Saving for retirement can seem straightforward compared to the daunting task of converting your hard-earned savings into retirement income.

When building a retirement income plan knowing what questions to ask will potentially save you money, lower your overall tax bill, and provide you peace of mind. Here are three questions you should ask when building a retirement income plan, as well as some considerations:

Question 1: What sources are available to you?

There are many ways to fund retirement. Thus, no retirement plan looks the same. To begin to understand how you will fund retirement, give yourself a quick assessment. What sources are available to you and how much?

What you should consider: Simplicity in retirement. This can be achieved by consolidating retirement accounts such as your employer-sponsored retirement plans into an IRA. See - Why an IRA makes more sense in retirement than your 401(k)

Question 2: When do you plan on receiving income from your different sources?

There are a lot of unique planning opportunities regarding when to start receiving your sources of income. Knowing when to access these different sources can provide efficiency, lower taxes paid, and increase your retirement income.

 The IRS and Social Security Administration have imposed rules that coincide with specific ages. Familiarizing yourself with these key rules and ages associated with accessing popular income sources can help you begin to answer the question of “When?”. Here are some key ages to consider when building a retirement income plan around these popular sources -

Tax-deferred accounts (401(k)/403(b)/IRAs):

• Age 59.5 - you can’t access tax-deferred dollars without a 10% early withdrawal penalty before age 59.5. The IRS does highlight some exceptions to the 10% penalty for premature withdrawals.

• Age 72 (or age 70.5 if you were born before 1951) – The IRS requires that an individual withdraws a minimum amount of their retirement plans (i.e. an IRA) each year starting in the year they reach age 72. This requirement is known as a required minimum distribution or an RMD. Account-holders that do not take their full RMD will be faced with a stiff excise tax equal to 50% of the RMD not withdrawn.

Social Security:

Most Americans can begin claiming Social Security retirement benefits as early as age 62, or as late as age 70. Once you stop working, it can be tempting to claim Social Security as soon as possible to subsidize your income. However, it’s often strategic to delay Social Security as long as possible. The longer you delay claiming your Social Security benefit the greater your guaranteed inflation-adjusted monthly benefit will grow (up to age 70). Factors that should be considered when creating a plan around Social Security are life expectancy, other sources of retirement income, and spousal benefits.

What you should consider:

• Which sources you will draw first?

• Should you delay social security as long as possible?

• How long each source will last?

Question 3: What are the tax implications of accessing your retirement income sources?

Not all income sources are taxed at the same rate. Take the time to understand your applicable taxes and build a tax-sensitive retirement income plan to prevent paying unnecessary amounts to the government.

What you should consider:

• The tax implications of the aforementioned RMD’s. RMD’s can unknowingly force you to pay a higher than necessary tax bill once you are forced to take required withdrawals.

• A tax bracket optimization strategy that provides savings on your overall retirement tax bill. This can be especially beneficial in the early years of retirement. Learn more about Tax Bracket Optimization here.

The misfortune of not having a retirement income strategy.

Heading into retirement without an income strategy is financially precarious. To illustrate the benefit of creating an effective plan, we are sharing a hypothetical example.  Meet Charlie and Frankie:

• Charlie (age 61) and Frankie (age 60) live in Oregon and each plan to retire when they turn age 62.

• Charlie has $1,000,000 in a 401k/traditional IRA.

• Frankie has $250,000 in a 401k/traditional IRA.

• They have $150,000 in joint accounts.

• At age 67 Charlie and Frankie are eligible to receive $2,990/month and $2,376/month, respectively.

• Their annual income goal during retirement is $90,000.

In the following charts, we compare the impact of an efficient retirement income strategy to one that is not. The only thing that is different in the two scenarios is the consideration of when to draw specific sources and the associated tax implications. Unfortunately, when managed inefficiently the couple is only able to maintain their target annual income for 26 years. Additionally, the inefficient strategy forces the couple to pay an additional $129,000 tax over 30 years when compared to a more efficient strategy.

Assumptions: 4% investment rate of return on all accounts. No additional contributions are made to investment accounts. Taxes include both Federal and Oregon State income tax.

This is one of the most important financial decisions you can make.

Taking the time to thoroughly answer these questions can provide long-term value.

Engaging with a financial planning firm can be helpful if you are not fully confident in making a retirement income plan. Working with the right financial planning firm for your unique situation can be the difference between a carefree retirement and a stressful one. To learn more about how we think about serving clients through comprehensive financial planning, check out our services here.

