional $500 monthly expense is essentially lost.
Recently, I performed a study of home ownership costs and benefits. My conclusion was straightforward and unsurprising. During the first half of a 30-year mortgage, home equity growth is furnished about 29% through principal paydown, and 71% through appreciation. Time is the true benefit.
In later life, homeowners’ net worth averages 38 times that of renters. Despite the costs and pitfalls, ownership forms the fundamentals of a good life.
Everyone living in the possible path of a hurricane knows that we are in the annual Southeastern USA Hurricane Season (June 1 through November 30). Since we all tacitly accept weather risk by living here, we need to have plans in the event of an actual disaster. As we age, our options for disaster preparation assume ever-increasing responsibility for our own safety, as well as the safety of family members. “Pack up and go” is not always an option. When relocation is necessary, we cannot decouple from our health care resources.
Once enrolled in Medicare, Americans often assume that they can receive medical attention whenever and wherever in the USA they happen to be at the time. Unfortunately, many Medicare enrollees may come up short if they make that assumption, and then suddenly require medicine or care during a temporarily relocation. Preparation is the key to safety, and today we address some of the most critical aspects of relocation preparation.
The government website medicare.gov has a virtual library of helpful information. Specifically, go to disasterassistance.gov for a comprehensive list of disaster topics and resources. Today’s highlights are taken from the section explaining how to continue receiving prescription drugs when away. Do not regard this Blog as comprehensive advice. As usual, we attempt to educate readers how to address pertinent questions and how to realize helpful answers.
When Medicare enrollees have sufficient warning that they will need to relocate due to an impending disaster, they should contact their Plan provider. Medicare has a 24/7 free phone number (800-633-4227), while other providers of Drug Plans also have contact numbers. Before you call any of them, be prepared, with your Medicare ID, policy numbers, list of prescriptions, etc. Work to secure a 60-to-90-day supply for all prescriptions.
If your Drug Plan requires an in-network provider, ask your regular pharmacy if they have any in-network providers where you intend to ride out the disaster. If not, contact your Plan to see if they will authorize you to use an out-of-network provider. If not, and should you have to pay full price for your prescriptions, ask in advance if they will reimburse you for part of the cost.
Prescriptions are not the only items that require pre-planning, but they may be the most important for your continued health. Other portions of the disasterassistance.gov website include instructions for visiting doctors, as well as receiving specialized care for dialysis, chemotherapy, and other serious medical necessities.
We are in the early portion of the 6-month Atlantic hurricane Season. Every affected resident must be aware of upcoming conditions, as well as what to do about their health.
As recently as 2024, about 70 million Americans are actively participating in 401(k) Plans at their place of employment. Percentagewise, recent auto-enrollment plans have increased the participation rate from 54% (for non-auto-enrolled plans) to about 84%. This is an excellent development, and we should always push to bring that figure up toward 100%. Planning to retire solely on Social Security is the worst so-called retirement planning anyone could adopt.
Congress unintentionally created the 401(k) in 1978, when they were addressing an issue with taxation of executive deferred compensation. Two years later, a benefits consultant was reading the language of Section 401(k), and realized that it could be interpreted to allow participants to contribute to their own accounts on a pre-tax basis. IRS agreed, and the rest is history.
For most working Americans, finding dollars that could be deferred to their own futures is difficult, given the many demands on their incomes. Although individual 401(k) contribution limits are generous, only a minority of participants are able to maximize (“max out”) their legal contributions. Others should, to the best of their ability, do what they can to maximize current contributions and take advantage of opportunities built into the Plan.
While there is no lower limit to individual contributions, incentives built into many Plans should be explored and targeted. Maximizing the minimum means taking advantage of Plan provisions that add value above participant contributions. The most common incentive is Company matching funds.
While matching provisions vary by Plan, typically they apply to contributions by individuals (salary deferrals), up to a certain percentage of salary. For example, the Company may match 50% of employee contributions up to 6% of salary. Combinations are numerous and complicated.
