Category: Insights

12.26.2023
PUBLISHED WED, DEC 13 20232:00 PM EST UPDATED THU, DEC 14 20238:25 AM EST

The Federal Reserve on Wednesday held its key interest rate steady for the third straight time and set the table for multiple cuts to come in 2024 and beyond.

With the inflation rate easing and the economy holding in, policymakers on the Federal Open Market Committee voted unanimously to keep the benchmark overnight borrowing rate in a targeted range between 5.25%-5.5%.

Along with the decision to stay on hold, committee members penciled in at least three rate cuts in 2024, assuming quarter percentage point increments. That’s less than what the market had been pricing, but more aggressive than what officials had previously indicated.

Markets had widely anticipated the decision to stay put, which could end a cycle that has seen 11 hikes, pushing the fed funds rate to its highest level in more than 22 years. There was uncertainty, though, about how ambitious the FOMC might be regarding policy easing. Following the release of the decision, the Dow Jones Industrial Average jumped more than 400 points, surpassing 37,000 for the first time.

The committee’s “dot plot” of individual members’ expectations indicates another four cuts in 2025, or a full percentage point. Three more reductions in 2026 would take the fed funds rate down to between 2%-2.25%, close to the long-run outlook, though there was considerable dispersion in the estimates for the final two years.

Markets, though, followed up the meeting and Chair Jerome Powell’s press conference by pricing in an even more aggressive rate-cut path, anticipating 1.5 percentage points in reductions next year, double the FOMC’s indicated pace.

In a possible nod that hikes are over, the statement said that the committee would take multiple factors into account for “any” more policy tightening, a word that had not appeared previously.

“While the weather is still cold outside, the Fed has suggested a potential thawing of frozen high interest rates over the next few months,” said Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock.

Along with the interest rate hikes, the Fed has been allowing up to $95 billion a month in proceeds from maturing bonds to roll off its balance sheet. That process has continued, and there has been no indication the Fed is willing to curtail that portion of policy tightening.

Inflation ‘eased over the past year’

The developments come amid a brightening picture for inflation that had spiked to a 40-year high in mid-2022.

“Inflation has eased from its highs, and this has come without a significant increase in unemployment. That’s very good news,” Chair Jerome Powell said during a news conference.

That echoed new language in the post-meeting statement. The committee added the qualifier that inflation has “eased over the past year” while maintaining its description of prices as “elevated.” Fed officials see core inflation falling to 3.2% in 2023 and 2.4% in 2024, then to 2.2% in 2025. Finally, it gets back to the 2% target in 2026.

Economic data released this week showed both consumer and wholesale prices were little changed in November. By some measures, though, the Fed is nearing its 2% inflation target. Bank of America’s calculations indicate that the Fed’s preferred inflation gauge will be around 3.1% year over year in November, and actually could hit a 2% six-month annualized rate, meeting the central bank’s goal.

The statement also noted that the economy “has slowed,” after saying in November that activity had “expanded at a strong pace.”

In the news conference, Powell said: “Recent indicators suggest that growth in economic activity has slowed substantially from the outsized pace seen in the third quarter. Even so, GDP is on track to expand around 2.5% for the year as a whole.”

Committee members upgraded gross domestic product to grow at a 2.6% annualized pace in 2023, a half percentage point increase from the last update in September. Officials see GDP at 1.4% in 2024, roughly unchanged from the previous outlook. Projections for the unemployment rate were largely unchanged, at 3.8% in 2023 and rising to 4.1% in subsequent years.

Officials have stressed their willingness to hike rates again if inflation flares up. However, most have said they can be patient now as they watch the impact the previous policy tightening moves are having on the U.S. economy.

Stubbornly high prices have exacted a political toll on President Joe Biden, whose approval rating has suffered in large part because of negative sentiment on how he has handled the economy. There had been some speculation that the Fed could be reluctant to make any dramatic policy actions during a presidential election year, which looms large in 2024.

However, with real rates, or the difference between the fed funds rate and inflation, running high, the Fed would be more likely to act if the inflation data continues to cooperate.

Source: https://www.cnbc.com/2023/12/13/fed-interest-rate-decision-december-2023.html

12.26.2023
Financial literacy is a lifelong journey.

Some people are lucky enough to grow up with parents or teachers who can help them understand concepts like saving and investing from a young age. But given that over 1 in 3 U.S. adults aren’t considered “financially literate,” according to a 2022 Ipsos poll, it’s clear plenty of people aren’t getting those lessons early on — if ever.

That’s part of why I recently joined CNBC’s senior economics reporter Steve Liesman, and deputy personal finance editor Kelli Grant, to speak with over 1,000 high school seniors in Queens, New York.

We shared our experience and expertise to help the students get a foundational understanding of how money works. These are the 10 most important financial lessons we think high school students need to know before they graduate.

