Net Worth Tracking: The Underutilized Financial Tool
When it comes to tracking finances, budgeting is likely what you think of, and rightly so. Budgeting continues to be the best method for establishing your monthly income and expenses to ensure you are on track. What I am suggesting is not a replacement for budgeting but a complement to it. Tracking your net worth allows you to see progress across your financial picture over the long term. Let’s dive into this underutilized tracking method that can significantly impact your financial outlook.
How to Figure Out Your Net Worth
The first step in calculating your net worth is understanding the necessary information. You can think of net worth as a mathematical equation. The equation goes: Assets - Liabilities = Net Worth. To break it down even further, I will often explain net worth as the difference between what you own and what you owe. What you own (assets) would consist of your home, vehicles, investments, money in the bank, and other tangible goods. What you owe (liabilities) would be any home loan, auto loan, student loan, or other consumer debt.
There is no shortage of methods for tracking net worth, so the best method will ultimately be what works for you. There are plenty of Net Worth Calculators on the internet, but I like to use the Schwab Net Worth Calculator. Others may prefer to create their own spreadsheet. Both methods are great ways to calculate and track your net worth.
How Often to Track
Once you know what comprises the net worth statement, you need to figure out how often you will track it. This is a preferential component, but the most effective frequency is calculating and recording your net worth every year. Because of fluctuations in cash flow and investment performance, tracking on a monthly or quarterly basis would not have much benefit. Doing this yearly makes the most sense because enough time has passed to see legitimate progress. Many people do an end-of-year financial review, and adding this into that process can be simple.
The other reason I like the year mark for calculation is that net worth is intended to complement your budget. Your monthly budget ultimately leads to the progress you see in your net worth statement. It takes the monthly victory of following your budget and shows you a more substantial victory by compounding those smaller wins over the course of a year.
The Benefits of Tracking
All this information is excellent, but why do it? Where does the benefit actually come into play with tracking net worth? The main advantage lies in the bird' s-eye view of your financial well-being. It provides you with context on financial components that your monthly budget doesn’t take into account. Seeing overall liabilities go down and, in turn, watching your asset total rise over the years can be an excellent encouragement to stay the course.
The final benefit of net worth tracking is its opportunity to measure success based on your progress instead of basing it on others. No two people have the same financial picture, so why compare to someone in an entirely different circumstance? Often, we can't help ourselves from it. But by tracking your net worth year after year, success is measured by your improvement from the last year and not by how your number stacks up to those around you.
The “Secret” to Growing Your Net Worth
The final question that often accompanies conversations about net worth is how to improve your number. Honestly, it’s pretty simple, and the answer isn’t anything groundbreaking—consistent effort. By being consistent over time, you allow compounding growth to occur. Not just when it comes to your money compounding but also the good habits associated with money management. Much of this comes back to the foundational principles I discuss in my article, “Mastering Your Money: Budgeting Essentials and When You Need Them.” The “secret” to improving your net worth is consistent effort over a long enough period.
Final Thoughts
Net Worth tracking doesn’t have to be very time-consuming, especially if it is done only once a year. Taking an extra 30 minutes at the end of each year to calculate your net worth may quickly become your favorite way of tracking financial progress. Remember, this is not intended to replace your monthly budget. If done properly, your net worth statement will be an amplified version of your monthly efforts and diligence.
References
https://www.schwabmoneywise.com/net-worth-calculator
Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
The Power of a Family Bank
Discover the power of a family bank: transform your wealth management. Many American families face the challenge of preserving and growing their wealth across generations. The concept of a family bank offers a robust solution, providing a structured system to manage and utilize family wealth effectively.
Many American families often face the challenge of preserving and growing their wealth across generations. The concept of a family bank offers a robust solution, providing a structured system to manage and utilize family wealth effectively. Drawing inspiration from Emily Griffiths-Hamilton's "Build Your Family Bank" and James E. Hughes Jr.'s "Family Wealth," this guide introduces you to the philosophy and logic behind creating a family bank. Let us explore how this powerful strategy can transform your wealth management approach.
Initial Steps to Establish Your Family Bank
Establish Leadership and Oversight
Set up a governance framework with clear roles and responsibilities. Typically, this involves a family council or board of directors that oversees the bank's operations, makes key lending decisions, and enforces policies. A structured governance system ensures transparency, accountability, and consistent decision-making.
Develop Lending Policies
Set transparent lending policies, including who can borrow, for what purposes, interest rates, and repayment terms. Incorporate the Applicable Federal Rate (AFR) to ensure compliance with tax regulations of family loans. Family members should submit business proposals to acquire loans, fostering a professional and disciplined approach to borrowing.