Company matching funds provide the first step in maximizing the minimum contribution. Every participant should (at least) contribute the percentage of his or her salary to which matching funds apply. Free money.
Some participants are able to accelerate their own contributions early in the year. This is sound thinking, but requires a word of caution. Many Plans limit matching funds by the month, and if participant contributions are “front-loaded” into the early months, some matching funds may be missed. Spreading contributions throughout the year may assure no loss of matching funds.
Maximizing the Minimum requires understanding the Plan’s provisions and applicable Tax Code limitations. Sadly, many participants believe they are “maxing out,” but fall short. Perhaps the best advice this financial advisor can offer is to start young and be consistent. Time in the market is your best friend.
Retirement Planning involves a complex intertwining of variables, including social values, financial considerations, tax consequences, and various legal constraints on investors. There are very few absolutes (many are those legal constraints), as everyone’s situation is unique and fluid. Plans must be flexible and adaptable, able to be updated frequently as conditions change.
Comprehensive Financial Planning, as practiced by Certified Financial Planners® (CFPs®), begins with defining and documenting a client’s goals. All components of a Comprehensive Plan must work together to arrive at the Goal. As goals shift and develop (as they will), financial components must be adaptable to evolving situations. Extensive knowledge and training are essential for successful fiduciary advisors administering client Plans.
For decades, a Financial Plan was created at the beginning of a client/advisor relationship. Printed in vivid colors, and on substantial paper stock, pages were placed in a 3-ring binder, with tabs for cross-reference. The beautiful-looking document was expensive for the client, and once presented, was usually placed in a drawer or on a shelf. Seldom even looked at, and hardly ever revised and updated, Comprehensive Plans were rare (and dust-covered).
Through our lifetimes, computer power has allowed the development of better and more flexible electronic Financial Planning components. Today’s “living” Plans are online, real time, have integrated components, and are easily accessed, maintained, and updated. Forming a relationship with a qualified CFP® allows a client to develop and maintain a life-long, up-to-date, Comprehensive Financial Plan.
Life changes, including growing older and forming a family, developing careers, changing locations (often several times), developing lifestyles, health considerations, and others, need to be reflected in Financial Plans. Today’s technology, combined with a long-term relationship with a qualified fiduciary financial advisor, will provide rewards, both financial and emotional.
Most Americans wait far too long to establish a relationship with a qualified CFP®, losing out on years of professional planning and investing. While no advisor can guarantee superior investing results, modern research by Vanguard suggests that clients of CFP® Professionals can realize above-average outcomes over long working relationships. To read more about this, you can reference Vanguard’s Advisor Alpha® Study.
Accumulating substantial retirement assets is a lifetime quest, and no one needs to go it alone. Starting earlier, rather than later, can yield a lifetime of benefits. Professional guidance may enhance your results, as well.
Part 3 of our exploration of Required Minimum Distributions (RMDs) from Qualified Retirement Accounts is dedicated to the RMD-reducing “product” known as the Qualified Longevity Annuity Contract, or QLAC. We use the term “product” because QLACs are insurance contracts (products) issued by large insurance companies. Generally speaking, a QLAC is a deferred annuity within an IRA that defers RMD payments on the QLAC amount until the owner reaches a pre-selected age. The year-end IRA Account value, less the QLAC value, determines the following year’s RMD amount.
The maximum QLAC-based deferral age is 85.
Some IRA owners facing their RMD year are not looking forward to taking the entire RMD (usually for tax reasons). Not needing current income, they prefer to defer the RMD income for a period of time. Some may be planning to work for a while, and others may never need the RMD, due to having sufficient income from other sources. The QLAC is flexible in deferring its portion of the total RMD until the contract expires (date chosen by purchaser, up to age 85).
For tax year 2026, the maximum QLAC contract value is $210,000 per individual IRA owner. For the owner of a $1 Million IRA, purchasing a maximum QLAC would decrease next year’s RMD by over 20%. This RMD reduction, with corresponding tax savings, carries on until the expiration of the QLAC, which was chosen by the account owner when the Contract was purchased. This could be one year, or many, up to a maximum age of 85.