1. Identify your goals, values, and desires—apart from your friends and social media

Personal finance is personal. Before you can even begin to set a budget and work toward your goals, you need to establish what those goals are. They need to matter to you.

Buying a home, for example, is a very common financial goal both because of its practicality and its potential to be a lucrative investment. But if you’d rather spend a lot of time traveling or living in different places, being a homeowner might not be your dream.

Don’t feel pressured to work toward a certain milestone that doesn’t align with what you want out of life.

2. Compound interest is your best friend, so start investing now

When it comes to investing, the time your money is in the market is often as important as the amount of money you’re contributing. That’s because of compound interest: The cash you invest earns interest, which gets added to your initial investment and you start earning interest on the interest.

Investing pros like Warren Buffett agree: Compound interest is one of the easiest ways to build wealth, and the way to maximize it is to keep your money invested as long as you can. That’s why it pays to start investing as soon as possible.

3. Be intentional with your money

Most everyone has to figure out how to live on a certain amount of money. Even if you have a lot to work with, it’s very easy to go broke, or wind up in the red, if you’re not keeping track. Consider how many lottery winners or professional athletes wind up back at zero.

Impulse buys are designed to be tempting. Take your time when shopping to consider if what you’re tapping your card for is truly how you want to spend your money.

Understanding wants versus needs means being able to identify the things you have to spend your money on, like housing, food and bills, versus the things you want to spend your money on, like trips or concerts.

Writing down everything you spend money on in a month is a good place to start to identify where your cash is going. From there you can see exactly how much you actually have leftover after your needs are met. Then you can decide what to do with the rest, or look for areas where you can pull back on spending to meet a certain goal.

4. Talk to everyone about money: The more you talk, the more comfortable you get

In the past, it was often frowned upon to talk about money. But that attitude has allowed financial problems like wage inequality and lack of knowledge to persist.

Talking about money with your trusted elders or more experienced peers can help you learn concepts like how to use a credit card wisely or the risks of investing.

The more comfortable you are talking about money in no-stakes situations, the easier it will be for you to bring it up when it matters, like when you’re negotiating a salary or putting an offer on a home.

5. Learn how to negotiate

The sooner you master the art of negotiating, the better off you’ll be. When it comes to both money coming in, like your salary, and money going out, like your rent, you could be putting yourself in a better position simply by asking for a better deal.

It can be intimidating to negotiate your first job offer, but you won’t know what you’re capable of getting unless you ask. If your employer won’t offer a higher wage, ask for other benefits like time off or a signing bonus.

Similarly, when you go to rent an apartment, you can always ask for a lower monthly price or to have utilities included in your rent. Most of the time, the worst that can happen is you’re told “no.”

6. Advocate for yourself, and if you don’t understand something, ask

You’ll get better with money the sooner you get comfortable asking questions about it.

If your paycheck seems lower than you thought it would be, it might be wise to consult your human resources department to make sure your tax withholdings are correct. Maybe your bank or your doctor charged you a fee you don’t understand — call and ask what’s going on.

You can’t improve your current situation if you don’t understand why you’re in it in the first place.

7. Learn from your mistakes

Everyone makes mistakes. It’s all part of the learning process, so long as you actually learn from them.

Ask yourself why the error happened and if it was possible you could have prevented it. Then take that knowledge with you into the future so you don’t make the same mistake twice.

8. Surround yourself with people who support your money goals

If you’re trying to save up for a spring break trip but your friends want you to go out to dinner and drinks every weekend and go shopping for new clothes every month, it may get difficult to stick to your goals.

You don’t have to all be in the same financial situation, but friends who pressure you to spend money you don’t have or want to spend can end up costing you big time.

On the flip side, if you have people in your life who will encourage you to stick with your goals and hold you accountable, it can feel a lot easier to succeed.

9. Find free or low-cost hobbies and activities you enjoy

Especially while you’re learning how to manage your money and beginning to build wealth, it’s a good idea to find free or low-cost activities that you like, such as spending time outdoors in nature, volunteering at local nonprofits, writing, sports or making art.

That way, you can have fun, and still hang out with likeminded people, when money is tight, or you’re just trying to save for the future.

10. True wealth is about more than money

The people who feel the wealthiest aren’t necessarily the people who have the biggest salaries.

Financial experts and wealthy people alike tend to agree: If you can get yourself in a position where you’re not worried about money because you have some wiggle room to do things that bring you joy, you’re likely to be happy and feel fulfilled.

That is easier said than done, especially when the cost of living keeps growing. But the point is that it’s possible at a wide range of income levels if you have the knowledge and skills to effectively manage your money.

Source: https://www.cnbc.com/2023/12/11/what-to-know-about-money-before-you-turn-18.html

By Steve Burns

Personal finance isn’t just about numbers; it’s about securing a future free from financial stress. Navigating the complexities of personal finance can be daunting, but understanding key lessons can be a game-changer for your financial future.