Implement Family Financial Education Programs
Provide ongoing financial education to family members through family summits or retreats, educational resources, and mentorship programs with individuals outside of the family. These initiatives should be specifically tailored to different age groups and financial literacy levels, ensuring that everyone can learn and grow at the life stage they are in.
Continuous Improvement
Regularly evaluate the performance of the family bank, reviewing loan impacts, financial health, and policy adherence. This ongoing assessment allows for timely adjustments, ensuring the bank remains effective and aligned with its goals. An idea format for these meeting is at an annual family retreat.
Benefits of a Family Bank
Wealth Preservation
A family bank helps preserve wealth by keeping financial resources within the family, reducing reliance on external financial institutions, and retaining interest payments within the family circle. This internal circulation of funds strengthens the family's financial base.
Fostering Innovation
Family banks can be a crucial source of funding for entrepreneurial ventures. By providing capital to family members with innovative ideas, the family bank fosters a culture of entrepreneurship and business growth, encouraging family members to pursue their ambitions with the support of the family. This also improves the overall competencies of the family as they gain knowledge in these new ventures.
Strengthened Family Bonds
The collaborative nature of a family bank strengthens family bonds. By working together towards the overall health of the family and the family bank, family members develop deeper trust and cooperation, enhancing family unity.
Empowering Financial Decision-Making of Future Generations
The educational aspect of a family bank improves financial literacy among family members. This knowledge equips them to make informed financial decisions and manage their resources effectively, contributing to their personal and professional success.
Shifting Future Growth Opportunities to Younger Generations
A family bank allows for the strategic shift of financial risk to younger generations who are better positioned to manage it. This can include funding new ventures or investments, enabling older generations to safeguard the growth of their wealth while empowering younger members to take calculated risks.
Special Considerations
While a family bank offers numerous benefits, it also comes with potential risks and downsides that need careful management:
Family Dynamics
Managing financial relationships within a family can lead to conflicts, especially if there are disagreements over lending decisions or repayment issues. Establish clear policies and dispute resolution mechanisms through a family board comprised of multiple family members in addition to outside advisors to address conflicts promptly and fairly. In addition to the board, regular family meetings and transparent communication can also help in mitigating misunderstandings.
Risk of Family Loan Defaults
There is always a risk that family members may default on loans, which could strain family relationships as well as the bank's financial health. Implementing a family investment policy statement for lending policies in addition to requiring detailed business proposals for loans by all family members. The family should also establish plans for how they would like to manage defaults should they occur.
Governance Challenges
Ensuring effective governance can be challenging, particularly if family members lack the necessary experience or commitment. Create a strong governance structure with experienced members and include external advisors that have the family’s best interest at heart.
Maintaining Financial Discipline
Ensuring that all family members adhere to the established policies and guidelines can be difficult as a family grows and evolves. Continuously work to ensure family policies are being enforced consistently and conduct regular audits. Foster a culture of accountability through transparent reporting and setting clear consequences for policy breaches. This may include excluding family members from use of the family bank.
The Rockefeller Centre in New York City
A Real-Life Example of a Successful Family Bank
The Rockefeller family has long used family banking principles to preserve their wealth across generations. By focusing on stewardship and long-term planning, they have maintained their financial legacy. The Rockefellers emphasize financial education and mutual support, ensuring that each generation is equipped to manage and grow the family’s wealth. Their family bank supports entrepreneurial ventures, philanthropic efforts, and educational initiatives, reflecting their values and long-term vision.
Creating a family bank can be a transformative strategy for individuals looking to manage and preserve their wealth for future generations. By fostering a family-wide view of financial stewardship, education, and mutual support, a family bank can not only secure a financial legacy but also promote family unity and fiscal discipline. I hope this guide has provided you with valuable insights into the power and potential of a family bank. If you have any questions or would like assistance in establishing your own family bank, it would be an honor to help you.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Legacy Planning(c), A Resource Library: The 5 Pillars of Capital For Your Legacy
Andrew Van Alstyne had the privilege to be featured on the
Legacy Planning(c), A Resource Library’s Podcast with Angelina Carleton.
Andrew and Angelina discuss that while most families seek out management of their financial capital, it is important to remember financial capital is merely a tool that should be used to grow the qualitative forms of capital within the family.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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Wealthtender Ask an Advisor Feature: Is $5.5 Million the Magic Number to Retire Comfortably and Pass Wealth to Your Children?
Andrew Van Alstyne had the privilege to be featured in Wealthtender’s “Ask an Advisor” for how much money is needed for retirement.
