Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker-dealer, member of FINRA, SIPC. Investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus, brought to you each and every Wednesday morning right here on KROS. Well, this is Nate Kreinbrink bringing you today’s show. August is moving right along. Hard to believe that we are two weeks in, mid-August is tomorrow with the 15th. A lot of back to school talk. Some of the outer, I think, area schools maybe has started back, maybe across the river. But again, that time is coming. Iowa State Fair going on, which always means obviously that the start of the school year is rapidly approaching and upon us. For a lot of the area schools, next week is that big day, so getting them back into the habits, some of the teachers having to report back.
So again, that time of the year, kind of exciting, nerve wracking, getting back into those school routines. A lot of the fall sports activities have gotten underway, heading home from work you see some of the football teams, marching bands, some of those out getting ready. College football, NFL, season, all that is coming. Cooler temperatures possibly. And getting into that fall weather as it becomes evidently clear that the summertime has kind of passed us by. So again, enjoy it and best of wishes and best of luck to the new school years, new seasons, new activities and everything that’s going on as we get into that time period.
So for today’s program, I know the last time, David Nelson was on last week with the live program the week prior to that, kind of talked a little planning and how that all ties together. Wanted to go to a topic that I kind of get hit with quite often, whether it’s in an office meeting, a review with a current client, first meeting with a potential prospect, or simply at an activity or something someone comes up and we get talking and the question always comes up is to, “Where should I save? I want to start saving. I know I need to save a little bit more. Where should I go save?” And a lot of times that topic kind of comes up and people become overwhelmed as far as where they should even start saving. What’s the best way, what’s the most tax efficient way to go about doing it? And they don’t necessarily know the different options or understand the different options in far as where to start saving.
So what ended up happening is nothing, and then they go another month, then another month, then another month, and next thing you know, they’re a year or two down the road and they wanted to start saving, but they never did just because they didn’t know where to start. And it’s a common question because there is a lot of different options as far as where to go. So again, if you don’t understand where that is and become overwhelmed by it, again, we want to make sure that we understand those different options, not just now, but how it’s going to affect us later on and what that may mean to you.
So again, when we start with this, again, it’s important to obviously understand how much to save. And again, depending on what your income is, what’s your bills, what your expenses are, whatever’s left over, we need to kind of look at it to start looking at it amount that way. What I always start saying, especially for those people young and just starting to get into it, we need to get into the habit of making saving a part of our monthly bills. Because normally if you’re like most people, what ends up happening is you have your bills, you have your groceries, you have again, some enjoyment, going out and doing some things, and then if there’s anything left over, then you’re going to save.
Well again, in today’s economy especially, but even in most normal circumstances, that there’s usually not a lot left over from month to month. So again, what ends up having to get saved is very little, if anything. What we need to do is we really need to get in the habit, and especially if you start at a young age, to get in the habit of making, paying ourselves part of our monthly bills. So if you have [inaudible 00:04:42] that cell phone bill, that internet bill, the electric bill, cable bill, some of these other subscriptions, we need to make sure that putting money away for our retirement is part of those bills. Whether it’s $25, whether it’s $50, whether it’s $100, whatever the case it may be when you’re just starting out, that needs to be part of our budget. That needs to be in that upper priority list as far as what we need to pay each month before we can look at doing extra things outside, going out to eat and doing some of those extra stuff with that extra money.
And if there’s anything left over, then you can do more of those. But again, getting into that habit of saving will put you on a great path of starting out and just starting that pile to continue to build. Again, when you’re younger and you’re just starting out, rate of return obviously has an impact on what your account is, but a lot of times what we see is that your contributions have a much bigger impact on your account than what any rate of return has. So again, whether you have a 10% return positive or a 10% decline in your account of markets are down in an extended period of time, again, if you have a smaller block of money, it doesn’t have as much of an impact as you putting $50, $100, $150 a month into your account to continue to just build that up.
And obviously as your account grows, that pendulum begins to swing where market returns have a bigger impact on your account, maybe per se, in accordance to what any contributions would be. But again, it’s just getting that snowball started, getting into that habit of putting money away and systematically increasing that as you get a bill paid off or you get a loan paid off or you get a raise. Again, continuously putting a little bit more in. I know we joke all the time, but it still remains very true that we’ve never had anybody come in and say that they started too early or they’ve saved too much. Again, it’s obviously always the opposite of that as far as what happened. So get into that habit of saving and again, you won’t regret it and it’ll put you in a great spot later on.