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Oregonians are not saving enough for retirement. OregonSaves is a state-sponsored retirement plan for employers that that do not offer an employer-sponsored retirement plan for their employees.

This program is ideal for employers who wish to encourage employees to save for retirement, but do not currently sponsor a retirement plan. Since there are no employer fees involved in OregonSaves, the biggest commitment is designating time to initiate and complete the enrollment process. Overall, OregonSaves aims to lower the barrier of entry for employees and at the same time provide employers the opportunity to help champion their employee’s financial well-being.

The plan highlights

OregonSaves is designed to combine features of employer plans with Roth Individual Retirement Accounts (IRA’s).

What It is

• Employee contribution and participation is voluntary.

• Self-employed individuals are also eligible for participation.

• The standard contribution rate is 5% of employees’ gross pay. These dollars are contributed directly from payroll into to a Roth IRA. Note that the 5% savings rate may be adjusted up or down and savers can also elect to make contributions through a bank account or a check.

• Employees first $1,000 will automatically be invested in the OregonSaves Capital Preservation Fund.

• Savings over $1,000 will automatically be invested in an OregonSaves Target Retirement Fund.

• There are three investment choices available through OregonSaves: Capital Preservation Fund, Target Retirement Funds, and a Growth Fund.

What It Isn’t

• Employee annual contributions are limited to $6,000 (or $7,000 for those 50 years and older). This program is not meant to replace or compete with employer-sponsored 401(k) plans.

• No employer contributions are permitted.

The Administration Considerations

One effective way to combat a saving deficit is to automate savings through payroll. Employers are responsible for syncing payroll with OregonSaves. Once the setup is complete, the ongoing maintenance includes updating employee lists and submitting employee saving elections.

Enroll Your Employees Today

If you think your employees would benefit from participation, then visit the OregonSaves website or consult our team with questions you may have.

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We frequently receive questions about which tax forms are required for a tax return. Generally speaking, most 401(k) retirement savers do not have to report anything special for taxes. Unfortunately, making generalizations about taxes is a slippery slope. We know taxes are confusing, so we have outlined some common 401(k) scenarios and their tax implications:

1. You made contributions to your 401(k) account this past year. You took no withdrawals or loans.

This scenario is true for most people. If your interaction with your 401(k) account was just saving money, then you will not receive any special tax forms for your 401(k) account. Your contributions (which are synced with payroll) will appear on your Form W-2 in box 12. Code D is for your pre-tax contributions and Code AA is for your Roth contributions. Ta-da!

2. You quit your job or were terminated during the year.

If your employment status changed, there are several ways this could impact your tax return. Here are the most common situations for employees: 

You did not move or make any transactions in your 401(k) account once you were terminated.

• If this is the case, then your tax filing responsibility is like scenario 1) above. The information that is important for your tax filing is included in Box 12 of your Form W-2. For those readers with an old 401(k) account (like an account you haven’t touched in 5 years), you should not expect to receive a Form W-2 from your ex-employer or report anything for your current tax return.

You (or your employer) cashed out your 401(k) account.

• If this is the case, then you will receive a 1099-R form. Additionally, your employer would indicate your gross distribution in box 2a and withhold 20% of your cashed out balance for federal taxes.

3. You took a withdrawal from your 401(k) account.

As discussed above, if you took money out of your 401(k) account then you will receive a Form 1099-R. Typically, a 401(k) withdrawal triggers income tax and a 10% penalty for individuals younger than 59.5 years old. However, the 2020 CARES Act eliminated the 10% taxation of distributions related to adverse financial consequences caused by the coronavirus. 

4. You completed a 401(k) direct rollover.

If you rolled an old 401(k) account to your new 401(k) account, you should receive Form 1099-R. Because this is not a taxable event, the form will indicate that your gross distribution is not subject to taxes. This will appear in box 7 with a code G (pre-tax) or H (Roth) for a rollover.

If you rolled an old 401(k) account to an IRA, then you will receive a Form 5498 for proof that your dollars were moved. Again, your income tax for such transaction is $0 assuming the rollover was complete within 60 days.

5. You have been paying down a 401(k) loan.

If you contributed to a 401(k) account without any late-payments or defaulting, then you do not have anything special to report for your tax return. This is similar to scenario 1) above.

6. You defaulted on a 401(k) loan.

In this case, you will receive a Form 1099-R and pay income tax on the outstanding balance. Additionally, you will pay a 10% penalty (if applicable).