Andrew discusses that it is important to focus what you want retirement to look like when calculating the amount you’ll need. He also discusses a different way of thinking as to how to leave a legacy to your loved ones while still alive.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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The Power of Backdoor Roth for Sales Professionals
Sales Professionals are constantly trying to figure out how to gain an extra edge over their competitors and better position themselves for customers. This should extend to navigating their financial picture and creating a solid retirement plan. Here’s where the backdoor Roth IRA enters the picture. While this financial planning strategy is open to many high-income professionals, it is uniquely advantageous for professionals with a variable income. While this approach doesn’t make sense for all high-income earners, it is worth keeping in your back pocket for when the time is right. In this post, we dive into this strategy, how it is utilized, and who should and shouldn't consider using it.
What is a backdoor Roth?
You may have heard of this strategy, but what exactly is it? A backdoor Roth IRA is not a type of account but rather a method to contribute to a Roth IRA even if your income exceeds the IRS income phase-out limits. You contribute to a traditional IRA with a contribution that is not tax deductible and then transfer those funds to a Roth IRA. Once completed, you can invest those funds within your Roth IRA, giving you access to the long-term tax advantage of a Roth IRA.
Why is it useful?
To understand why this is a beneficial strategy, we must first differentiate between a Roth IRA and a traditional IRA. Both are Individual Retirement Accounts (IRAs) used to invest money for retirement purposes. A traditional IRA has contributions that are tax-deductible in the year you contribute. When that money is pulled out in retirement, it is taxed at your regular income rate. Conversely, Roth IRA contributions aren’t tax deductible but grow tax-free. Withdrawals in retirement aren’t taxed, assuming you are 59 ½ or older and the account has been open for five years. The other perk of having Roth assets is the lack of required minimum distributions (RMDs), unlike traditional assets, which necessitate distributions starting at age 72, whether you desire them or not.
This strategy is useful for two groups of people. This isn’t a blanket recommendation for these groups, but if you fall into one of these groups, it may be worth considering. If you are a relatively young, high-income individual or household, a backdoor Roth might make sense since you have plenty of time for your investments to grow tax-free. The other category of people that should investigate this strategy would be someone who exceeds the income limits to contribute to a Roth and is anticipating their retirement income and tax bracket to be higher than their current income and tax bracket. However, it’s crucial to consult with an advisor for personalized analysis.
Should you utilize it?
The first criterion for this strategy is an income that exceeds the IRS phase-out limit to contribute to a Roth IRA directly. In 2024, the phase-out is from $146,000 to $161,000 for singles and heads of households. The phase-out for married couples filing jointly is between $230,000 to $240,000. These limits can change annually, making it important to check the IRS website for the current year's standards. If your income exceeds these limits, working with a financial advisor to ensure it is the most prudent strategy in that given year is critical. It is essential to proceed correctly; you should work with an advisor and CPA as you make this decision.
Who Shouldn’t Do This?
While there are numerous advantages to doing a backdoor Roth conversion, it is important to weigh the downsides. There can often be tax implications that come alongside a backdoor Roth that could ultimately make the strategy less attractive, especially if you cannot afford the taxes. The other consideration is your investment timeline. The shorter the investment horizon, the less likely a backdoor Roth is a wise strategy. This often comes into play for those late in their careers. While other circumstances make a backdoor Roth a less attractive option, these are the two primary considerations that a financial advisor and CPA should be able to help you work through.
Final Thoughts
It's important to remember that the decision to use this strategy is not a one-time event. It's a discussion you should have with your financial advisor and CPA to ensure it's still the best approach for you. This strategy is not a one-size-fits-all solution and should be carefully analyzed before considering it. When used correctly, it can be one of the most powerful tools in your financial planning arsenal. Feel free to reach out if you need clarification on whether this approach is right for you.
References
https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Wealthtender Ask an Advisor Feature: How Can a 24-Year-Old Married Couple Strike a Balance Between Short-Term Saving and Long-Term Financial Security?
Andrew Van Alstyne had the privilege to be featured in Wealthtender’s “Ask an Advisor” for what to focus on financially as a young couple.
Andrew discusses the importance of planning ahead for major life events, communicating with your spouse, and optimizing your savings strategy to be tax efficient.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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KAJ Masterclass Live: Managing Multi-Generational Wealth
Andrew Van Alstyne had the privilege to be featured on the
KAJ Masterclass Live Podcast.
Andrew discusses the importance of early discussions amongst family members to instill financial literacy. Andrew also shares his insights on how these open discussions can prevent financial under-preparedness. He also talks about the role of including all family members in wealth management, the benefits of starting inter-generational wealth transfers before death, and how to overcome the tension of talking about money in families with difficult financial histories.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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MSN Ask an Advisor Feature: What steps can a couple in their early forties with tweens take to balance saving for retirement and funding their children’s education?