Whether you’re just starting your financial journey or looking to enhance your fiscal strategies, this article offers invaluable insights. From building a robust emergency fund to mastering the art of budgeting and unlocking the power of compound interest, these principles are designed to transform your financial life. Keep reading to discover how you can take control of your finances and set yourself on a path to lasting financial freedom. In this article, we’ll delve into the ten greatest personal finance lessons that can change your life.

10 Personal Finance Lessons That Changed My Life:

• Build an Unbreakable Emergency Fund: Life is unpredictable. Research shows that having an emergency fund covering 3-6 months of living expenses can be a financial lifesaver.

• Unlock the Power of Compound Interest: Compound interest is called the 8th wonder of the world. Start investing early and watch your money grow exponentially.

• Master the Art of Budgeting: Studies confirm that budgeting is the cornerstone of financial freedom. Know where every dollar goes and take control of your financial destiny.

• Diversify or Risk Ruin: Academic papers and financial experts agree—putting all your eggs in one basket is a recipe for disaster. Diversify your investments to weather any economic storm.

• Guard Your Credit Score Like a Hawk: A stellar credit score isn’t just a number; it’s a ticket to low-interest loans and financial opportunities. Studies show that a good credit score can save you thousands of dollars.

• Embrace Delayed Gratification: The Stanford Marshmallow Experiment proved that Those who delay gratification are more likely to succeed financially. Patience pays—literally.

• Become a Tax Wizard: Don’t just work hard; work smart. Expert tax planning can boost your net income and secure your financial future.

• Live Frugally, Live Free: Living below your means is the secret to accumulating wealth as explained in the best-selling book “The Millionaire Next Door,”

• Invest in the ‘You’ Fund: Whether it’s a course, a book, or a conference, investing in yourself offers the best ROI, according to multiple studies.

• Be Financially Literate or Fooled: In a world of financial pitfalls, being financially literate is your best defense against scams and bad investments.

Build An Unbreakable Emergency Fund

An emergency fund is more than just a financial safety net; it’s your peace of mind in a bank account. Life is unpredictable, and whether it’s a sudden medical emergency, unexpected car repairs, or a job loss, you need a cushion to fall back on. An emergency fund equivalent to 3-6 months of living expenses can significantly reduce your financial stress. Without this cushion, you’re one emergency away from a financial disaster, which could lead you into a cycle of debt. The only way to achieve this is to save the variance between what you earn and what you spend.

Unlock The Power Of Compound Interest

Compound interest isn’t just a financial term; it’s a principle that can turn your small, consistent investments into a substantial sum over time. Compound interest is famously called the “eighth wonder of the world” for a reason. When your money earns interest, that interest makes interest; you’re essentially growing a money tree that works for you even when you sleep. This principle also applies to compounding capital gains or compounding dividends. Starting early gives your investments more time to grow, setting you on a path to financial independence.

Master The Art Of Budgeting

Budgeting isn’t just about tracking your expenses; it’s about taking control of your financial destiny. Knowing where every dollar goes helps you control your spending and save more. People who budget are less likely to fall into debt and more likely to achieve their financial goals. Mastering the art of budgeting empowers you to allocate funds effectively, making it easier to reach your financial milestones. Personal finance is more about discipline than math. You must create a budget and more importantly, follow it.

Diversify Or Risk Ruin

Diversification is more than just a risk mitigation strategy; it’s a financial safety net that protects your wealth during market downturns. Academic papers and experts recommend diversifying your investments across different asset classes to reduce risk. By spreading your investments into different assets, you ensure that a downturn in one sector or market won’t wipe out your entire portfolio, safeguarding your long-term financial health.

Guard Your Credit Score Like A Hawk

Your credit score is more than just a number; it’s a measure of your financial responsibility that can significantly impact your long-term financial health. A good credit score opens doors to lower interest rates on loans and credit cards, saving you thousands of dollars over your lifetime. Guarding your credit score like a hawk ensures you can always take advantage of the best financial opportunities.

Embrace Delayed Gratification

Delayed gratification is not just about self-control; it’s a life skill that has far-reaching implications for financial stability. The Stanford Marshmallow Experiment showed that deferring gratification is critical in achieving more favorable life outcomes, including financial stability. Learning to avoid impulsive spending helps you focus on your long-term goals, making it easier to accumulate wealth over time.

Become A Tax Wizard

Tax planning is more than just a yearly chore; it’s a continuous strategy that can significantly boost your net income. Understanding tax laws and planning accordingly can save you significant money. Effective tax planning increases your take-home pay, providing more funds for investment and savings and accelerating your journey to financial freedom. It’s crucial to understand the tax consequences of your investments and income along with how best to optimize your finances to pay minimal taxes. Paying for professional tax advice and preparation is money well spent. Taxes are the number one expense for most people that earn a good living.

