Archive for December, 2015

Unique Types of Properties to Invest in With an IRA

Thursday, December 31st, 2015

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Flexibility is one of the main reasons savers and investors use self-directed IRAs for real estate transactions. A property can be acquired quickly, with the required fees and costs being directly paid for from the IRA, and in turn, any profits will funnel straight back into the self-directed IRA account.

Commercial Property

The inconsistent performance of the stock market in recent years, and the ever-growing threat of a Federal rate hike has made commercial real estate a prime target for investors. This shift in investment focus has helped fuel the commercial real estate market. That’s because investors who use their IRAs to purchase commercial properties that generate excellent cash flow and appreciation can gain a number of awesome tax benefits. For instance, in the case of a Roth IRA, which is funded with after-tax money, investments are not taxed while growing, and are tax-free upon distribution. Roth IRAs also have no minimum distribution, so savers can decide when and how much to take as distributions. Traditional IRAs are funded with pre-tax money and are taxed at the time of distribution, which is the main difference between the two plans.

Real Estate Overseas

The most common investments made with a self-directed IRA are in real estate, but only a small percentage is invested in real estate overseas. Throughout most of the world, it’s not really possible for a foreign buyer to just borrow money from a local bank and use that money to buy real estate. This is where your self-directed IRA comes into play.
Using the property as a rental property, think how Airbnb does it, where a property is rented out, maybe by someone new almost every week (if not every night), makes it easy to remotely operate from anywhere.
You can purchase real estate, but just as it is with property you own in the US, once you move in, or make use of the property yourself, the total value becomes taxable as a distribution under the terms of your retirement account, and your entire IRA account could get hit with repercussions from the IRS.

Farms

Who knew that you could invest in a farm without owning farmland? Well you can with a self-directed IRA! There are a few more options like REITs, or mutual funds, or ETFs, but today, we’re just going to talk about self-directed IRAs.
Farmland can help your IRA grow in a few ways as an agricultural investment. A farm that produces crops ranging from fruits and vegetables to cotton and other raw materials for manufacturing tend to be the most profitable because these crops, of course, produce income when they are sold (and most regrow annually). In addition, the value of the land may increase, resulting in a capital gain. Before your IRA can buy anything with an IRA, you have to fund it. As of 2015, you can contribute up to $5,500 a year to an IRA, or a $6,500 catch-up limit if you are 50 and older. Keep in mind that you can also rollover money from another retirement plan to buy a farm, and another funding option is to buy partial ownership of the property, and have other investors.

The Simple Math: How Much Does Someone Really Need to Retire?

Monday, December 28th, 2015

Simple math

Ok, honestly? Saving for retirement is sometimes tough to get excited about. It’s so very far away, and it feels like a slow uphill climb. And it seems that no one can ever seem to tell you how much you actually need to save.

But the fact is, we NEED to plan for it, we know it’s imperative that we get it right.

How much do I need to save for retirement?

This is an age old question that has long been debated, and will be debated until the end of time. Luckily, there is a great study that was done for us to put some simple math behind the answer to this question. The Trinity Study was a paper written by 3 professors of Trinity University in 1998 (and was updated in 2009), and the conclusion showed that retirees could live on 4% of their total retirement portfolio annually for up to 30 years without running out of money. They reviewed payout periods from 15-30 years against stock market data from 1925 – 1995, accounting for cost of living increases as well. The Trinity Study deemed 4% the “safe withdrawal rate” for a 30-year retirement.
To break that down, here’s how it would look:

  • You have $750,000 saved for retirement
  • 4% of $750,000 is $30,000
  • You can withdraw $30,000 per year for 30 years “safely” in retirement

If you want to adjust the variables, there’s a great calculator out there called FIRECalc that can show you the details of how long your portfolio can last using the Trinity Study data. This also does NOT take into account other forms of income such as Social Security or the increasingly rare pension. Bottom line, you need to figure out what your retirement budget looks like (e.g. Living on $40,000 per year), and then multiply that by 25 (25x 4% = 100%) to get to your retirement number (e.g. $1,000,000).

How to stay motivated

When I’m faced with a long-term goal, the easiest way for me to stay motivated is to break it down into bite-sized chunks. When I want to buy a car, I price it out (say, $5,000), and then figure out WHEN I want to buy it. If I want the car in 1 year, I divide the cost by 12 months and figure out how much I need to save per month to get there ($416 per month).