Andrew Van Alstyne had the privilege to be featured in MSN to talk to readers about saving for both your children’s education and for retirement.
Andrew discusses the importance of setting goals and priorities while remaining adaptable to the variabilities that life may bring you.
Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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How Healthcare Professionals should use the Synergy of Health and Wealth to be Successful
Is it easier to be healthy when you are wealthy? Is it easier to be wealthy when you are healthy? I would say yes to both questions since health and wealth have synergy. Let’s explore a few habits that can assist healthcare professionals to be successful with both.
Downward Spiral versus Upward Spiral
Struggling to maintain both physical health and financial stability can be a common issue for many healthcare professionals. Health challenges can include poor diet, lack of exercise, insufficient sleep, or poor stress management. Wealth challenges can include overspending, low savings rates, poor investment decisions, or the absence of a financial plan.
Instead of focusing on health OR wealth, it is crucial to focus on BOTH since they are interconnected. Poor health can limit work capacity and increase medical expenses, reducing financial security. Conversely — limited finances can cause increased stress and decrease the time available for exercise/relaxation, which is detrimental to health. By focusing on both, you can create a positive feedback loop where improvements in one area support improvements in the other.
Habits to Adopt
The hardest part is usually just getting started. It takes a lot of hard work and dedication to move from out of shape to in shape. Once in shape, it is much easier to maintain and stay in shape. The same is true regarding finances. It takes a lot of hard work and dedication to pay off debt, balance the budget, and start setting money aside for the future. Once a financial plan is in place and followed, it is much easier to maintain and stay on track. Fortunately, the same habits can help enhance health and wealth.
Goal Setting: Setting clear and achievable goals
Example: Set a savings target for your retirement account for the year
Example: Set an activity goal for the number of times you plan to exercise every month
Discipline and Routine: Establishing and sticking to a routine
Example: Set up automatic monthly payments into your retirement account
Example: Carve out specific times each week for consistent exercise
Small actions every day can lead to significant results over a long period of time
Monitoring Progress: Regular check-ins and adjustments to stay on track:
Example: Review your budget and expenses regularly
Example: Calculate your net worth and update it every 6 months or every year
Example: Track your weight, strength, and cardiovascular health
Accountability: Seeking professional help when needed:
If you struggle with eating or exercise habits, consider working with a dietician or personal trainer to achieve your health goals
If you struggle with finances, budgeting, or expenses, consider working with a fee-only fiduciary financial advisor to achieve your financial goals
Having another person to assist with accountability and goal tracking can be immensely helpful
Encouragement Moving Forward
No one is perfect, but striving for continual improvement can lead to a healthier and more financially secure tomorrow. Here are a few key thoughts to remember.
Consistency is Key: Small, incremental changes can lead to significant improvements over time
Start Today: Don’t put things off until tomorrow. Make the harder first steps now so your future self will thank you
If you would like help improving your financial situation, please Schedule a Time to Meet. I would be happy to connect and assist.
Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
The Importance of Filing Estimated Quarterly Taxes
Learn why filing estimated quarterly taxes is crucial for avoiding IRS penalties, managing cash flow, and ensuring financial predictability. Our comprehensive guide provides key dates, steps to estimate what you owe, and expert tips for entrepreneurs, investors, and high-net-worth individuals.
Navigating the tax landscape is a critical aspect of financial planning for many. One crucial component of this landscape can be the filing of estimated quarterly taxes. Unlike employees who have taxes withheld from their paychecks, individuals who generate income through self-employment, investments, or other non-traditional means must take responsibility for calculating and paying their taxes in installments throughout the year. Here, we’ll discuss the importance of filing estimated quarterly taxes, key filing dates, how to properly estimate what you owe, as well as other essential considerations.
Why Estimated Quarterly Taxes Matter
Paying estimated quarterly taxes is vital for several reasons:
Avoiding Penalties:
The IRS requires taxpayers to pay their taxes as they earn income. Failing to pay enough in estimated taxes can result in significant penalties and interest charges when taxes are filed at the end of the year. By making quarterly estimated payments, you can avoid these late fees entirely. This proactive approach helps maintain financial stability and compliance with tax laws.
Cash Flow Management:
Regularly paying taxes throughout the year helps manage cash flow, preventing a large, and usually unexpected, tax bill at the end of the year. For most, this means avoiding a sudden drain on resources that could impact other financial goals.
Financial Predictability:
Quarterly tax payments provide a clearer picture of your financial health throughout the year. By aligning your tax payments with your income streams, you can make more informed decisions about budgeting, investments, and business expenditures.