Live Frugally, Live Free

Living frugally is not about deprivation; it’s about making smarter choices that set you on a faster track to financial independence. Books like “The Millionaire Next Door,” showed living below your means frees up more money for saving and investing that can lead to building wealth. It’s a lifestyle choice that enriches both your wallet and your life.

Invest In The ‘You’ Fund

Investing in yourself is the best investment you’ll ever make. Your skills, knowledge, and health are your most valuable assets. Whether it’s a course, a book, or a conference, investing in yourself offers the best return on investment. It increases your earning potential and enriches your life in ways that money can’t buy.

Be Financially Literate Or Be Fooled

Financial literacy is not a luxury; it’s a necessity. In a world of financial pitfalls, being financially literate is your best defense against scams, bad investments, and poor financial decisions. Being economically savvy equips you with the tools to make informed decisions, safeguard your money, and ensure a more secure financial future.

Key Takeaways

• Financial Cushion: Always maintain a robust reserve for unforeseen expenses.

• Miracle of Exponential Growth: Leverage the magic of compound returns.

• Expense Mapping: Gain mastery over your financial landscape through budgeting.

• Asset Mix: Safeguard your wealth by spreading your investment risks.

• Credit Vigilance: Keep a watchful eye on your creditworthiness.

• Self-Control: Learn the art of postponing immediate pleasures for long-term gains.

• Tax Acumen: Become proficient in optimizing your tax liabilities.

• Economical Living: Adopt a minimalist lifestyle to accelerate wealth accumulation.

• Self-Capital: Allocate resources to enhance your skills and well-being.

• Financial Savvy: Equip yourself with the knowledge to navigate financial complexities.

Conclusion

In the journey toward fiscal autonomy, the lessons outlined in this article serve as pivotal guideposts. From establishing a robust monetary buffer and harnessing exponential growth to cultivating expense awareness and asset diversification, these principles are instrumental in shaping a resilient financial future. Moreover, the emphasis on credit vigilance, self-restraint, tax proficiency, economic living, self-investment, and financial acumen underscores the multifaceted approach needed for comprehensive economic well-being.

PUBLISHED WED, NOV 1 20232:00 PM EDTUPDATED WED, NOV 1 20232:55 PM EDT

KEY POINTS

• The IRS has increased the 401(k) plan contribution limits for 2024, allowing employees to defer up to $23,000 into workplace plans, up from $22,500 in 2023.

• The agency also boosted contributions for individual retirement accounts to $7,000 for 2024, up from $6,500.

 The IRS has announced new 2024 investor contribution limits for 401(k) plans, individual retirement accounts and other retirement accounts.

The employee contribution limit for 401(k) plans is increasing to $23,000 in 2024, up from $22,500 in 2023, and catch-up contributions for savers age 50 and older will remain unchanged at $7,500. The new amounts also apply to 403(b) plans, most 457 plans and Thrift Savings Plans.

The agency also boosted contribution limits for IRAs, allowing investors to save $7,000 in 2024, up from $6,500 in 2023. Catch-up contributions will remain unchanged at $1,000.

In 2024, more Americans may qualify for Roth IRA contributions, with the adjusted gross income phaseout range rising to between $146,000 and $161,000 for single individuals and heads of households, up from between $138,000 and $153,000 in 2023.

The Roth IRA contribution phaseout for married couples filing together will rise to between $230,000 and $240,000 in 2024, up from between $218,000 and $228,000.

The IRS also increased income ranges to qualify for the retirement savings contributions credit and the ability to deduct pretax IRA deposits with a workplace plan.

I was talking to a friend recently about strategies that make ordinary people wealthy. Often, people talk about trying to spend less by budgeting, saving more, and investing. Or working harder to earn more.

These things definitely help. But we all know that without a good budget, savings, and investing plan, it’s hard to build wealth.

After all, even rich people go broke when they spend more than they earn without saving anything.

This happens to lottery winners who suddenly don’t know what to do with their windfall. It also happens to normal folks who go bankrupt after mismanaging their finances.

Interestingly, a recent study found that most American millionaires are the owners of a regional business, such as an auto dealer or a beverage distributor.1 They’re not some high-flying tech CEO or social media influencer who travels to different exotic beaches every weekend.

In other words, these millionaires are normal people having normal jobs.

These millionaires might be “normal.” But they do things differently than most other folks. This is where mindset comes in. The way their mind works makes them go beyond the crowd.

Here are the 3 mindsets and habits that make ordinary people wealthy.

Mindset #1: Grow from your comfort zone

Most people don’t become rich because they don’t take action. They just keep doing the same thing over and over again. The result? They stay where they are.

They make roughly the same amount of money and debt, year after year. And they never build wealth.

That doesn’t mean you have to jump out of your comfort zone, leave your job, and start your own business right away. Or worse, start gambling with crypto and individual stocks you read about on Reddit.

You can also build wealth whilst staying within your comfort zone. As long as you act, remain consistent, and are not afraid of failure.

Mohnish Pabrai, for example, is one of the most successful investors who came from an ordinary background.

