Month: March 2023

Whether you have a child or loved one who’s recently graduated or who’s gearing up to make the transition from college life to the “real world,” this major turning point will require numerous financial decisions. From finding a place to live and paying monthly bills to investing and saving for the future, college graduates may be faced with managing their own money for the first time.

However, many adults lack financial literacy – that is, they don’t understand how to effectively budget, save, invest, or handle other critical aspects of “adulting.” This can lead to poor financial decisions that may end up costing the average person over $1,800 per year.¹

So, how can you help your child or loved one avoid making some of these mistakes and improve their financial literacy? Here is a checklist of financial planning tasks that may help graduates step into life after college on confident financial footing.

Create a Monthly Budget

Many people don’t use a budget, and some may not even know how much they spent last month. Even if a young adult is living comfortably and paying bills on time, mapping out their monthly income and expenses can go a long way toward
reducing their spending, which may allow them to save more for the future and prepare for emergencies.

A good starting point for young adults may be using the 50/30/20 Rule. According to this budgetary plan:

● 50% of their income should go toward necessities, including housing, food, utilities, car payments, insurance, and debt payments.
● 30% of their income can be devoted to discretionary spending, such as dining out or entertainment.
● 20% of their income should go into savings or investment accounts to help advance their long-term goals.

Save For the Unexpected

Speaking of saving, it’s always good practice to encourage your children to start a rainy day or emergency fund. Ideally, they’ll want to build up a safety net of around three to six months worth of living costs in case they lose a job, suffer an injury, or have a significant expense pop up. However, starting small by setting aside even just $50-$100 per month can add up quickly. After all, no one knows when they may need an extra $1,000 for unexpected expenses.

Build Up Their Credit Score

A good credit score is essential for most financial goals, whether it’s opening a new credit card or buying a house. But recent college grads may not have had much time to build their credit history. To help them improve their scores and develop a history, here are three things to get them started:

1. Get a credit card or a secure card through their current bank, or have them added to yours.
2. Keep spending to a maximum of 30% of their credit limit.
3. Pay bills and debts on time each month.

Prioritize Paying Off Debts

After college, most young adults have already accumulated student debt to the tune of around $37,574, in addition to potentially having credit card debt.2 Even a single late payment can harm a credit score, so it’s essential they make at least the minimum payment on loans and credit card balances each month. Setting up automated payments can help them accomplish this. These debt balances can accrue interest, so encourage them to prioritize paying the full amount when they can or consider refinancing should rates move lower.

Save For Retirement

One crucial financial step many young adults overlook is saving for retirement. It’s never too soon to start preparing, and the earlier they do, the earlier they may be able to achieve a comfortable lifestyle after work. If a recent graduate’s employer has a 401(k) plan, encourage them to take full advantage of it – especially if their employer matches their contributions. Additionally, they can open an individual retirement account (IRA) to start saving on their own.

Grow Wealth With Smart Investments

College graduates should consider starting to invest and grow their wealth early. While building their portfolio may not offer an immediate payoff, growing wealth takes time, and the more runway they have, the more likely it is they’ll be able to reach their financial goals.

Next Steps

Managing money for the first time can be overwhelming. Go a step further in helping your loved ones by introducing them to your financial advisor so they can access the guidance they need as they embark upon a healthy financial life journey.

Best,

Robert (Rory) J. O’Hara III, CFP®, CRPC®

Founder | Senior Managing Partner

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

Endnotes

1. O’Brien, S. (Jan. 19, 2023) Lack of financial literacy cost 15% of adults at least $10,000 in 2022. Here’s how the rest fared. CNBC, https://www.cnbc.com/2023/01/19/heres-how-much-people-say-lack-of-financial-literacy-cost-in-2022.html 
2. Hanson, M. (Jan. 22, 2023) Average Student Loan Debt. Education Data Initiative, https://educationdata.org/average-student-loan-debt#:~:text=The%20average%20federal%20student%20loan,them%20have%20federal%20loan%20debt

Are you thinking about leaving your work life soon? Retirement can be an exciting milestone in your life, allowing you to spend your time however you choose. But to get there, you must prepare – both financially and emotionally.