Key Filing Dates
The IRS has set specific deadlines for paying estimated quarterly taxes:
First Quarter: April 15
Second Quarter: June 15
Third Quarter: September 15
Fourth Quarter: January 15 of the following year
Please be mindful that if the due date falls on a weekend or holiday, the deadline is extended to the next business day. Missing these deadlines can trigger late payment penalties, so it’s crucial to mark your calendar and set reminders.
It is important to note that these quarterly dates are not aligned with traditional fiscal calendars. The second and third quarters were adjusted in the 1960s to align with the Congressional budget year which starts on October 1. This timing allows the government to receive an additional quarter of tax payments before the new fiscal year begins.
Estimating What You Owe
Accurately estimating your quarterly taxes involves a few key steps:
Calculate Your Expected Income:
Estimate your total income for the year from all sources, including self-employment, investments, rental properties, and any other income streams. This estimate should be as accurate as possible to avoid underpayment or overpayment.
Deduct Allowable Expenses:
Identify and subtract any business expenses and deductions for which you are eligible. This might include costs related to operating your business, such as supplies, travel, and home office expenses. Ensure you keep detailed records and receipts to substantiate your deductions.
Subtract your deductions from your total income to get your taxable income.
Special Considerations
Safe Harbor Rule:
To avoid underpayment penalties, the IRS provides a "safe harbor" rule. If you pay at least 90% of your current year’s tax liability or 100% of the previous year’s liability (110% for high-income earners), you can avoid penalties. This rule provides a buffer for taxpayers whose income might vary year-to-year, offering some peace of mind.
Income Fluctuations:
For individuals with fluctuating incomes, such as seasonal businesses or commission-based earners, it may be beneficial to use the annualized income installment method. This method allows you to pay estimated taxes based on the actual income earned during each quarter. This approach can help ensure that your tax payments more accurately reflect your income patterns.
Given the complexities of estimating taxes, especially for those with diverse income streams, consulting a tax professional or financial advisor can provide valuable insights and help ensure accuracy. A professional can also help you identify potential deductions and tax-saving strategies, keeping you compliant with tax regulations while optimizing your tax liability.
Filing estimated quarterly taxes is a critical responsibility for many entrepreneurs, small business owners, and high-net-worth families. By understanding the importance of timely and accurate payments, knowing the key filing dates, properly estimating what you owe, and utilizing available resources, you can avoid penalties, manage your cash flow more effectively, and maintain control over your financial future.
Filing estimated quarterly taxes does not have to be a daunting task. With careful planning and the right approach, you can stay ahead of your tax obligations and focus on what you do best— growing your business and managing your wealth.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Money Talk with Skyler Fleming: How Family Conversations Shield You from Financial Under-Preparedness
Andrew Van Alstyne had the privilege to be featured on the
Money Talk with Skyler Fleming Podcast.
Andrew discusses the importance of family conversations in financial planning. Andrew also shares his insights on how open discussions can prevent financial under-preparedness. He also talks about the role of including all family members in wealth management, the benefits of inter-generational wealth transfers, and how to overcome the tension of talking about money in families with difficult financial histories.
Click the Links Below to Watch or Listen to the Full Episode:
Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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Sales Gravy Podcast Feature: Personal Finance Strategies for Sales Professionals
Ben Lex had the privilege to be featured on the Sales Gravy Podcast.
Ben discusses the importance of personal financial well-being for sales professionals and how to improve their current circumstances with their variable income.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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Route 664 Podcast Feature: Wealth Planning
Andrew Van Alstyne had the privilege to be featured on the Route 664 Podcast.
Andrew discusses the significance that proper financial planning can have on multi-generational wealth and the importance of doing thorough, comprehensive financial reviews.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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Financial Freedom and Wealth Trailblazers Podcast Feature: Financial Guidance and Planning
Andrew Van Alstyne had the privilege to be featured on the Financial Freedom and Wealth Trailblazers Podcast.
Andrew discusses the importance of finding an advisor that aligns with your needs and who understands your relationship with money. He also discusses the significance that proper financial planning can have on multi-generational wealth.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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The Power of the Three Bucket System to Maximize Retirement Savings
Discover the Three Bucket System for retirement savings. Learn how to optimize tax efficiency and maximize investment growth while crafting a personalized strategy tailored to your financial goals.
Effective retirement planning is a common goal for many clients seeking financial guidance. While the focus often starts with an optimal savings strategy, the transition into retirement raises important questions about accessing those funds for income once the earning years stop. Among the various strategies available, the Three Bucket System stands out as a powerful approach that can optimize retirement savings while minimizing tax implications. In this article, we'll explore the intricacies of the Three Bucket System, explaining how it works and how investors can implement this strategy to maximize their retirement income.
