BFSG Blog - Benefit Financial Services Group

How Are Workers Preparing for Retirement?

By:  Tina Schackman, CFA®, Senior Retirement Plan Consultant

According to a 2021 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI), U.S. workers preparing for retirement vary by age but there are signs that savings habits are starting to take place earlier than previously reported. In fact, 48% of respondents between the ages of 25 and 34 reported having savings of $100,000 or more.

Starting to save early is one of the easiest ways to accumulate savings for retirement.

Of the 31% of respondents that stated they made changes to their retirement plan since January 1, 2020, more than half increased the amount they contribute.  A workplace retirement plan, such as a 401(k) or 403(b) plan, can help build retirement savings through tax-deferred savings and the potential for your company to match your contributions to the plan.  Check out our recent Summer Webinar Series “Retirement Accounts: Traditional vs. Roth” for typical ways to save for retirement.

What’s getting in the way of reaching savings goals?  Debt is the #1 reason, and it weighs heavier on workers who experienced loss of income or a job.  In fact, 70% feel debt is negatively impacting their ability to save for emergencies. Establishing and sticking to a budget can be a great way to get your finances under control and find more ways to save.  We recommend you watch the replay of “Connecting the Dots to Your Financial Future (Part 1)” to learn some budgeting tips and debt payment strategies.

Confidence is key! The majority of U.S. workers remain confident in their ability to live comfortably in retirement. 

Source: EBRI 2021 Retirement Confidence Survey (*1993 first year asked)

We wanted to provide a few tips to start creating healthy savings habits:

  1. Pay yourself first and start early.
  2. Don’t take on more debt than you can afford.
  3. Pay down credit cards as soon as you can.
  4. Understand your employer’s retirement plan.
  5. Create a budget and track expenses.
  6. Set financial goals and have a plan (start with a small goal that can be easily attained)

Contact BFSG if you’d like to learn more about developing your personal financial plan at financialplanning@bfsg.com.

Prepared by Broadridge Advisor Solutions. Copyright 2021. Edited by BFSG, LLC.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Federal Student Loan Interest Rates Set to Increase for 2021-2022

After two years of decreases, interest rates on federal student loans are set to increase almost a full percentage point for the 2021-2022 school year.1

The interest rates on federal student loans are reset each year after the May auction of the 10-year Treasury note. The rates apply to new federal student loans issued on or after July 1, 2021, through June 30, 2022. The interest rate is fixed for the life of the loan.

Subsidized vs. unsubsidized: what’s the difference? With subsidized loans, the federal government pays the interest that accrues while the borrower is in school, during the six-month grace period after graduation, and during any loan deferment periods. With unsubsidized loans, the borrower is responsible for paying the interest during these periods. Only undergraduate students are eligible for subsidized loans, and eligibility is based on demonstrated financial need.

In case you missed it, check out our A Definitive Guide to Education Planning webinar where we outline your options with student loans.

1) The New York Times, May 28, 2021

2) U.S. Department of Education, 2021

Prepared by Broadridge Advisor Solutions. Copyright 2021. Edited by BFSG, LLC.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Inflation is always and everywhere a monetary phenomenon

By:  Michael Allbee, CFP® Principal| Senior Portfolio Manager

The past few months saw some eye-popping inflation readings after subdued inflation prints last year due to COVID. The Core Consumer Price Index (“CPI”), which excludes the volatile energy and food categories, rose 0.9% in June after increasing 0.7% in May and 0.9% in April, bringing the year-over-year reading to 4.5%. Headline CPI, which includes energy and food, rose to 5.4% year-over-year for the largest 12-month increase since August 2008.

A confluence of events drove these inflation outbursts: 1) the year-over-year inflation readings were expected to jump during the summer due to the low readings a year ago, 2) the speedy rollout of widespread COVID-19 vaccinations in the U.S. and fiscal stimulus unleashed pent-up demand faster than expected, catching many businesses off-guard, 3) the flow of goods ordered from overseas was slowed by shipping bottlenecks including the six-day blockage of the Suez Canal, 4) staffing issues are a contributing factor in the shortages, and 5) other one-off supply constraints (i.e., ransomware attack on a U.S. fuel pipeline, a brutal winter storm knocked out the power grid in Texas, and a global shortage of semiconductors).

Many economists (including those at the Federal Reserve) expect many of these price hikes to be short-lived (“transitory”) as output increases to reduce the bottlenecks.  In fact, roughly 90% of the CPI increase was accounted for by reopening price rebounds and supply disruptions. By far the largest contributor to the price rise in that category (accounting for over a third of the increase in the headline CPI) was used car purchases as new car sales were disrupted chip shortages. The other large contributor was transportation services, chiefly airline ticket sales. All the other categories (core services) barely budged. Despite three monthly increases, the 12-month increase in the shelter component, which constitutes nearly a third of the overall index, is still just 2.6%.

And add to this that as the supply constraints ease, year-over-year comparisons to the abnormal pandemic era are subsiding (May 2020 marked the pandemic low in the price index), the $300 federal enhanced unemployment benefit is expiring (many states have already ended it), many employers are re-opening offices, and school will soon be back in session.