7. You retired.

If you retired this past year, congratulations! There is nothing for you to report on your income tax return unless you took money out of your 401(k) account, in which case your taxable distributions would be included on Form 1099-R and included in your taxable income.

8. You turned 72 in the previous year.

If you turned 72, you need to research the Required Minimum Distribution (RMD) rules.  For example, if you are 72 years old and still working then you don’t have to take a RMD (unless you are a >5% owner of the organization). These rules are important to understand because the financial penalties for missing a RMD are substantial. Lastly, the 2020 CARES Act waived RMD requirements for this past year.

Taxes are complex! Please reach out to our team if you have any questions about your 401(k) account and your taxes.

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Last week GameStop went viral as a topic unlike anything I’d seen in my 10 years at Human Investing. Probably just like you, I googled “Gamma Squeeze”, had someone two degrees of separation from me divulge they had been a part of wallstreetbets, and now have significantly more money, and felt like I was watching a version of March Madness play out real-time in the financial markets.

With the introduction of free trading and the gamification of trading stocks with apps like Robinhood, this past week was the culmination of many factors colliding (more on that later). Different than in The Big Short (2008 Real Estate Crisis) where select hedge funds were taking advantage of large investment banks being overleveraged in the housing market, this time it was retail investors taking advantage of hedge funds overleveraged in GameStop. If Michael Lewis or someone else isn‘t writing this book already I’d be shocked, and I can’t wait for the movie too.

Most of the questions our team has been fielding this week looked like a version of:

• Why GameStop?

• Why now?

• Explain this to me like I’m 5

• Is this a one-time occurrence or is something like this going to be happening more frequently?

• And probably most importantly what does this mean for me, my investments, and the markets as a whole?

To help me answer some of these questions I’ve enlisted our head analyst, Andrew Gladhill. In our office known as Glads. For those of you who haven’t spoken with Glads or seen his work, he’s a CFA and anyone who knows him would most likely have him on their Who Wants to be Millionaire “phone a friend” shortlist. Maybe most importantly, one of the ways Glads makes our team better is being able to take complex topics and break them down in very digestible terms. Take it away!

Some key terms you need to know

Shorting

The short answer: Shorting is betting that a price will go down (not up), and you benefit as the price goes down. For example, if you short a stock trading at $20, and it goes down to $15, you have made $5.

The long answer: Shorting works through a few steps:

• Step 1 – you borrow the stock today from someone who holds the stock (Let’s call them Emily) with a set date you must return the stock back to Emily. Emily lends you the stock because Emily charges you interest.

• Step 2 – you sell the stock today (say for $20)

• Step 3 – you must return the stock to Emily, plus interest (say $1) buying it at the current market price to do so (say $15)

• In this example, you have made $4 (Sold for $20, bought for $15, charged $1 interest)

Why do you short? Because you believe something is overvalued, and you want to profit from when the price goes down.

Short Squeeze

The short answer: When a shorted position has the price increase, those who are shorting it (the shorters) are forced to buy the position, driving the price up further.

The long answer: If the price rises on a short position, the shorter starts losing money. They can either hedge their losses by buying the stock before the return date, or wait to buy and hope the price falls. Remember, the shorter must return the stock to the original owner by a set deadline. Because the price of the stock can rise higher and higher, the shorter’s potential loss is limitless.

So a short squeeze is when the price of a company goes up because lots of people are buying a heavily shorted stock, increasing the price. The rise in price causes some shorters to close out their positions, which involves buying the stock. More buying activity causes the price to increase, causing greater losses for the shorters. If the price rises high enough, the losses get large enough that more shorters are forced to close out their short position to avoid having their total portfolio value go negative. This creates a positive feedback cycle of buying activity, pushing the stock price even higher.

Why WAS Gamestop ($GME) TARGETED?

The Short answer: GME had an unusually high amount of shares sold short, allowing the short squeeze to be possible. Retail investors gathered online & decided to try to make it happen.

The Long Answer: Short float is the number of shares sold short (borrowed & then sold) that have not yet been repurchased. Gamestop had a short float over 100%, meaning some shares of Gamestop had been lent out more than once. This happened because many believed Gamestop (a retail video game store) was the next Blockbuster and would go out of business. The share price would go to $0 a share, and they would profit from the price dropping. Some retail investors noticed the high short float on GME in an online community known as reddit wallstreetbets (aka WSB, aka retail investors). The retail investors saw an opportunity for a short squeeze due to the large short interest, and GME being a relatively small company.