As with all things IRA, IRS, and insurance products, QLACs are complex. Understand the concept and the product before you buy. Here are a few thoughts, not intended to be a comprehensive list:
- QLACs do not change in value, as they have no. rate of return
- Their value lies solely in the delay of taxable income from the IRA’s RMD during the selected life of the QLAC.
- QLACs are required to pay RMDs directly to the owner, beginning after the selected life of the QLAC, based on current age.
- Upon expiration of the QLAC Contract, any unpaid value in the QLAC is paid out to the beneficiary (insurance company does not keep your money, as many people believe).
Assets preserved through deferral of current taxation using the QLAC are as valuable as the tax deferral feature of the IRA during working and contributing years. The rate of return on the QLAC should be considered to be the owner’s marginal tax rate for every year of ownership.
Last week, I wrote this: “Required Minimum Distributions, or RMDs, are the eventual price Uncle Sam exacts from each of us for the multi-year tax-deferral privilege they granted us during our working lives.” In our day jobs as financial advisors, we frequently meet people who would rather not have to withdraw the funds from their retirement accounts. While we understand their positions, we also maintain that the RMD requirement is reasonable. In my opinion, our ability to contribute and grow Retirement funds in tax-deferred accounts over decades is vastly more significant than later taxes on the RMD requirement.
For many Retirement Account owners, the RMD requirement fits into their retirement lifestyle when used as a replacement for the monthly income formerly received while working. Timing of RMD payments is only bound by the calendar year, with annual, monthly, or quarterly withdrawals treated the same by IRS. Federal Tax withholding can be structured to work like paycheck tax, but no FICA or Medicare withholding applies (RMDs are “unearned income”).
Timing of RMD withdrawals is a personal, needs-based decision, with as many available permutations as account owners. With flexibility comes the opportunity to tailor withdrawals to your needs and/or wants. Our clients’ requests span the gamut, ranging from transactions (such as car purchases or dream vacations), to monthly income streams or investment of the net proceeds in taxable brokerage accounts.
Most retirees welcome the income they receive from RMDs, but (for tax reasons) some would rather reduce their annual RMD withdrawal requirements. For these folks, there are two relatively unknown options, called Qualified Charitable Distributions (QCD) and Qualified Longevity Annuity Contracts (QLAC). Although they are completely different strategies, both are effective methods of reducing future taxable RMDs.
IRA owners who are subject to RMDs and are charitably minded can now distribute donation funds directly to their qualified charities, while saving themselves income tax on the QCD amounts. Rather than receiving direct (and therefore taxable) distributions from their IRA, an account custodian (Schwab, Fidelity, etc.) sends a check directly to the charity. This amount reduces the RMD dollar-for-dollar, but is not counted as income to the Account Owner. No income, no tax, on all QCD funds (up to the current $111,000 annual limit).
We should note that all IRA owners who have attained age 70-1/2 are eligible to execute QCD transactions. Under the new, higher RMD age limits, this feature was not restricted by any increased age requirements.
Next week, we will cover the QLAC option for postponing a portion of RMD requirements for IRA owners who do not need current income.
Required Minimum Distributions, or RMDs, are the eventual price Uncle Sam exacts from each of us for the multi-year tax-deferral privilege they granted us during our working lives. For years, Retirement Account (Traditional IRA, 401(k), etc.) withdrawals were mandated to begin in the year the account owner reaches age 70-1/2. In 2018, his unwieldy number was thankfully replaced by (and increased to) 73 for people born between 1951 and 1959. In 2025, the RMD age became 75 for those born in 1960 or later. These changes reflect increasing life expectancies and the need to preserve retirement assets over a longer retirement.
For the year in which an account owner achieves RMD age, there is a 1-time withdrawal exception allowed. The first RMD can be delayed until the first quarter of the following year, which is generally used by people who are retiring in their RMD birthday year. This allows taxable RMD income to be deferred until the year following retirement, when working income terminates or is reduced.
