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Saving for Retirement

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A Fun Guide on Saving for Retirement

Do you daydream about retiring early and traveling the world? Or are you worried you won’t have enough money saved to ever retire at all? Either way, planning for retirement may seem boring or stressful. But it doesn’t have to be! This fun guide breaks down the most common retirement accounts, how to optimize them, and tips to help you save for the future retirement of your dreams.

Tax-Advantaged Accounts to the Rescue

First things first, you’ll want to take advantage of accounts that give your savings a little tax break to grow faster. With 401(k)s for private sector employees and 403(b)s for non-profit personnel, you can score big by contributing pre-tax dollars straight from your paycheck. It’s like intercepting a portion of your income before it even hits your bank account. Plus, many employers offer matching contributions, which is like getting a bonus touchdown pass thrown right into your retirement fund!

Whether you have a retirement savings plan at work or not you may also want to contribute to an IRA (Individual Retirement Accounts). These accounts come in two flavors: Traditional and Roth. Traditional IRAs are like playing the long game, deferring taxes until you make withdrawals in retirement. On the other hand, think of Roth IRAs as your short game where you pay taxes upfront but enjoy tax-free withdrawals down the road.

Maxing Out Contributions

Want to supercharge your retirement savings? Aim to max out your contributions to your employer-sponsored plan and IRAs. Just like professional sports teams have a salary cap when building their rosters there are limits to the amount of money you can stash away in retirement accounts. Please note that you may not be able to contribute to an IRA if you are covered by a workplace retirement plan. Your eligibility phases out starting at $77,000 for single taxpayers and $123,000 for married couples filing jointly.

401(k) Plans:

In 2023, the contribution limit for employees participating in 401(k) or 403(b) plans was $22,500. That limit increase to $23,000 in 2024.

Traditional and Roth IRAs:

In 2023, the annual contribution limit for IRAs was $6,500 for individuals under the age of 50. That limit increase to $7,000 in 2024.

Catch-Up Contributions:

For you veteran players, individuals aged 50 and over, the catch-up contribution limit of $1,000 for IRAs in 2023 is holding steady in 2024.

Same thing for employees aged 50 and over participating in 401(k) or 403(b) plans. The catch-up contribution limit sits at $7,500 for 2023 and 2024. Therefore, participants in these plans who are 50 and older can contribute up to $30,500 starting in 2024.

Consistency is Key

Championship dynasties are built on consistent coaching and player development over time, not quick fixes. By setting up automatic contributions every month you steadily build your investment portfolio. Compounding works like athletic training – today’s small fitness gains accumulate into huge performance ability over years of focused effort. The key is continuing to invest regularly because market drops mean your ongoing contributions buy more shares. This allows you to ride the next wave back up over long periods of time. Taking advantage of compound growth and down markets sets your savings up for success.

Keep Your Eye on the Prize – Retirement Readiness

Don’t wait until the two-minute warning to start saving for retirement. Time is your biggest ally when it comes to building wealth. Even small contributions can grow into a retirement touchdown thanks to the magic of compound interest. So, lace up those cleats and start socking away cash as soon as possible. Your future self will thank you for it!

What does your dream retirement include? Picture yourself already there, living life on your own terms, as you take small steps today to make that a reality someday. Remember, retirement savings is a marathon, not a sprint. So, find a strategy that works for you, stay disciplined, and keep your eyes on the prize – that retirement freedom where every day feels like game day!

Portfolio Rebalancing – Halftime 2024

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Halftime 2024 – Portfolio Rebalancing

As we hit the halfway mark of 2024, and the stock market is near all-time highs, it’s a perfect time to review your investment portfolio. Just like a football coach adjusts strategies based on first-half performance, now it’s time to assess your strategy and make adjustments, like rebalancing your portfolio, to ensure a strong finish.

Why Rebalance?

Rebalancing is the process of realigning the weightings of your portfolio assets to maintain your desired level of risk and return. Here’s why it’s important:

  1. Maintaining Risk Tolerance: Your original asset allocation was chosen based on your risk tolerance, time horizon, and investment goals. As some assets outperform and others underperform, your portfolio’s risk profile can change, potentially becoming more aggressive or conservative than intended.
  2. Locking in Gains: By selling high-performing assets and buying underperforming ones, you can lock in gains and potentially buy low, setting yourself up for future growth.
  3. Discipline: Rebalancing enforces a disciplined approach to investing, helping you avoid emotional decisions based on market fluctuations.

Guide to Rebalancing

Halftime Analysis

Like players reviewing game videos, examine how each of your investments has performed. Large-cap stocks have been the clear winner so far in 2024, gaining just over 15% in the first half of the year. International stocks picked up a little more than 5%, while even keeping your cash in a money market fund earned you 2.5%. On the other hand, small cap stocks or bonds went essentially nowhere unless you were in a good actively managed small cap fund. As a result, your portfolio may not resemble your target asset allocation.