Understanding the Three Bucket System
The Three Bucket System is a retirement savings strategy based on the tax status of different types of accounts, aiming to maximize tax efficiency and optimize investment growth. It involves dividing retirement savings into three distinct buckets:
Taxable Bucket:
The first bucket consists of taxable accounts, such as brokerage accounts or savings accounts, where investments are subject to taxation on capital gains, dividends, and interest income. While contributions to these accounts are made with after-tax dollars, they offer flexibility in terms of liquidity (access to the funds) and no restrictions on contribution limits.
Tax-Deferred Bucket:
The second bucket comprises tax-deferred accounts, such as Traditional IRAs, 401(k)s, 403(b)s, and similar retirement plans. Contributions to these accounts are made with pre-tax dollars, allowing for immediate tax savings. However, withdrawals during retirement are subject to ordinary income tax, and there are penalties for early withdrawals before age 59½ (with some exceptions). Investments in this bucket grow tax-deferred until withdrawn, enabling investors to potentially accumulate a larger retirement nest egg over time.
Tax-Free Bucket:
The third bucket encompasses tax-free accounts, such as Roth IRAs and Roth 401(k)s. Unlike traditional retirement accounts, contributions to Roth accounts are made with after-tax dollars, but qualified withdrawals, including earnings, are tax-free in retirement. Additionally, Roth accounts offer flexibility in terms of withdrawal timing and no required minimum distributions (RMDs) during the account owner's lifetime.
Benefits of the Three Bucket System
Tax Diversification:
Diversifying retirement savings across buckets with varying tax statuses is key to reducing overall tax liability in retirement. This strategic allocation empowers retirees to adjust their contribution and withdrawal strategies based on prevailing tax rates, effectively managing their tax burden. By spreading assets across taxable, tax-deferred, and tax-free accounts, investors can optimize their after-tax income while preserving wealth.
Flexibility in Withdrawals:
The Three Bucket System provides flexibility in retirement withdrawals, allowing investors to tailor their distributions to meet their financial needs while optimizing tax efficiency. Retirees can choose which accounts to draw from based on factors such as tax rates, investment performance, and financial goals, maximizing their after-tax income in retirement.
Risk Management:
Diversifying retirement savings across different tax buckets helps mitigate risks associated with changes in tax laws, market volatility, and economic conditions. By maintaining a balance of taxable, tax-deferred, and tax-free assets, investors can adapt to changing circumstances and protect their retirement savings from unforeseen events.
Implementing the Three Bucket System
Implementing the Three Bucket System requires careful planning and coordination. Here are four key steps to consider:
Assess Your Current Retirement Accounts:
Start by reviewing your existing retirement accounts to determine their tax status and contribution limits. Identify which accounts fall into each bucket (taxable, tax-deferred, tax-free) and evaluate their investment holdings and performance.
Establish Allocation Targets:
Decide the ideal allocation of your retirement savings contributions across the three buckets based on your tax situation, risk tolerance, and retirement goals. Make sure to take into consideration factors such as your current age, income level, anticipated retirement expenses, and projected tax rates, both now and in retirement.
Plan a Withdrawal Strategy:
In addition to planning how you are going to contribute to these accounts, a withdrawal strategy from your retirement accounts is needed to optimize tax efficiency and investment growth. By strategically tapping into taxable, tax-deferred, and tax-free accounts based on individual tax circumstances and financial goals, retirees can maximize their after-tax income and preserve their retirement nest egg for the long term. This approach not only ensures financial stability throughout retirement but also enables investors to leverage the potential growth of their investments while minimizing the impact of taxes on their overall portfolio.
Monitor and Adjust Regularly:
Regularly review your retirement accounts and adjust your allocation as needed based on changes in your financial situation, tax laws, and market conditions. Rebalance your portfolio periodically to keep your desired asset allocation and further mitigate risk.
The Three Bucket System offers a comprehensive framework for managing retirement savings with tax efficiency and investment growth in mind. By strategically allocating assets across taxable, tax-deferred, and tax-free accounts, investors can optimize their retirement income while minimizing tax liabilities. Implementing this strategy requires careful planning, but the long-term benefits of tax diversification, flexibility in withdrawals, and risk management make it a valuable approach for achieving financial security in retirement.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
How Much Should You Invest for Retirement?
When it comes to investing, we all have to start somewhere. It can be easy to look for a set number or percentage of income to invest and stick with it. While that may be the simple approach, I believe more needs to be considered when choosing an amount to invest continually. With that being said, this should not be so complicated; it takes forever to figure out. While investing will look different for everyone, there are some helpful guidelines to establish what investing should look like for you.