For retirement, we can run the same math equation. If you can only live on 4% of your total portfolio per year, then you need to save 25x your annual spending. But I like to break it down even further.

You need to save 300x your monthly spending to retire.

Now, that may seem like a daunting number, but the real magic here is you can easily impact the number by reducing what is required in your monthly budget. Here is the rule to live by when looking at any recurring expenses in your monthly budget:

For every dollar I spend, I need to save $300 for retirement.

I hope that sentence gives you some pause as you think about the mindless things you can waste your money on each month. Heck, your $9 per month Netflix account requires another $2,700 saved to keep in retirement.

But on the flipside, for every dollar you CUT from your monthly spending, that’s $300 LESS you need to save!

How to get to retirement faster

So now that you know how your monthly budget will affect your retirement goals, you can strategically reduce your expenses. Let’s look at how a few quick savings tips can impact the amount you need to save for retirement:

  1. Cancel Cable. This one is a no-brainer these days. With Netflix, Hulu, Amazon Prime, Crackle and Sling.tv, there’s no reason to hang on to that expensive $80-per-month cable bill. I recommend picking two paid services, and watch the rest free. At most, you’re still saving $50 per month.

    $50 x 300 = $15,000 less needed for retirement

  2. Reduce Phone Bill. There are many services out there that are MUCH cheaper than the big cell companies. Services like Republic Wireless and Ting allow you to get all the talk and text you want, with reasonable data rates, possibly cutting your bill in HALF! If you take two phones on a major carrier and move them over, you can save $80 per month with the same plan!

    $80 x 300 = $24,000 less needed for retirement

  3. Lower Monthly Food Bill. Simple meal planning can drastically reduce the amount spent on food per month. Sit down at the beginning of the week and come up with dinner plans ahead of time. Planning around what’s on sale and what you have in stock can keep you from buying things you don’t need. If that’s too much work, services like eMeals will do it for you for a mere $5 per month. Savings is AT LEAST $100 per month, and usually more.

    $100 x 300 = $30,000.00 less needed for retirement

As you can see, the three simple changes above resulted in almost $60,000 less needed to save for retirement! For most average Americans, that would allow them to retire over 1 year earlier! Imagine what you could do if you really started to dig into your spending and see where money is leaking out. I bet you could easily shave over $100,000 off the amount needed to save for retirement, OR MORE!

So the next time you add an item to your budget, or think about signing up for a service that you probably DON’T need, remember this rule:

For every dollar I spend, I need to save $300 for retirement.

Merry Christmas from Accuplan Benefits Services!

Friday, December 25th, 2015

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Four Priceless Pieces of Advice from Mr. Money Mustache

Thursday, December 24th, 2015

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If you’re unfamiliar with Mr. Money Mustache, he’s the man taking the internet by storm as a financial guru who successfully retired in 2005 at age 30. His name is Pete, and he describes himself as “a thirtysomething retiree who now writes about how we can all live a frugal yet Badass life of leisure.”
Several people I personally know have now subscribed to MMM’s (Mr. Money Mustache’s) way of living (or are at least trying to), and say that his philosophies and teachings have changed their financial views forever. How can it not? After reading several articles on his website, you might start to question your own financial decisions and direction that your life is going in. However, there’s never any reason to feel despair, his teachings are for people of all ages and payscales. Here are four priceless pieces of advice that I’ve found to be most advantageous.

Ridiculousness is Ubiquitous

This post, I imagine, was written to address critics of the MMM lifestyle. It goes over hypotheticals of two extreme views of wearers of red, and wearers of blue as a metaphor for those who live in extreme extravagance, and those who live in frugality, and how ridiculous they look to each other: “In one area, the Sheeple wear red costumes and fiercely criticize those who wear blue. But just on the next continent, blue-wearers are in the majority and they are beheading those who dare to wear red. Great books and ornate traditions are built to describe how wearing Red robes is The Way, which are cited authoritatively to discredit those who believe in Blue, and vice versa.”
This article was one that I didn’t think would apply to me, as I most definitely do not consider myself to be one that lives in extravagance, or frugal. What it did for me, however, is open my eyes to see that there are definitely attributes of the extravagant that I found myself subscribing to, and that we all subscribe to, even if we cannot afford the Ridiculousness, or it just didn’t make sense for us. The frivolity of it all that dawned on me is was struck me the most.