Review Your Target Allocation

Next, revisit your target asset allocation. This is the mix of stocks, bonds, cash, and other investments that align with your risk tolerance and financial goals. In my case, I aim for a portfolio composed of 50% stocks, 30% bonds, and 20% alternatives and cash. Your targets may be significantly different.

Assess Current Allocation

Calculate the current allocation of your portfolio. Given the market movements in the first half of 2024, your portfolio might look different from your target. Large Cap stocks may now represent a larger portion of your portfolio than intended, while Small Caps and Bonds may be underrepresented.

Identify Overweight and Underweight Assets

Compare your current allocation to your target allocation. Identify which assets are overweight (more than your target) and which are underweight (less than your target).

Choose a Rebalancing Strategy

Decide on your rebalancing approach. There are a few strategies you can use:

  1. Calendar-Based Rebalancing: Rebalance at regular intervals, such as quarterly or annually. This approach is simple and ensures you regularly check your portfolio.
  2. Threshold-Based Rebalancing: Rebalance whenever an asset class drifts from its target allocation by a certain percentage, such as 5%. This approach is more dynamic and responsive to market conditions.
  3. Dynamic Rebalancing: During the Financial Crisis of 2008 I developed an approach I call Dynamic Rebalancing. It is like having real-time analytics on the sidelines, constantly assessing market conditions and suggesting when to call certain plays. It’s been used by institutional clients since then, but I’ll be making it available to subscribers once my newsletter gains some traction.

Here’s why you might choose this approach:

  • When to Rebalance: Dynamic rebalancing leverages market momentum, capturing larger returns as the market moves between bull and bear phases.
  • Flexibility: It uses the mean reversion nature of market cycles to determine when and how much to rebalance.
  • How Much to Rebalance: It uses the strength of market moves to enhance the probability of achieving greater returns, allowing for over and underweighting in addition to rebalancing “to target.”
  • Effectiveness: Dynamic rebalancing is particularly effective for signaling when to rebalance between stocks and bonds. It can even be helpful within asset classes, such as between large-cap and small-cap stocks. It reviews asset class-specific trends monthly and takes action on “outlier” signals, reducing turnover with trades typically occurring from 6 months to 2 years apart.

Executing Portfolio Rebalancing

To rebalance, you’ll typically need to sell portions of overweight assets and buy more of the underweight ones. Here’s how you might adjust based on our mid-2024 scenario:

  • Sell: Reduce your holdings in large-cap stocks which have significantly outperformed.
  • Buy: Use the proceeds to Increase your investments in small-cap stocks, bonds, and perhaps international stocks which have all underperformed relative to large-cap stocks.

Consider Transaction Costs and Taxes

Before making any trades, consider the transaction costs and tax implications. In tax-advantaged accounts like IRAs or 401(k)s, you can rebalance without worrying about capital gains taxes. In taxable accounts, be mindful of the tax impact of selling investments. Only consider selling investments in a taxable account that you have held for a year or more to avoid higher short-term capital gains tax.

Monitor and Adjust

After rebalancing, continue to monitor your portfolio. The market will keep changing, and your portfolio should stay aligned with your long-term goals. Set reminders to review your portfolio regularly and be ready to make adjustments as needed due to changes in the financial markets or even your long-term financial goals.

Why Portfolio Rebalancing Now?

With stocks at all-time highs, now may be an opportune time to rebalance. Here’s why:

  1. Capture Gains: Selling high-performing assets like large-cap stocks allows you to lock in gains and protect your portfolio from potential downturns. It’s like protecting a lead in football – sometimes the best offense is a good defense.
  2. Risk Management: Rebalancing helps ensure that your portfolio’s risk profile remains aligned with your tolerance. With large-cap stocks up significantly, your portfolio might be riskier than you intend.
  3. Opportunity: Underperforming assets like small-cap stocks may offer buying opportunities. By rebalancing, you can buy these assets at lower prices, positioning yourself for future growth.

Conclusion: Keep Your Portfolio in Top Shape

Rebalancing is a vital part of maintaining a healthy investment portfolio. By taking a disciplined approach and regularly adjusting your asset mix, you can keep your portfolio aligned with your risk tolerance and financial goals. As we reach the halfway mark of 2024, consider taking a closer look at your investments, making necessary adjustments, and ensuring that your retirement savings are on track. Just like a coach making strategic changes at halftime, your proactive steps now can set you up for success in the second half of the year and beyond.

Higher for Longer Interest Rates

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What Can An Investor Do About High Interest Rates?

While inflation has been gradually decelerating, the Personal Consumption Expenditures (PCE) price index, a key inflation metric used by the Federal Reserve, was up 0.3% for April 2024 and 2.7% year over year. This means that inflation remains stubbornly above the Fed’s 2% target. As a result, the central bankers are likely to keep interest rates higher for longer to bring price pressures fully under control. Lowering rates too soon could let inflation stick around, so the Fed will probably keep interest rates where they see clear signs that inflation is under control.

In this ‘higher for longer’ interest rate environment investors need to play defense like a championship team protecting a lead.

