Alumni Q&A: Your Financial Future

Investments…portfolio…401(K)….retirement…we all know these words are important, but do we always have a clear picture of what our financial future holds? Julie Fuller (’92) and Michelle Mahoney (’87), co-founders of Generations Wealth Management in West Des Moines, took some time to answer a few common questions on this topic.

Q: What are the three best pieces of advice you would give someone planning for retirement?
Make sure your financial facts are straight about the future. Many people mentally set an age they plan to retire, but don’t put pen to paper to know if that is a reasonable goal.

First of all, understand your income sources (i.e. pension, Social Security benefits, investment income, etc.) as well as your debt outstanding (i.e. mortgage, car loan, credit cards, etc.)  Does it make sense to use cash on hand to pay down debt?  In this low interest rate environment, it probably does.

Secondly, prepare and abide by a realistic budget for monthly and annual expenses. This analysis may provide some nice surprises as you anticipate retirement – such as savings on wardrobe/dry cleaning, gas/car maintenance/parking, and restaurant lunches.

Finally, make sure you research your health care coverage in retirement; private pay and/or Medicare, as well as the projected costs of each. Most importantly however, don’t overlook long term care insurance.  70% of Americans who reach age 65 are expected to need some form of long term care services at some point.  Unfortunately, for those that don’t plan ahead, the out of pocket cost needed at the time of care may be enough to derail your retirement plan altogether.

Is there one particular investment that most people don’t make that they should?

Before you make any investing decision, sit down and take a look at your entire financial situation. An important step to successful investing is knowing your current goals and risk tolerance.

All investments involve some degree of risk. If you intend to purchases securities – such as stocks, bonds, or mutual funds – it’s important to understand before you invest that you could lose some or all of your money.  Historically, equities have offered the greatest return over the long term, so we believe all investment portfolios need some allocation to a diversified pool of equities.

Certainly the concern for conservative investors – especially those who keep much of their funds in cash or near cash equivalents (bank accounts, money market funds and short term CD’s) is inflation risk. This is the risk that inflation will outpace and erode purchasing power over time. We believe diversification and asset allocation is the key to a successful portfolio.

There are no magic bullets in today’s volatile investment environment. Often we find one of the best things we offer clients is discipline. To us, that means selling that favorite holding when returns are high, and then reallocating those funds to an underperforming asset class. In other words, “buying low and selling high” – which is much easier said, than done. We truly believe this approach removes emotion from the process, and allows the portfolio to be the most successful over the long term.

401(K) versus a ROTH IRA…which one should I have?
The type of individual retirement account you choose can significantly affect you and your family’s long-term savings. So it’s worth understanding the differences between a 401(K) contribution and a Roth IRA contribution in order to select the best one for you.

Anyone with earned income, and is eligible for a company plan, can contribute to a 401(K). Ideally, you should save the maximum the IRS allows ($17,000 in 2012, with an additional $5,500 for those over 50 years old), but if that’s not possible, shoot for 10% of your income, remembering these contributions reduce your taxable income.  At the very least, contribute at least enough to get the maximum employer match, as that is free money.  Roth IRAs do have income-eligibility restrictions that are also updated annually, so you may or may not be able to make a ROTH IRA contribution.

Both 401(K)s and Roth IRAs provide generous tax breaks, but it’s a matter of timing when you get to claim them. For example, 401(K) contributions reduce taxable income for the year you make the contribution, while withdrawals in retirement are taxed at ordinary income tax rates. Roth IRAs, on the other hand, provide no tax break for contributions, but earnings and withdrawals are generally tax-free.  So with 401(K)s, you avoid taxes when you put the money in, and with Roth IRAs you avoid taxes when you take it out in retirement. Given this different tax treatment, it is ideal to have both types of accounts in your investment portfolio, if at all possible.

One planning idea we recommend is setting up Roth IRA’s for all minor children that have earned income (yes, even if it’s just from a summer job). It’s a great way to get them involved with money and investing while they are still under the roof, and the time value of money on a non-taxable account can be quite substantial.

Julie Fuller, CFP, CPA
Michelle Mahoney, CFP

Generations Wealth Management, LLC
4800 Mills Civic Parkway, #205, West Des Moines, IA  50265

Securities and Advisory Services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser

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