Renting vs. Buying

The subheading for this article is “If you have to ask, you should probably rent” and that sentence has been bouncing around my head since I read it a few weeks ago. Partly because I myself have been toying with the idea of getting out of the rent race, and settle down in a nice 2 bedroom townhome, hopefully within the next year. So I read this article thinking that it would sway me the direction that I wanted to go, but again, I realized I was being Ridiculous again. With a capital R.
Pete, who is Canadian, goes over the numbers in this article, and breaks down just how much home-ownership in the busy city of Toronto actually will cost you.
In the end, Pete says, “If you live in an area where houses cost more than $300,000, take a close look at the rent prices around the areas you currently drive. Budget your driving costs at at least a dollar per mile (80 cents/km in Canada to account for higher costs) because you absolutely must put a high value on your spare time to get ahead in life. Doing the math on life decisions like this was by far the biggest factor in my own early financial independence.”

Teach Your Children Well

In this article, Pete says, “As parents we are really in the business of producing the happiest and most capable adults we can, given the constraints of the real world. If my boy eventually ends up as happy with his lot in life as his parents are, we will be more than satisfied.” Which I think we can all agree that that’s the goal of all parents, but what most don’t know is how to help their children reach that point, and become successful adults. A huge part of it, as Pete says, is teaching your children about money the way that you wish you were taught.
Living by example, talking about higher education, making money, and where money goes are all lessons that he goes over in this article. Read it, and pass it on.

There are Investments with Instant Gratification

This article surprised me, because I really was expecting advice on investing. I should have known better, but hey, I’m kind of new to this. What’s talked about instead is mainly family, frugality, fanciness, and living a great life. Pete writes, “How can fanciness and frugality both exist at the same time?

It’s really simple, and best summed up with just a few more key F-words:

Focus, Festivity and Flow

It’s important to remember that life is about being happy and doing what you love, and taking it day-to-day. “Nowadays, I make a point of putting some good stuff on the stereo at appropriate times (the festive times) throughout the day. It’s easy to forget, but it is definitely worth remembering.”

Be happy, be frugal, be wise, and be kind.

Getting a Head Start on Your 2016 Taxes

Monday, December 21st, 2015

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Whether you’re pre-distribution or post-distribution age and have an IRA, tax-wise, things can get complicated fast. There’s a lot that goes into getting taxes ready for some of us, so why not save yourself the panic in April and get prepared now?

Is a Roth IRA for you?

With a traditional IRA, contributions are made up of pre-tax dollars, but you’ll pay taxes on future withdrawals, and traditional IRAs are subject to required minimum distribution, or RMD. In a Roth IRA, contributions are made with post-tax dollars, but future withdrawals are tax free and aren’t subjected to required minimum distribution rules.
If you hold an asset in your IRA that could have significant growth potential, like real estate or a startup, it might make sense to convert to a Roth IRA. You will pay taxes on the amount you convert, but your earnings will then grow tax free indefinitely.​

Don’t forget about your business

Contributions to SEP-IRAs, SIMPLE IRAs and solo 401Ks reduce your tax bill now and help you rack up tax-deferred investment gains for later. For example, in the 2014 tax year, you could feasibly contribute as much as $17,500 in deferred salary ($23,000 if you were 50 or older) plus another 25% of your net self-employment earnings after deducting one-half of self-employment tax and contributions for yourself, up to a maximum of $52,000 total for both contribution categories, with a self-employed 401K, for example. Contribution limits vary by plan type and the IRS adjusts the maximums annually. Just this year, for example, the solo 401(k) contribution limit increased to $53,000.

Your RMD’s

If you’re turning 70½ this year, you have to take your 2015 required minimum distribution (or RMD) by April 1 of 2016, and you also have to take your 2016 RMD by the end of the year, Dec. 31, 2016. That means you could be taking two RMDs in 2016, which might result in a higher tax bill. It is best to consult with a tax planning professional to determine how best to approach your RMD this tax season.

If you’re 70½ or older this year, you must take a 2015 required minimum distribution by Dec. 31, 2015. Remember, there are significant penalties for not taking your RMD during the correct timeframe, including potentially having the undistributed portion taxed at 50%.