To help you get a plan in place, here are seven questions you can ask yourself:

1. Are You Really Ready to Retire?

While most people leave the workforce around the age of 66, there’s no set-in-stone deadline.¹ Just because you’re reaching the age of retirement doesn’t mean you have to give up a job that you love. By the same token, if you’ve always dreamed of retiring early, you might just need help making a plan. Regardless of your situation, don’t feel pressured to retire until you’re ready to make the transition.

2. How Much Money Do You Need to Retire Confidently?

There’s no magic number or formula that tells you how much you need to save, especially because your costs will highly depend on what you want to do with your retirement years. To help create a clearer picture, use your current cost of living as a baseline, and don’t forget to consider factors like inflation or lifestyle adjustments. It’s important to remember that you’ll likely have a lot more time on your hands once you’ve stopped working, so think about how you’ll it – what will your hobbies and other activities cost?

3. How Much Will Health Care Cost?

Healthcare costs can quickly add up in retirement years – especially if you’re too young for Medicare, which you become eligible for at 65. You might be able to purchase health coverage through a previous employer with COBRA, or you can buy private insurance on your own. In addition to insurance costs, you’ll also want to consider long-term care expenses, as people 65 and older have a nearly 70% chance of needing these services, according to the Administration for Community Living.²

4. What Income Streams Do You Have?

As you start thinking about retirement, it’s critical to take into account all your sources of retirement income. This might include:

● Savings and retirement accounts
● Investments
● Supplemental income from life insurance
● Social Security benefits

To get a better picture of how confidently you could live off of these sources, compare this total retirement income with your intended spending habits.

5. Have You Created a Plan For Your Retirement Savings?

After spending most of your life accumulating wealth, retirement is the time to use it to achieve a reliable income stream. For many people, this might involve moving money from old 401(k) or 403(b) plans into an IRA with the help of a financial
advisor. Then, you can either set up periodic transfers into a checking account or withdraw a lump sum if you need the extra money.

When building a plan for drawing on your retirement savings, be sure to consider important age thresholds for retirement account withdrawals and social security benefits. Currently, you must be 59 ½ or older to draw from your retirement account without paying an early withdrawal penalty and you can start claiming Social Security benefits at 62. Once you turn 73, you may have to make Required Minimum Distributions (RMDs) from your tax-deferred retirement accounts every year.

6. Is Your Plan Financially Viable?

Before you get too far ahead of yourself, it’s crucial to think pragmatically about your retirement plan. For instance, have you accounted for inflation and the potential tax consequences of drawing from your investments? It’s important to note that transfers from 401(k)s and traditional IRAs are taxed as ordinary income. If you’re under 59.5 years old, you’ll also incur a 10% penalty for any withdrawals.

7. What Does Retirement Mean For You?

Finally, ask yourself what retirement really means for you. Do you want to keep working on passion projects, or spend more time with loved ones? Focus on what you want to do, as it’s not only important for your sense of fulfillment, but it will also help you plan your finances accordingly.

Retirement can be a truly freeing time, but it also involves some big decisions and a lot of forethought to do it right. You don’t have to make this decision alone. Your financial advisor can help you address your worries and help you determine if retirement makes sense for you financially, or help you get there if you’re not quite there yet.

Best,

Robert (Rory) J. O’Hara III, CFP®, CRPC®

Founder I Senior Managing Partner

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions. Not associated with or endorsed by the Social Security Administration or any other government agency.

Endnotes
1 “United States Retirement Age.” Trading Economics, February 2023.
https://tradingeconomics.com/united-states/retirement-age-men
2 “How Much Care Will You Need?” ACL Administration for Community Living, February 18,
2020. https://acl.gov/ltc/basic-needs/how-much-care-will-you-need

Some investors may be looking for ways to manage their potential investment-related losses and tax obligations. If this describes you, tax-loss harvesting might be a strategy worth considering. However, it can be difficult to execute and should not be attempted without first consulting a tax professional as the amount of savings provided by tax-loss harvesting may depend on your tax bracket and investment allocation, among other considerations.