The timing of the RMD distribution date should consider the account owner’s need for income. Most people delay the annual RMD as long as possible, thereby allowing more time for tax-free growth throughout the year. For owners who don’t need the income and would prefer to withdraw smaller accounts, it may be smarter to take the distribution early in the year. This action intentionally reduces further appreciation of the RMD funds, consequently reducing the next year’s RMD.
Most RMDs are paid in cash, and many apply Federal Tax withholding to cover the added income from the RMD. However, it is perfectly acceptable to distribute shares of stocks, ETFs, or Mutual Funds. Taxes can be paid from another source or through a separate distribution of cash.
Assets distributed as an RMD must be distributed to a taxable account, and are taxed as ordinary income in the year they are rolled out of the Retirement Account. These assets receive a step-up in basis. Whenever the taxpayer sells those assets, gain or loss will be calculated using the price received, less the new basis. Appreciated assets held for over a year will be taxed at favorable Capital Gains rates (some exceptions apply). Gains taken in less than one year are taxed as ordinary income. Losses on asset sales work the same way, depending on the holding period, with the same one-year holding period rules.
Failure to take any Required Minimum Distribution results in a serious financial penalty. RMDs are not eligible for Roth Conversion, as they would be classified as excess contributions. RMDs are required to be completed prior to the owner performing any Roth Conversion from the affected account.
Today’s job market is greeting graduates everywhere with ambiguity. Technology is advancing at a rapid pace, driven by Artificial Intelligence (AI), which, just a few short months ago, was mostly a mysterious concept for Americans. AI is now everywhere, adding to career uncertainty.
Employers of today are seeking changing skill sets from graduates. College as a necessity is losing popularity for many students and their parents, not to mention potential employers. Skilled trades are in demand, but most employers are experiencing shortages of potentially qualified trainees. Paid apprenticeships are not only available, but scholarship money is sitting idle.
Dirty Jobs creator Mike Rowe is sitting on pools of cash, awaiting applications for scholarships to learn such skills as welding, electrical, plumbing, etc. Check out his website mikeroweworks.org, and you will be greeted with this message: “AI-Proof Six-Figure JOBS.” This is an enticing prospect, and Mile Rowe has already demonstrated his sincerity and effectiveness over decades.
Today’s graduates, whether from high school, secondary education, or post-graduate school, are likely not well equipped to manage their future personal financial situations. For decades now, Americans have been undereducated in finance and economics, and the results have not been a pretty sight. Hopefully, that may be changing for the better.
Whether their eventual retirement realities will resemble earlier dreams likely depends primarily on their own lifetime of choices. Sadly, there are no “do-overs.” Individual actions and decisions throughout decades of working and saving direct outcomes for retirement lifestyles.
Today, whether entering the labor market or higher education, this is a time of high uncertainty. As a graduate of any level, you have no say in the conditions you find “on the ground.” Some graduating classes are fortunate to arrive into an economy that welcomes them with open arms and jobs galore. For others, hiring may be suspended for a time. A cyclical economy is to blame, but that is small consolation for unfortunate job seekers during bad times. However, we are not currently in bad times, and opportunities abound.
Our society is in a state of rapid change, which must be approached with flexibility and an open mind. Some universities are receiving applications for Engineering students more than any other discipline. Who saw that coming?
Above all else, graduates should go out into the world with a positive attitude and a very open mind. Congratulations to each and every one of you graduates. Those who embrace AI, and learn as much as they can as quickly as possible, should be rewarded.
As financial planners, we are frequently challenged to assist clients with their retirement plans. Americans are universally attuned to (and afraid of) the potential problem of running out of money while still alive. That was less problematic in the days of lifetime pensions, especially when enhanced with the promise of lifetime Social Security. However, times have changed. Pensions have become scarce, and Social Security is facing hard times ahead.