He wasn’t born into generational wealth and he didn’t study in an Ivy League university. Instead, he grew up in cheap apartments with his family in India, while his father started and failed various business ventures.

In the book, Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life, Pabrai said:

“I watched my parents losing everything multiple times… And when I say losing everything, I mean not having enough money to buy groceries tomorrow, not having money to pay the rent… I never want to go through with that again.”
Pabrai didn’t leave his IT company job until his startup business had acquired enough clients. And when his business made enough money that he could invest full-time, he still pooled most of his capital from other investors.

Pabrai always had a safety net for when things went wrong. But unlike other people who are content with being safe, Pabrai actively pursued his goals.

That’s the key to ordinary people becoming wealthy: They act. They take calculated risks. And they don’t quit when things get hard. They remain consistent.

Mindset #2: Optimize your environment

There are three levels of environments that make a major impact on your finances: The city you live in, the people you work with, and the people you spend time with the most outside of work.

• Live in a cheaper city — I never met anyone who got wealthy (unless they’re earning millions) by living in a big, expensive city. I used to work at a big company in London. At the time, I was spending most of my income on rent, commuting, and simply living in an expensive city. Then I moved back to my hometown, Leeuwarden, in The Netherlands. First back to my parents, and later, I bought an apartment. My mortgage was €500. In London, I paid almost three times more in rent, for a smaller place. The same apartment I bought for 135K is now worth 200K. So I didn’t only save in rent, I also built equity.

• Avoid working with bad people — That’s also one reason I quit my corporate job in London. I couldn’t stand the office politics. There was a lot of backstabbing and people who didn’t want to see you do well. If you’re in a negative environment or deal with people who don’t want to see you win, you’re only destroying chances of success.

• “Marry the right person” — This is actually money advice from Warren Buffett.2 It might not seem related to personal finance at first. But when you think about it, who else but your spouse/partner has one of the biggest impacts on your financial decisions? This applies to other people who become close to you as well: Friends, family members, etc.

Mindset #3: Think 50% when you spend. And 10% when you don’t

Let’s say you want to buy the latest $1000 iPhone.

The thing with most of the stuff we buy is that their value goes down over time. That applies to cars, furniture, clothes, electronics, etc.

So before I spend money on big purchases, like a new phone, a new car, and so forth, I always think about them in future terms.

I estimate that most of our stuff degrades by at least 50% in value within 3 years. And I don’t know about you, but I just can’t be bother with reselling most of my old stuff on marketplaces.

So after years of using my devices, I end up trading them in for even less than what they’re worth. I know I’m leaving money on the table. But I do that the moment I buy something.

Compare buying stuff to investing your money. The S&P 500 index grows at around 10% per year on average.

With the power of compounding, $1,000 is worth $1,610.51 in 5 years.

That $1,000 iPhone is really worth $1,610.51 when you think about the other option you have, which is to invest.

Spending your money on something means giving up a bit of freedom and options. That’s what money truly represents. We all spend money to buy a certain level of freedom.

Every dollar you spend is another dollar lost from your freedom goals. That doesn’t mean you become a money hoarder. But whenever you spend, always try to ask yourself:

“Is this thing worth the freedom I’m losing?”
If you want to retire early, you’ll need a certain amount, usually a million bucks or more. That amount of money won’t materialize by itself. You’ll need to keep earning enough to enjoy life while building your nest egg.

Source: https://dariusforoux.com/ordinary-people-wealthy/

Meredith Dietz
October 31, 2023

New FAFSA rules will simplify the form and help more aid go to those who need it most.

The Free Application for Federal Student Aid (FAFSA) determines your eligibility for need-based financial aid for college. In previous years, the FAFSA asked families about the amount they contributed to employer-sponsored retirement accounts like 401(k)s each year, and factored it into households’ overall yearly income, reducing their eligibility for need-based aid.

That’s changing: Under a new rule for the FAFSA form, pre-tax contributions to workplace retirement plans will no longer count as income, which means the potential for greater financial aid. Here’s how families can use this change to prioritize both their retirement savings and budgeting for college costs.

How the new FAFSA rule will impact your retirement planning

In previous years, the FAFSA asked families to report their retirement contributions, which would factor into their total income. That meant those dollars would reduce their chances for need-based aid. That’s all set to change with a redesigned FAFSA, in which questions about untaxed payments to tax-deferred pension and retirement-savings plans have been removed. These changes are part of the FAFSA Simplification Act passed back in 2020.

This change means that with proper planning, a 401(k) can now provide both retirement security and help increase your eligibility for financial aid, since saving pre-tax through your employer will be a viable way to reduce your total income as reported on the FAFSA. In other words, you may no longer be faced with the strict “either/or” decision to invest in your child’s college or your retirement plan. While some colleges and universities use alternatives to FAFSA, this change will open up more options for many families hoping to strategically leverage their retirement savings.