Bond Investments

For now, bond investors should continue to focus on short-term bonds and floating rate funds that can benefit from higher yields without too much interest rate risk. Active bond managers who can adapt to changing conditions might be a better bet than index bond funds.

Stock Investments

For stocks, look for companies with strong balance sheets and reliable dividends. These companies can better handle high interest rates compared to heavily indebted ones. Funds that focus on value, quality, and dividends are smart choices because they invest in companies that can handle economic bumps caused by the current high rates.

Diversification

Diversification across asset classes, sectors, and investment styles is key to reducing risk. It’s like having a balanced team with a strong offense and defense. Above all, maintain discipline around your asset allocation plan based on your goals and risk tolerances. Staying diversified and rebalancing your portfolio can help during volatile times, just like keeping your cool and sticking to your strategy in the final minutes of a tight game.

Higher for Longer Interest Rates thanks to PCE inflation leveling off.
Personal Consumption Expenditures (PCE) Price Index
Source: Morningstar and Bureau of Economic Analysis

Turbocharge Your Retirement Savings in 2024

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Secure Act 2.0 and Inflation Indexing

Secure Act 2.0 unleashes several key changes directly benefiting individuals like you. If you’re a fan of boosting your savings game, here are some game winning strategies. We will dive into the key changes that are set to redefine the retirement landscape in 2024 and beyond, but before we dive into the game-changers we will highlight the contribution limit increases already on in play thanks to the annual inflation adjustment.

Inflation: Growing Your Nest Egg Faster

Inflation isn’t just affecting your grocery bills; it’s also giving your retirement savings a boost! Here’s how inflation-indexed contribution limits for 2024 benefit you:

Traditional and Roth IRAs: Score big with a $7,000 touchdown this year, up from $6,500 in 2023. That’s an extra $500 to turn your retirement dreams into reality. In addition, if you are 50 and over still in the game, you can make a ‘Catch-Up’ contribution of $1,000. There are some limits on IRA and Roth IRA contributions based on your income, in particular if you are covered by a retirement plan at work, depending on your individual circumstances. More information on a potential curveball is available at the IRS website.

401(k) and 403(b) Plans: Max out at $23,000 in 2024, a jump from $22,500. Every dollar counts when compounding over time! And, if you are 50 and over, bring out the ‘Catch-Up’ play with an additional $7,500 contribution.

Secure Act 2.0: Revolutionizing Retirement Savings

This legislation isn’t just a catchy name; it’s a game-changer for your retirement journey. Let’s unpack the exciting additions:

Catch-Up Contributions on Steroids: Feeling behind in the game? Starting in 2025 ‘Catch-Up’ contributions for people aged 50 and over and still in the game will be indexed for inflation in IRAs and Roth IRAs too. And 2025 brings a turbo boost to retirement plan savings by raising the bar even higher for people ages 60-63 to a whopping $10,000 in 401(k) and 403(b) plans. Time to bridge the gap faster and level up your retirement savings game.

Roth 401(k) RMDs? Not Anymore! Love the idea of tax-free retirement income? Secure Act 2.0 makes it a reality by kicking mandatory distributions (RMDs) out of your Roth 401(k). Your money can grow tax-free, and you can pass it on to future generations without limitations. A game winning touchdown for generational wealth!

Later RMDs, Longer Growth: Secure Act 2.0 has already pushed the trigger age for Required Minimum Distributions (RMDs) to 73. It increases 75 for 2033. This translates to years of additional tax-deferred compounding, potentially boosting your long-term retirement income.

Oops, Missed an RMD? No Panic! Life happens, and sometimes RMDs slip through the cracks. Secure Act 2.0 understands! The penalty for missing an RMD has been reduced to 25%, with further reduction to 10% if you correct the oversight within a reasonable timeframe, however the IRS defines as ‘reasonable’. A breather for unintentional oversights – we’ve all been there.

Annuities on the Move: Need flexibility with your retirement income? Annuities are contracts that provide a stream of income for a specified period or for life. Starting in 2024, you will be able to transfer annuities without tax consequences or surrender charges. If your current retirement plan has an annuity option for retirement income you will now be able to easily roll it over into a plan sponsored by your new employer. This will enhance the portability and availability of annuities for retirement income.

Small Business, Big Benefits: Don’t work for a corporate giant? Worry not! New “Starter 401(k) plans” make offering and participating in retirement plans more accessible, even for the little guy. Secure your future, even if you’re the sole player on your team!

Your Next Steps: Seize the Moment!

With all these changes (and this is just the highlight reel), how do you navigate and maximize your retirement advantage? Feeling a bit overwhelmed? No worries, you can always consult a financial advisor – consider them your seasoned coach. Otherwise, subscribe to our newsletter, and I’ll be your guide through this retirement adventure. Remember, staying informed and taking control of your journey are the power moves for securing your financial future. Get ready to save and invest for a fun-filled retirement – it’s your time to shine on the retirement field!