Employers have mostly transitioned from providing lifetime pensions (Defined Benefit Plans) to 401(k) and many similar Defined Contribution Plans. Today, relatively few Americans can look forward to lifetime income from a private pension (Social Security is essentially a public pension, but that discussion is for another day). Plus, an increasing portion of us are skeptical of Social Security’s continuing ability to pay our promised lifetime benefits, which may be reduced in excess of 20%. That would place further onus on individuals to increase and extend their own retirement income. This option is difficult for Americans to accept.
Preparing for a comfortable financial future must include saving and investing. Long-term personal investing is the most viable method of individual wealth accumulation. Success in long-term investing is largely a function of Asset Allocation, otherwise known as Portfolio Diversification. Everyone is familiar with the old saying, “don’t put all your eggs in one basket,” and with good reason. One dropped basket, and you go hungry.
Due to increasing longevity, a potential retirement period could rival the length of an average work life. Today’s retirees should be wary of the common practice of “becoming more conservative investors” as they approach and enter retirement. Not to say that no changes are warranted for investors as they finish out their careers, but they need to pay attention to the concepts that made them successful.
The Asset Allocation that makes an investor successful during working years should not simply be trashed and replaced. We all need to stay concentrated on what made us successful investors while working. That means allocating resources to last (and grow) for many more decades.
Entertainer James Hubert Blake, affectionately called “Eubie,” was born in 1887, but he preferred to have everyone believe it happened in 1883. Before his death in 1983, he is credited with having said, “If I’d known I was gonna live this long, I’d have taken better care of myself.” Notwithstanding the truth, upon his passing, the “official” record honored his personal preference by accepting the 1883 birth date. Why not? Attaining the age of 100 is an ambitious goal.
Take better care of your financial life while you tend to your health.
Last week, we discussed reasons why taxpayers should not just file a Tax Return on April 15, then immediately forget about Tax Planning until next year. Ignoring Tax Planning is never a good idea. There are special circumstances this year that may reward Americans in ways not seen before. In addition to improving current year results, some people may be able to save enough from the Tax Return already filed to warrant filing a Corrected Return.
On July 4, 2025, President Trump signed the 2025 Working Families Tax Cuts Act (commonly known as the One Big Beautiful Bill Act, or OBBBA.) Provisions of OBBBA were retroactive to January 1, 2025, and the IRS did not have time to incorporate all the taxpayer-friendly provisions into the 2025 Form 1040 Individual Income Tax Return. Instead, taxpayers and their tax preparers were left to do their own research to assure best results.
OBBBA provisions so-called “no tax on tips” and “no tax on overtime” were made retroactive to January 1, 2025. Both are capped for each taxpayer and are gradually phased out according to overall income. That fact should not deter any taxpayers from understanding and utilizing the formulas. These exclusions can provide what is essentially “found money” for workers who earn tips and/or work overtime hours.
For taxpayers ages 65 and up, there is also a new $6,000 per person deduction from Taxable Income. This deduction is based on the concept of “no tax on Social Security,” and is available to seniors (must have attained age 65 by year-end), regardless of filing status. Additionally, even seniors who are not receiving Social Security monthly benefits qualify for the new deduction.
It is not necessary to itemize deductions to have this extra deduction reduce Taxable Income. Eligible taxpayers should all take advantage of the provision.
To put it mildly, OBBBA was a Godsend for both working and retired Americans. Not taking advantage of our new tax savings would be wasteful. For tax year 2025, there is an additional burden on taxpayers to know and apply the savings, but there is light at the end of the tunnel.
Employers will be required to issue a new style W-2 income reporting form at the end of 2026. Income from tips and/or overtime that may be excluded from Federal Income Tax will be itemized. Responsibility for claiming the exclusions will no longer be solely upon the taxpayer and the preparer, tax software, or tax professionals. While no analysis is yet available, I suspect that many people missed at least part of the 2025 tax savings.
These new provisions are taxpayer-friendly and should not be overlooked, even for last year. Go back and take a look at your 2025 Tax Return to be sure. You just might save some “extra” cash.