The retail investors planned to force a short squeeze on GME. The retail investors would buy up as many shares of GME as possible, driving up the price. The retail investors would hold their shares, drying up the supply, pushing the price up even further. All this upward price movement would force a short squeeze, driving the price up even further, and the positive feedback cycle would result in astronomical price increases for GME as the short squeeze hits. Retail investors will be able to sell their shares at high prices to the shorters forced to closing out their position.

Why was trading restricted?

The short answer: Companies that execute trades (brokerages, i.e. Robinhood) must have money to cover trade differences with clearing firms (the back end companies that finalize trades) as collateral. The rapid, unexpected movement in GME brought some brokerages ability to do that into question, and they had to pause the trading until they could secure more funding.

The long answer: When you sell or purchase a stock, that trade isn’t finalized until settlement, which is 2 days later. This time is used to verify the transfer of cash & the security purchased. It’s like when you deposit a check at the bank, the bank makes sure the check clears before you can withdraw cash. Clearing firms finalize stock transactions. The brokerages (i.e. Robinhood, Fidelity, Schwab, e-Trade) are required by law to maintain cash deposits as collateral with clearing firms to cover any losses. The required deposits by the clearing firms for the brokerages went up because GME was having higher price volatility. Some brokerages had to pause trading in GME while they secured enough funding to make the deposits required by the clearing firms. The financial system rarely handles meteoric rises in stock prices in such a short amount of time, and certain parts of the system that normally work so smoothly we never think about them suddenly brought trading to a screeching halt.

what does this mean for me and my portfolio?

Thank you, Glads. This story and its ramifications are certainly not finished. As more details come out it will continue to paint a clearer picture of what it means for investors over the past week and looking forward as well. To bring this all home and answer the question, “what does this mean for me and my portfolio” a few thoughts:

While Gamestop took up all the headlines this past week, for most investors it had little to no impact on their portfolio. For example, the Vanguard Total Stock Market Fund (VTI), is a staple in many retirement accounts across the country, the fund was down 3.59% last week (in line with the market). GameStop contributed a positive 0.04% return to the fund (basically nothing!) despite being up nearly 655% on the week, a bi-product of how small of a company GameStop is relative to other companies in the fund that truly move the needle.

So should I get in?

Should you open up a trading account in preparation of the next public short-squeeze? The boring/correct answer is this is not the forum to be giving specific financial advice for your specific situation. If you’re truly speculating about that and want to talk to it through, PLEASE sign up for a Calendly link with one of our advisors and they are happy to talk with you about it.

My favorite book I’ve read in the past few months is The Psychology of Money by Morgan Housel. It’s one of the best (in my opinion) personal finance books because it focuses on behavior (potential controllable actions) rather than guessing what’s the next best stock is. He has an entire chapter devoted to the topic of, “People have a tendency to be influenced by the actions of other people who are playing a different financial game than they are.” This is the case for most people saving for retirement when thinking about GameStop, shorting, and what we’ve seen in the news. It’s Human to feel like you missed on an opportunity with GameStop and to want to hit it big on the next trade. But most likely that’s not your game.  Most likely your game (and mine too) involves saving and investing for a long time, letting compounding interest take care of the rest, and maybe most importantly staying out of your own way. And while that game doesn’t create the same headlines, as Housel writes in a different chapter it can create a different type of headline to aspire to.

See the full article here

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According to most research, although millennials are considered the most highly educated generation, we are the least informed when it comes to our financial decisions. Not only do we lack financial literacy, but pre COVID-19, 63% of millennials felt anxious when thinking about their financial situation, and 55% felt stressed when discussing their financial situation. I imagine COVID-19 has negatively impacted those figures even further.

There are many factors that affect our personal financial stress levels, but historically, the financial industry has felt inaccessible to those who lack financial literacy and/or feel insecure about their financial situation. How are we supposed to learn if we lack access to knowledge?

SAVINGS APPS TO SAVE THE DAY

I love the concept of savings apps, because it improves accessibility of investing and saving for a large population. Basically, if you have a smart phone and a few extra dollars, you can be a saver. A study conducted in 2019 found that individuals who used savings apps kept better track of their finances and were more resilient when faced with a financial shock. However, accessibility without education can be hazardous. So, here are two recommended savings apps that provide learning and saving opportunities.