To help you understand tax-loss harvesting, here’s a basic primer about what it is and how it works.

What is Tax-Loss Harvesting?

Tax-loss harvesting is a process that involves deliberately selling securities at a loss in order to offset your earnings from other securities, thereby potentially reducing your tax burden. In other words, if you have an investment that’s lost value, you can sell it and deduct the value of that loss from the gains you realize elsewhere. That deduction lowers your total taxable income for the year, which may result in tax
savings.

This IRS-approved tax maneuver is only applied to investments bought and sold within taxable accounts; losses cannot be deducted from tax-deferred accounts like traditional IRAs and 401(k)s. Even if your investments only lose money and you don’t realize any capital gains in a particular year, you can still use investment losses to help offset your ordinary income for that year.

Be sure to check the annual limits on the amount of capital gains losses you can deduct from your income each year, although losses that exceed the annual limit can be carried over into following years for harvesting purposes.

What Might Tax-Loss Harvesting Look Like?

To illustrate what tax-loss harvesting can look like in practice, let’s say you bought a stock less than a year ago that’s since gained $10,000 of value. In most cases, long-term losses (incurred by assets you’ve held for more than a year) can only be used to offset long-term gains. Short-term losses (incurred by assets you’ve held for less than a year) can only be used to offset short-term gains. Also less than a year ago, you bought a stock that ended up losing $15,000 of value over the same period. You sell the first stock at a profit of $10,000 and the second stock at a loss of $15,000 for a net loss of $5,000.

In this case, your $15,000 loss would offset all of the taxes you owe on the $10,000 profit, and you can use the additional $5,000 to offset up to $3,000 of your ordinary income (the IRS limit). The remaining $2,000 loss can then roll over into the following tax year.

Bear in mind that these deductions are taken from your total income that’s subject to taxes, not from your tax bill. Assuming a 24% tax rate and that your deduction doesn’t drop you into a lower tax bracket, harvesting a loss of $3,000 might save you $720 in ordinary income taxes. The savings have the potential to be even greater as your tax rate increases.

Tax-loss harvesting can be a complicated tactic with many moving parts; it may require you to consult with a financial professional beforehand and it won’t be an effective strategy for every investor in all situations.

Key Considerations for Tax-Loss Harvesting

While you can sell an investment and lock in a loss at any time of the year, many choose to wait until year-end to tax-loss harvest so they can gain a full picture of their annual portfolio performance and its tax implications. The deadline for tax-loss harvesting each year is December 31.

After tax-loss harvesting, consider replacing the assets you’ve sold with others that complement your financial goals and the other investments in your portfolio. Those replacements must meet certain requirements, though. As part of the wash-sale rule, the IRS imposes a 30-day waiting period from the time of sale before you’re able to purchase a “substantially identical” asset to the one you sold.¹ Failure to meet these requirements may preclude you from claiming your investment losses for tax purposes.

Tax-loss harvesting operates on the basic idea that a dollar is worth more today than it will be in the future since that dollar can be invested and has the potential to grow before your tax bill comes due. While effective tax-loss harvesting can bear fruit over time – or at least help mitigate losses – it’s still a risky strategy that requires careful planning.

In many cases, it may not be worth it to sell an asset simply to earn the associated tax deduction. More likely, your decision to sell depreciated assets (and harvest the losses from them) will be part of a broader portfolio adjustment or reallocation strategy.

Could Tax-Loss Harvesting Make Sense for You?

By leveraging tax-loss harvesting as another tool within your financial toolbox, you may be able to lower your total tax burden and make tax-efficient adjustments to your investment strategy over time. However, it’s not a tool that should be used lightly – the process can be complex and may not result in savings if improperly handled.