The other side of saving is again, those people that again are looking to save more, they’ve been saving, maybe again, they paid off a car loan, they paid off a mortgage, they paid off some debt that they have, they got a raise at work and they’re looking at saving more. Where should they stay or where should they start saving? And again, this is, again, as everything is that we go over, there’s no one size fits all. Again, it’s individualized and what works for one person may not work for another person because their circumstances, their situations are different. So again, we need to kind of look at it on an individual.
But as a general rule of thumb, what you want to look at is first off, if you have an employer plan at your place of employment, so a 401k, a 403b, a simple IRA, 457 plan, depending on what field you work in, again, you want to look at that and you want to understand what it is that they are matching, if they are matching anything. Again, there’s variances depending on the type of account. If they’re 401k, 403b, if they’re matching 3%, 4%, 5%, 6%, whatever the case it may be, you want to take a look at that and you want to make sure that if you are not contributing that full match, that needs to be your first place you start.
So again, if they’re match up to five or 6% and you’re only putting in three, any additional savings for where you start needs to be in there to get that full match again, to get that extra money that they’re willing to match to put in to do that. So that’s the starting point no matter where it is that you go. And again, understanding the different types of it. Simple IRA plans, your employer has two different ways to put money in for you. They can make it a guaranteed 2% where you don’t have to put anything in and they’re going to put 2% into your account every pay period, versus again, on the other side of the simple, which is probably the more common part is that they will match up to 3%. So if you put in 2%, they’ll put in 2. If you put in 3, they’ll put in 3.
If you put in 5, they’re only going to match up to 3%. So anything above and beyond that you’re not getting that match from, but again, you’re taking full advantage of that. So you want to look at those places. The other thing then outside of it is again, if you’re looking to save outside of more than what the company matches, again, do you raise the amount going into your employer plan at work or if you’re eligible based off of income to maybe put it into an IRA or a Roth account or a non-qualified account outside of your retirement plan. Now again, there’s different rules, there’s different restrictions depending on what age you are, depending on what you’re looking to do with that money. That again, we want to make sure that we understand that to say, “Hey, everyone should put it into a Roth outside of work.” Isn’t necessarily the case for everybody.
Understanding that usually with your plans at work, there is a clause that will allow you to borrow money, and then you just pay it back as long as you are still employed at that employer over an extended period of time. Putting money into an IRA or Roth account, you cannot borrow money from it. Anything that you take out is considered a distribution and may potentially be taxable and or penalized if you take it out before 59 and a half. So again, there’s different laws, there’s different rules that apply to each of those different type of accounts. You want to make sure that, again, we understand those to decide, okay, what is best for me to, again put into that. Contribution limits are another thing. Your employer plan at work generally allow you to put more into it on an annual basis than what an IRA or a Roth account is.
So again, looking at those types, looking at what we’re kind of hoping to put in for the course of that year, and then again, basing that accordingly. Obviously then you look at different types, whether it’s pre-tax or Roth accounts. Do I want that tax deduction now into the pre-tax where if I put in a dollar, my income goes down by a dollar, that money grows tax deferred, but again, all that is then taxable on the backend when I take it out, versus a Roth where it’s after tax, I don’t get the tax deduction when I put that dollar in today, it continues to grow tax-free. If I meet certain requirements past age 59 and a half, again, accounts been open for five years, that whole thing is able to come out then tax-free at a later date.
So again, there’s trade-offs either way. You want to look at what income is now versus what income is going to be later. Obviously we don’t know what tax rates are going to be into the future, but we do know what they are today if we put it in and if you are in a lower tax bracket and it makes sense to maybe put it into the Roth, get that tax-free growth, maybe that’s the way we start leaning with it. But again, there’s a lot that kind of goes into it. Again, we talked retirement accounts there, again, if you’re just looking at putting money away, there’s non-qualified accounts. So a non-retirement account where you can invest the money, and again, you get a 1099 at the end of every year for any interest or dividends. If you do some planning with it, you can maybe look at capital gains rates if they apply to you, which again is generally at a lower rate than what ordinary income rates would be.
So again, there’s a lot that goes into it, understanding how the money is taxed, different type of accounts, what are the rules, what are the regulations, and again, then acting accordingly and making the best judgment. So again, a lot of information that goes into it. So again, if you’re having those discussions, don’t put it off anymore. Come in and talk to somebody. Let us get you on that right path, understand the different options, and decide which one is best for you. Again, you won’t regret getting started. So again, we are running out of time, but I did want to mention that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of August will be donated to the Skyline Center here in Clinton. Again, this is Nate Kreinbrink with NelsonCorp Wealth Management, bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research incorporated, a broker-dealer, a member FINRA, SIPC. Investment advisor representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.NelsonCorp.com.