The Importance of Investing
We must first establish why you should invest in the first place before diving into how to invest. Investing gives you the advantage of putting your money into a vehicle designed to grow wealth. This is the classic case of risk vs reward. You could leave your money in a savings account but will get minimal growth, if any. The alternative is investing some of that money into the stock market strategically to take advantage of a multiple percentage return.
When investing, it is crucial to know your goals with that money. This could be anything from saving for vacation to retirement planning and anything in between. Knowing what you are investing for is one piece of the puzzle. The second piece to consider is the timeline of your investment. If you are investing money that you plan to use for a vacation six months from now, your strategy will look significantly different than the money you invest towards your retirement, which is 20 years away. The final consideration is the risk you are comfortable taking with your investment. The timeline plays a role in this, but a personal component needs to be considered and talked through with a financial advisor.
How Much To Invest
When it comes to establishing the amount you are investing, it again depends on multiple factors. You must take into consideration the end goal as well as your own capacity to invest. The overarching recommendation is to invest 15%-25% of your income toward retirement. While this can be a helpful target to shoot for, this amount could be too little with the end goal. Instead of picking an arbitrary amount, I suggest doing a retirement expense inventory. Doing this will allow you to get a goal that is tailored to your cost of living and retirement expectations. This takes into account life expectancy, healthcare costs, and expected retirement lifestyle. From here, you can reverse solve to find a proper investment target using a compound interest calculator. Keep in mind that this target is going to move on you throughout your life. What makes sense at 30 years old will be different at 40 years old because you’ve gained more clarity on the components used to establish your target.
As great as it would be for everyone to understand their retirement expenses, it can often be challenging to project. What about someone with significant student loans who can't swing 15% of their income to retirement? This is where capacity comes into play. The above scenario is the goal, but it may not be feasible for your current financial situation. If that describes you, then the mentality you should have is to start small but start now. You will be better off by investing a little bit each month and building the habit of investing, as opposed to waiting until your circumstances are perfect to start. I recommend you find an amount that works with your budget and commit to investing that amount for a year. By doing this, you have built the habit of investing and allowed your money to start working through compounding interest.
Where to Invest
Now that you have established your goals and an amount of money to invest, you can consider what investment vehicle you want to use. If this is new territory for you, read my article “The Order of Operations for Retirement Savings.” This can give you a baseline of where to begin with investing.
All the pieces we have discussed up to this point will influence the strategy you choose for investing. At the end of the day, diversification is one of the most essential components of retirement investing. You’ve heard the phrase, “Don’t put all your eggs in one basket,” which holds true when investing. The stock market is volatile and should be approached with a well-thought-out strategy. Diversify your investment across multiple asset classes such as stocks, bonds, real estate, etc. This will help you have a robust strategy when the market is up and protect you from downsides when the market is down.
Adjust and Review
I’ve mentioned it once, but it deserves to be revisited. The amount you contribute to retirement savings will be a moving target. It will change as you get closer to retirement, have income fluctuations, and gain clarity on your financial goals. This change is not something to shy away from. It creates the opportunity to revisit this topic regularly. If you work with a financial advisor, this conversation should be part of a standard cadence between you and them. Having a plan is important, but understanding how that plan should flex over time is equally important.
Keep in mind that these are general guidelines around investing toward retirement. As I mentioned, everybody has a different situation and should consult a financial advisor to help consider all factors of your financial picture. If I can leave you with any piece of advice, it is that the best time to start investing was yesterday. The second best time is today.
References
https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
https://smartasset.com/investing/how-much-money-to-invest-in-stocks-per-paycheck
Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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The Order of Operations for Retirement Savings
One of the most common questions people ask me is how to determine the best way to save for retirement. It’s a fair question because there is no one-size-fits-all retirement saving and investing approach. Each person’s unique financial situation can impact how they save for retirement. So, before we jump into a general recommendation for the order of operations in retirement savings, consult a financial advisor-–like myself-–to discuss your individual financial considerations that can influence your retirement outlook.
Step 1: Work-Based Retirement Plan
Employer retirement plans, such as 401k, 403b, or 457, are often the best and simplest way to begin retirement savings. Not all plans are created equal, depending on your employer, but these plans contain some significant benefits worth taking advantage of.
Minimal Barrier to Entry
Employer-sponsored retirement plans typically have low to no barriers to entry. In most cases, employees are auto-enrolled in the company plan, with some employers requiring a small contribution from each employee. If not automatically enrolled, opting into the plan is often as simple as filling out a few forms.
Matching Incentive
One widely recognized benefit of employer plans is the associated company match. While not mandatory for all employers, a company match is becoming a common addition to benefits packages. I like to call this “free money”. By contributing a percentage of your paycheck, your employer agrees to match your contribution up to a specified limit. For example, “Employer agrees to match 50% of employee’s contribution up to 6%”. This means that if you contribute 6% of your paycheck, your employer will add an additional 3% to your contribution. This is a key reason why work-based retirement plans are so effective.