One way the FAFSA process will be simplified is by drawing more information directly from tax documents. However, the FAFSA collects that tax information from two years prior to the application, so contributing more to retirement accounts this year won’t have an impact on the financial aid awarded for 2024-25 school year—but it will for the 2025-26 year.

The redesigned FAFSA is expected to launch in December 2023 for the 2024-25 academic year. Here’s how you can start prepping now to apply for federal student aid in December.

BY ANGELICA LEICHT

OCTOBER 20, 2023 / 3:32 PM EDT / CBS NEWS

Life insurance is a financial product that can offer invaluable protection and peace of mind for you and your loved ones. However, this type of coverage comes at an extra cost, so it’s crucial to do your homework and make an informed decision before purchasing a policy. Otherwise, you could pay out of pocket for a policy that doesn’t offer the coverage that you need or want.

And, to make sure the policy you’re purchasing is the right one, it can be helpful to ask questions — and in some cases, a lot of them. That way, you’ll know exactly what you’re getting into with any potential life insurance policy — and can be sure that you’re picking the right option before signing on the dotted line.  

10 important questions to ask before buying a life insurance policy

Be sure to ask these crucial questions as part of your search for the right life insurance policy:

What is my primary reason for buying life insurance?

Before delving into the details of life insurance policies, it’s essential to establish your objectives. Are you purchasing life insurance to provide financial security for your family, cover funeral expenses, pay off debts or as an investment tool? Understanding your goals will guide you in selecting the right type and amount of coverage.

What type of life insurance is best for me?

Life insurance comes in various forms, with the two most common being term life and whole life (or permanent) insurance. Term life offers coverage for a specified period, while whole life provides lifelong coverage — typically with a savings or cash value component. The coverage length, amount and other factors can vary between the two, so make sure you know which works best. And, your choice should align with your financial goals and budget, too.

How much coverage do I need?

Determining the appropriate coverage amount is vital. It should be enough to replace your income, pay off debts and cover future expenses, such as your children’s education or your spouse’s retirement. A common rule of thumb is to aim for coverage that’s 10 to 15 times your annual income, but in some cases, you could need a lot more (or less).

How much can I afford?

Your budget plays a significant role in selecting a life insurance policy. Consider what you can comfortably afford while maintaining your other financial goals, such as saving for retirement or emergencies. Balancing cost with coverage is essential.

What is the insurance company’s financial stability?

It’s important to choose an insurance company with a strong financial track record. Research ratings from agencies like A.M. Best, Moody’s and Standard & Poor’s to ensure the company is financially stable and capable of meeting its obligations. 

Are there any exclusions or limitations in the policy?

Be sure to read the policy documents carefully. Life insurance policies may contain exclusions or limitations related to pre-existing conditions, suicide and certain activities or occupations. Understanding these terms will prevent any surprises when you need to file a claim.

Can I customize my policy?

Many insurance policies can be tailored to your specific needs. Ask about the possibility of adding riders or endorsements, which can provide additional coverage for specific situations, such as critical illness, accidental death or disability.

How will inflation affect my coverage?

Consider how inflation will impact your coverage amount over time. You may need to periodically review and adjust your policy to ensure it remains adequate to meet your financial needs in the future.

What is the process for filing a claim?

Understanding the claims process is crucial. It’s essential to know what your beneficiaries will need to do to initiate a claim, what documentation is required and how long it typically takes for a claim to be processed and paid.

Can I change my policy in the future?

Life circumstances change, so it’s important to know whether you can adjust your policy if your needs evolve. Some policies offer flexibility through options like converting term insurance to whole life or increasing coverage amounts without the need for a medical exam, but not all will, so be sure you know how any potential life insurance policy functions before purchasing it.

The bottom line

Purchasing a life insurance policy is a significant decision that can have a lasting impact on your financial security and the well-being of your loved ones. By asking these important questions and thoroughly researching your options, you can make an informed choice that aligns with your financial goals and provides the protection you need for the future. Remember that life insurance is not a one-size-fits-all solution, though, so take your time and consider consulting with a trusted financial advisor to find the policy that’s right for you.

By Joy Taylor
Published October 21st, 2023

Older adults who want to make charitable gifts can get a tax break by making a qualified charitable distribution from an IRA.

Many Americans donate to charity each year. Knowing that the money can help an organization that is near and dear to your heart helps you feel warm and fuzzy inside. Getting a federal tax break for the contribution might be an added bonus. 

However, these days, most people who donate can’t write off their gifts. That’s because only individuals who itemize deductions on Schedule A of Form 1040 can deduct charitable contributions. And fewer people are itemizing each year because of higher standard deductions. Only 11.6% of federal tax returns for 2021 claimed itemized deductions.

For IRA owners who are 70½ or older, one of the easiest ways to make a charitable donation and get a tax break is by making a qualified charitable distribution from a traditional IRA. For 2023, you can transfer up to $100,000 directly from your traditional IRA to charity. If you have more than one IRA, the $100,000 cap applies per account owner, not per IRA. 