If you’d like to learn more about tax-loss harvesting or other tax-efficient tactics, reach out to a financial professional to discuss your options. A financial advisor can help you determine whether this tactic could help you meet your investment goals.

Best,

Robert (Rory) J. O’Hara III, CFP®, CRPC®

Founder I Senior Managing Partner

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

Endnotes
1 “Publication 550 (2021), Investment Income and Expenses.” Internal Revenue Service. Accessed February 10, 2023.
https://www.irs.gov/publications/p550#en_US_2021_publink100010601

Whether you’re just starting your career or you’re further along in your professional journey, you may have had the opportunity to invest in a 401(k) through your employer. These investment plans provide a tax-advantaged way to save for retirement and, in some cases, your employer may even make extra contributions on your behalf. But what exactly is a 401(k), and how can you take full advantage of one?

What is a 401(k) Plan?

A 401(k) plan is an employer-sponsored defined contribution plan which employees can contribute a portion of their salary to. Within this account, you can invest in a variety of securities – as determined by your employer – to potentially grow your savings over time. In the case of a traditional 401(k), any contributions you make are deducted from your paycheck before taxes are applied, which can help lower your taxes each pay period. Investments made with those contributions are allowed to grow on a tax-deferred basis within the account. You’re then required to pay income taxes on withdrawals you make from the account.

Roth 401(k)

As an alternative to a traditional 401(k) plan, some employers may offer a Roth 401(k). In this plan, your contributions are made with post-tax dollars, but you may be able to withdraw funds tax-free in retirement assuming you meet certain requirements, including:

● It must have been at least five years since you first contributed to the account

● In most cases, you must be at least 59.5 years old

Roth contributions – not the investment returns earned on those contributions – can be withdrawn at any time for any reason. Additionally, you may be able to draw from the account to cover certain qualifying expenses, such as a first-time home purchase. Due to the tax treatments surrounding Roth 401(k)s, it may be a good fit for those who expect to be in a higher tax bracket in retirement and may not benefit as much from lowering their taxable income today. You may be able to make contributions to a traditional 401(k) and a Roth 401(k) if your employer offers both, although they share an annual contribution limit.

403(b) Plan

Similar to 401(k)s, a 403(b) plan is a tax-advantaged retirement account designed for employees who work at public schools or other tax-exempt organizations, such as non-profits. These plans can also come in traditional and Roth models with their respective tax rules. Like a 401(k), 403(b) plans are subject to income restrictions.

Contributing to Your 401(k)

Generally speaking, when you begin a job, you decide how much of your salary to contribute to the company’s 401(k). For instance, if your paycheck is $3,000 and you choose to deposit 5%, then $150 is subtracted before taxes. That means your taxable income becomes $2,850.

Before you start contributing to your 401(k) plan, it’s important to understand how the account works first. For instance, the IRS places limitations on the amount that can be contributed to these retirement accounts each year. Those over 50 years old have a higher annual contribution limit, called a “catch-up” contribution.

Some employers may provide a match for your contributions, often up to a certain
percentage of your salary. If your employer offers a 401(k) match program, you should consider taking full advantage of it – otherwise, you’re leaving money on the table.

Your 401(k) plan may allow you to borrow from your account balance, although it’s generally advised not to do so unless it becomes absolutely necessary. Note that if you don’t repay the loan, including interest, unpaid amounts could become a plan distribution.

Choosing 401(k) Investment Options

Once you’ve opened a 401(k) account with your employer, you’ll typically have several investment options provided by the plan administrator. These can include things like bonds, mutual funds, index funds, and even exchange traded funds in
some instances. However, options vary widely depending on your employer, and knowing which to choose isn’t always obvious.

A financial advisor can help you make the right investment decisions in your 401(k) plan and beyond. If you’d like guidance on what works best within your financial plan, consider connecting with a financial advisor today.

Best,

Robert (Rory) J. O’Hara III, CFP®, CRPC®
Founder I Senior Managing Partner

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.