Automatic Deduction
The final distinction of these employer plans is that your contributions come directly from your paycheck before you receive it. This makes the process of saving for retirement very simple and automated. Automatic deduction enables you to save for retirement before recognizing that money as income.
Step 2: Emergency Fund
I know what you’re thinking—having an emergency fund has nothing to do with retirement savings. While it doesn’t directly count as retirement savings, it’s a necessary step in the equation. To fund your retirement, you need to ensure that your current financial situation is under control. The control starts with having a safety net in place. An emergency fund allows you to manage your current financial picture before addressing your future financial picture. By establishing an emergency fund, you can stay on track with your retirement goals when unexpected expenses arise rather than halting retirement contributions to cover unforeseen costs. Once you’re contributing to your work-based retirement plan and have an emergency fund established, we can move on to other retirement savings accounts.
Step 3: Individual Retirement Accounts
Individual Retirement Accounts (IRAs) are often the next step in retirement savings. These accounts are separate from employer plans but still hold numerous benefits. There are two main types of IRAs, each effective depending on individual financial considerations. While this won’t be a deep dive into these accounts, here is a quick overview of their function and benefits.
Traditional IRA
A traditional IRA is a pre-tax retirement account. Contributions are made pre-tax, resulting in a current-year tax deduction. The money invested in the account grows and is taxed at an ordinary income rate when withdrawn. This is often referred to as tax-deferred, meaning that you defer your taxes until withdrawal.
Roth IRA
A Roth IRA is considered a post-tax retirement account. Contributions happen after taxes are taken out of your income. Since you pay taxes upfront, that money grows tax-free. Regardless of your tax bracket at withdrawal, you won’t have to pay taxes on the money in your account, assuming you follow proper withdrawal guidelines.
Which One?
This is where a professional comes in handy. Many individuals benefit from utilizing both IRAs at different points in their careers, often dictated by their current income. In most cases, ask yourself, “What is my current tax bracket compared to my retirement tax bracket?” If your current tax bracket is higher than your projected retirement bracket, it might make sense to contribute to a traditional IRA over a Roth. But a Roth could be the most efficient option if your current tax bracket is lower than your projected retirement tax bracket. The maximum contribution for an individual in 2024 is $7,000 for those under 50 years of age and $8,000 for those 50 and above.
Step 4: Health Savings Account
Health Savings Accounts (HSAs) are great financial tools for some individuals. An HSA is primarily a form of health insurance an employer could offer. It’s a high-deductible plan that allows you to put money into an account for qualified medical expenses. HSAs often have an employer contribution attached. Due to the high deductible, these plans are great for healthy individuals with lower medical needs.
There’s a point where an HSA can secondarily be used as a retirement savings account in addition to its primary use as a health insurance plan. This is when you have unused money in the plan to be invested. This allows you to utilize the “triple-tax advantage” of using an HSA as an investment vehicle. Contributions are tax-deductible, while the earnings and withdrawals are tax-free when used for medical expenses. After the age of 65, withdrawals can be taken from your HSA account for non-medical expenses and taxed like a traditional IRA. For many individuals, the HSA functions as a great tool for wealth accumulation after maxing out your IRA.
Step 5: Taxable Account
The final piece of the puzzle for retirement savings is a taxable account or brokerage account. This account does not offer the same tax benefits as the previously mentioned accounts, which is why it is last on the list. Contributions to these accounts occur after taxes, and the growth or income produced each year counts towards your taxable income for the year. With that being said, the benefit of this account is that you can contribute and withdraw as you please. Because the money is likely invested, it may take a few days to sell and withdraw, but there is no age limit to take the money out. What you lose in tax benefit, you gain in liquidity.
These accounts have multiple purposes but are commonly used to create a “bridge account” for retirement. Because work-based retirement plans, IRAs, and HSAs all require you to be a certain age before making withdrawals, you can use a taxable account to save and invest money if you decide you want to retire early. This account functions as the “bridge” to fund your life from when you retire until you start collecting Social Security or retirement account distributions.
As I mentioned at the start, this is not a blanket approach to retirement savings for everyone. While the structure may work for some, it is important to talk with an investment professional to consider how your income, retirement plan, and goals will impact your strategy. What’s universal about this information is that everyone can contribute to retirement savings in multiple ways to ensure their financial picture is on track.
References
https://www.bogleheads.org/wiki/Prioritizing_investments
https://www.bogleheads.org/wiki/Health_savings_account
https://thecollegeinvestor.com/1493/order-operations-funding-retirement/
Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.