The amount next year will be a bit higher because the Secure Act 2.0 retirement law provides for annual inflation indexing of the $100,000 cap. Qualified charitable distributions are not permitted from employer plans, such as 401(k)s. The tax break applies only if you are 70½ or older on the date of the charitable transfer. 

If you are married, you and your spouse can each potentially give up to $100,000 in 2023 from your separate IRAs, provided each of you has a substantial amount in your IRA. But let’s say you have a $70,000 balance in your IRA, and your wife has an IRA worth $1.2 million. In this situation, your qualified charitable distribution cap is limited to $70,000 and your wife’s is limited to $100,000. Your wife won’t be able to make a distribution of $130,000 to make up for your lower gift. 

There are three main tax benefits of qualified charitable distributions. They are not taxable. They are not added to your adjusted gross income, which can help you mitigate surcharges on your 2025 Medicare premiums. And they can count toward your annual required minimum distributions. (Note: The first dollars out of your IRA are considered to be required minimum distributions, so if you want to do a qualified charitable distribution that will count toward your required payout, give money to the charity before you take money for yourself.) 

But you can’t deduct the qualified charitable distribution on Schedule A. That would be double-dipping.

Only transfers from your IRA directly to charity are considered qualified charitable distributions. Most IRA custodians will require you to fill out a form requesting the charitable payout. The custodian will then either send a check directly to the charity or make a check out to the charity and send it to you to mail to the organization. In either circumstance, get a receipt from the charity to substantiate the donation. 

Also, give a heads up to the charity if the check is being sent to it from the custodian. Let the charity know the money will be arriving, and give your name and address for an acknowledgement receipt for your tax records. If you have check-writing privileges on your IRA account, your custodian might let you write the check to charity yourself, but first ask if that’s OK. 

Don’t wait until the last minute in 2023 to do a qualified charitable distribution. It can take some time for the money to go from the IRA to the charity, particularly if an investment needs to be sold for cash, and the charity must receive the money by Dec. 31 for your contribution to count for that year.

The money must generally go to a section 501(c)(3) organization. However, there is now a limited exception to this rule. IRA owners can do a one-time qualified charitable distribution of up to $50,000 through a charitable gift annuity, charitable remainder unitrust or a charitable remainder annuity trust. Many private colleges have charitable gift annuity programs. If you’re an alumnus, you may hear about this from your alma mater. 

Reporting on your Form 1040 

The Form 1099-R that you will get early next year won’t reflect the qualified charitable distribution. The 1099-R will show only the total amount of distributions made from the IRA for 2023. 

When filling out your 2023 Form 1040 or 1040-SR, you would include the total distribution amount on line 4a of the 1040. Then subtract the qualified charitable distribution and report the remainder, even if $0, on line 4b. Write “QCD” next to line 4b. If filing electronically, a drop-down box for line 4 should give you a choice to click QCD.

BY JOY TAYLOR

It’s finally fall. Leaves are changing color. Children and some adults are awaiting trick-or-treat. And student loan payments have resumed putting a dent in a lot of people’s wallets after a three-year halt on repaying college debt ended. But these tax breaks can help ease the pain. 

1. There’s a deduction for student loan interest

Taxpayers needn’t itemize on Schedule A of the Form 1040 to take this write-off.

• Up to $2,500 of student loan interest paid each year can be claimed as a deduction on Schedule 1 of the Form 1040
• For 2023, the break begins to phase out for single filers with modified adjusted gross incomes above $75,000 and for joint filers with modified AGIs over $155,000. It ends for taxpayers with modified AGIs over $90,000 and $185,000, respectively
• Parents who help a child repay student loans generally can’t take the write-off unless they are also legally liable on the loans. But, even if a parent paid the loan and can’t take the write-off, a child who meets the modified AGI limits can still take the interest deduction, provided he or she isn’t eligible to be claimed as a dependent on the parents’ return. The IRS treats this as if the parent gifted money to the child, who then paid the debt

2. Most student loan debt forgiven in 2021 through 2025 is tax-free for federal income tax purposes

This relief, enacted in the March 2021 stimulus law, is an exception to the general rule that cancellation of indebtedness is taxable. IRS has instructed lenders and loan servicers to not issue Form 1099-C to borrowers whose student loans are forgiven during this time period, and the discharged debt is excluded from income. Some states have different tax rules, which can be confusing. 

3. Up to $10,000 from 529 accounts can be used to help pay off college debt of the account beneficiary without having to pay income tax on the withdrawals

It’s important to note that this $10,000 is a lifetime limit, not an annual limit. 529 distributions for student loan repayments that exceed $10,000 are taxable in part to the extent of the excess and are also subject to a 10% penalty. 