However, while inflation might prove to be transitory, the longer-term path of inflation is still unclear and could depend on economic policy decisions yet to be made. Consider this. Inflation has been rising since last June, and yet the Fed has not changed policy one iota. It has been running monetary policy full steam ahead during rising inflationary pressures. Adjusting for inflation, monetary policy has become easier as the real Fed Funds rate (adjusted for inflation) has fallen from -1.1% to -4.4%. This is the result of their new policy framework not to raise interest rates preemptively but to seek maximum employment and deal with inflation later.

Given that “inflation is always and everywhere a monetary phenomenon” as famously said by Nobel laureate Milton Friedman, our goal as your advisor is to construct a risk-appropriate portfolio that will withstand any one of numerous economic scenarios that may unfold, including a scenario of high inflation.

One of my favorite quotes is attributed to Roman philosopher Seneca: “Luck is what happens when preparation meets opportunity.” At BFSG, we had already prepared our portfolio for an inflation scenario before coming into this year by reducing our exposure to long-term bonds, holding Treasury Inflation-Protected Securities (TIPS), initiating and adding to our gold position, holding international stocks denominated in foreign currencies, and having discussions with clients to reduce exorbitantly large cash reserves in low yielding savings accounts. We believe we will have an opportunity as inflation subsides over the next year to build these positions further and possibly add other real assets (i.e., real estate, natural resources, etc.). We believe our portfolios are prepared to meet the opportunity to enable our clients to withstand inflation and other challenges that will inevitably come our way.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

A Beginner’s Guide to Deferred Compensation

By:  Paul Horn, CFP®, CPWA®, Senior Financial Planner | Wealth Manager

Understanding the Basics

A Non-Qualified Deferred Compensation (NQDC) plan allows individuals to defer a portion of their income now and then withdrawal the money typically in retirement when their income is lower. Most of the time the amount of money deferred can be invested in stocks or bonds so the money can grow over time.

Deferred Compensation plans are called non-qualified because they do not have to comply with Employee Retirement Income Security Act (ERISA) like a 401(k) or 403(b) and can be offered to a certain group of employees like executives. These plans will have a written agreement between the employer and employee that outlines all the rules like how much can be deferred when the payout can occur and what investment options are available.

You will make annual elections on how much income you would like to defer and when you would like to receive that money back in the future. Most commonly you can choose a lump sum option or receive payments over a set amount of time like five or ten years. For example, if you defer $50,000 in 2021 you could choose to receive that $50,000 at retirement or as a $10,000 a year payment over five years.

Rules You Need To Know

Deferred Compensation plans do not follow ERISA guidelines, so it is very important to fully understand the rules for your plan.  For example, some plans will have many investment and distribution options while others may only offer limited (or no investment) options.

The deferred compensation stays on the company’s financial statements, so it is not fully protected if the company has financial issues down the road like filing for bankruptcy. When choosing to use a deferred compensation plan it is important to have strong faith in the company’s long-term viability.

Choose Your Distribution Option Wisely

Once your distribution elections are made it can be difficult to make changes. Most plans limit the number of changes you can make and require you to work at least another 12 months before you retire. Another common rule is that any changes made will delay the distribution by five years. For example, an individual that is 59 and plans to retire at age 60 makes some changes to her elections for the distribution. As a result, the new changes typically will be paid out at age 65 at the earliest based on the five-year rule.

Let’s take a look at an example and why you typically want to spread the payments out over time. An individual retires in 2022 with deferred compensation of $600,000 and chooses to receive everything as a lump sum. Assuming no other income sources the $600,000 would be taxed at a Federal income tax rate of 35% for a couple filing jointly (based on current Federal income tax rates and not factoring in deductions). However, if they choose to spread the payments over five years, they would receive $120,000 per year for five years. Assuming no other income sources they would be taxed at a Federal income tax rate of 22% each of those five years. By delaying the payments, the individual greatly reduces the tax burden and creates an income stream for the first five years of retirement. 

How We Can Help

We can look at your plan documents and provide guidance on how much you should save each year and provide recommendations on the best distribution options. If you have a plan in place already, we are happy to review it and see if any changes should be made to how you will receive distributions from the plan. These decisions vary for each individual based on their income needs and tax situation.

Summary

Deferred compensation plans offer a wonderful way for people to delay income which can potentially be taxed at a lower tax bracket in retirement and create a cash flow stream for a part of retirement. When these plans are structured effectively, they can allow you to retire early and have a stream of income in your early and middle years of retirement.

The challenge though lies in the options people choose for when to receive the money in the future. It is very important to work with your BFSG adviser so we can help you navigate how to receive the money in retirement. These plans can be complex, and it is important to understand how to most effectively use this great employer benefit!

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Monthly Economic Summary (June 2021)

Last month was an interesting month for the markets and below is the economic summary for June.  As always, if you have any questions or want to discuss more in-depth do not hesitate to give us a call!

Sources:

  1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov)
  2. Indices:
    • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
    • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
    • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
    • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.