4. Employers that offer qualified educational assistance programs can help

These programs can be used to pay down up to $5,250 of an employee’s college loans each year through 2025. The payments are excluded from workers’ wages for tax purposes. 

5. Relief can be offered through workplace retirement plans, starting in 2024

A new law will allow employer 401(k) matches conditioned on student loan repayments made by employees. 

The IRS blessed such a program in a 2018 private letter ruling. In that situation, the firm contributed to its 401(k) plan on behalf of employees paying down their college debt. The employer matches took place regardless of whether employees also paid in. Participation was voluntary, and employees had to elect to enroll in the program. Employers have been lobbying Congress for years to enact a statute to allow them to do this without seeking a private ruling from the IRS, and lawmakers obliged them last year in the SECURE 2.0 law.

Bob Haegele
October 19, 2023

As inflation lingers, the Social Security Administration (SSA) is boosting its cost of living adjustment (COLA) for benefit checks in 2024. It’s just one of many changes announced by Social Security recently.

Here are some key changes to Social Security happening next year – and what you need to know.

Watch for these 5 changes to Social Security in 2024

More than 71 million people depend on one of Social Security’s benefit programs, so annual changes to the program and its payouts are always highly anticipated. While this year’s cost-of-living-adjustment is down substantially from last year’s 8.7 percent increase — the biggest boost in over 40 years — any extra income is welcome news for beneficiaries on fixed incomes.

1. Cost of living adjustment (COLA) rises

The SSA has announced that benefit checks will rise 3.2 percent in 2024. The 3.2 percent adjustment will amount to a $59 increase in monthly benefits for the average retired worker on Social Security, beginning in January.

Specifically, the average check for retired workers will increase from $1,848 to $1,907. For a couple with both partners receiving benefits, the estimated payment will increase from $2,939 to $3,033, a rise of $94.

Since 1975, the SSA has tied cost of living adjustments to the Consumer Price Index for urban wage earners and clerical workers (CPI-W). The SSA compares the third-quarter CPI-W for the prior year to the third-quarter CPI-W in the current year to determine the COLA. It then adjusts the COLA based on the difference in CPI-W from one year to the next.

2. Maximum taxable earnings going up

In 2023, the maximum earnings subject to Social Security taxes was $160,200. That is, workers paying into the system are taxed on wages up to this amount, typically at the 6.2 percent rate. In 2024, the maximum earnings will increase to $168,600, meaning more of a worker’s income will be subject to the tax. This adjustment is due to an increase in average wages in the U.S.

3. Maximum Social Security benefit also set to increase

As expected, the maximum Social Security benefit for a worker retiring at full retirement age will also increase in 2024, from $3,627 to $3,822. It’s important to note that this maximum applies to those retiring at the full retirement age, which is 67 for anyone born after 1960.

The maximum will be different for those who retire before the full retirement age, because benefits are reduced in that situation. The same applies for those who retire after the full retirement age, a strategy that can max out your benefit check.

4. Average benefit for spouses and disabled workers is increasing, too

The average benefit will increase across the board in 2024, and that includes benefits for people such as widows, widowers and the disabled. Here’s how those figures break out:

The SSA says the average widowed mother with two children will see an increase from $3,540 to $3,653.
Aged widows and widowers living alone will see their benefits increase from $1,718 to $1,773.
The benefit will increase for a disabled worker with a spouse and one or more children from $2,636 to $2,720.
Of course, those are averages, and individual circumstances will vary.

5. Social Security adjusts earnings test exempt amounts

If you claim your retirement benefits before you hit full retirement age, Social Security will withhold some benefits from your check above certain levels of income. It’s what the program calls the retirement earnings test exempt amounts, and it can claim a serious chunk of your benefits if you’re still working. Here’s how it will work in 2024.

If you start collecting Social Security before full retirement age, you can earn up to $1,860 per month ($22,320 per year) in 2024 before the SSA will start withholding benefits, at the rate of $1 in benefits for every $2 above the limit. In 2023, the maximum exempt earnings were $1,770 per month ($21,240 per year).

In the year you reach full retirement age, this rule still applies, but only up until the month you hit full retirement age and with much more forgiving terms. In 2024, you can earn up to $4,960 per month ($59,520$ per year) before benefits are withheld, at the rate of $1 in benefits for every $3 earned above the limit (instead of every $2). In 2023, the threshold was $4,710 per month ($56,520 per year).

Medicare Part B premiums increase

While Social Security and Medicare are different programs, most retirees participate in both, and many have their Medicare Part B premium automatically deducted from their Social Security check.

Monthly Medicare Part B premiums will rise from $164.90 in 2023 to $174.70 in 2024. The annual Part B deductible is also rising next year, from $226 in 2023 to $240 in 2024, or a $14 increase.

Bottom line

The 2024 Social Security COLA offers retirees and others a better-than-average boost to their benefits as inflation lingers. But that’s not the only change to the program, as other levels and thresholds have been adjusted to account for on-going inflation, too.