• Mint is a free app powered by INTUIT (think Turbo Tax) that houses all of your financial information in one place. Mint uses a holistic view and budgeting tools to find extra savings for you. Not only do they provide you with custom savings tips, but they also have a hub of resources, ranging from building a grocery budget to investing advice, so you can learn along the way!

• Digit has the same philosophy as Mint: find savings within your current financial situation. With this philosophy, Digit analyzes your current income and expenses and then lets you know what you can afford to save. They invest your dollars in FDIC insured account using a portfolio based on your risk level and comfortability. You are also able to attach these savings to a specific goal – emergency savings, honeymoon, a doggo—you name it. There is a monthly cost of $5, but you do receive 1% annual bonus savings every three months.

NOT FEELING IT? FOLLOW THEIR SAVING PHILOSOPHIES

It’s okay if you don’t vibe with the savings app world. But if you do want a better grip on your finances, follow the philosophy behind the savings apps:

1. Keep track of your income.

2. Assess your spending habits.

3. See where you can save.

For me, that looks like walking past the gluten-free bakery every so often instead of into it (which is usually the case) and saving the extra $5. At the end of the month it can make a difference (Don’t believe me? See how much you can save by ditching your morning coffee here).

Finally, allow yourself to interact with financial resources without being too hard on yourself. The purpose of these apps is not to be a report card. The purpose is to empower you to make thoughtful decisions that will improve your financial health. If you have questions, check out our Financial Wellness Center or reach out! We are here for you.

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A fiduciary is defined as an individual or a legal entity, such as a financial advisor. The fiduciary takes on the responsibility and has the power to act in the interest of another. This other person is called a beneficiary or principal—we call them member, human, or client.

A fiduciary financial advisor (which is all we have at Human Investing) cannot sell products that charge or pay commissions.

When a member works with a Human Investing financial advisor, the client gives the advisor their trust and expects recommendations to be made with honesty and good faith in keeping with their best interests. This may not always be the case with a non-fiduciary advisor.

The Fiduciary Standard

All Human Investing employees are required to abide by the fiduciary standard. When a financial advisor has a fiduciary duty, they must always act in the beneficiary's best interest.

Financial advisors fall into two buckets: fiduciaries and non-fiduciaries. Surprisingly, not all financial advisors have a requirement to put member's interests first. Worse yet, some advisors and their firms can be dually registered, swapping back and forth between fiduciary and non-fiduciary roles.

Suitability Standard vs. Fiduciary Standard

Financial professionals who are not fiduciaries are held to a lesser standard known as the "suitability standard." What this means is that the recommendation from a non-fiduciary only needs to be adequate.

Other Watch Outs When selecting an Advisor

If an advisor states that they have FINRA Series 7, 6, or 63, that means they are licensed to sell products for commissions. An advisor would only have those licenses for two reasons: 1) to sell commission products or 2) collect commissions from products they (or someone else) have sold.

There are many individuals and firms that say they are financial planners and do financial planning. But did you know that many of the people that say they are financial planners are not trained in the process and profession of being a financial planner? Individuals responsible for member financial planning are CERTIFIED FINANCIAL PLANNERS™. A CERTIFIED FINANCIAL PLANNER™ certification is “the standard of excellence in financial planning. CFP® professionals meet rigorous education, training and ethical standards, and are committed to serving their clients' best interests today to prepare them for a more secure tomorrow.”

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Are you retiring from PERS soon? Provided below is a concise breakdown of the most common benefit options and what they mean.

Often it makes the most sense to receive a lesser monthly benefit while protecting your loved ones with a survivorship option. Comparatively, it is like paying insurance monthly to ensure there is income for your beneficiary if you should die prematurely.

There are many more factors to consider, but a written estimate and analysis in coordination with your financial plan will provide a platform for deciding the best option for you and your family.

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401(k) plans are powerful tools individuals can use to save and invest for retirement. I would argue that with high individual contribution limits, tax advantages, and employer contributions, a 401(k) is the best tool to save for retirement. In fact, we love 401(k)’s so much as a savings tool we wrote the book on it - Becoming a 401(k) Millionaire (actually Peter Fisher our CEO did).

While 401(k)'s have helped answer the question "How to save for retirement?", they do not answer "How to turn retirement savings into retirement income?". That’s where Individual Retirement Accounts (IRAs) enter the picture. IRAs provide flexibility in retirement that towers above 401(k) plans in three key areas: investment selection, distribution strategy (taking money out), and tax efficiency.

Building an Investment strategy for retirement

Utilizing investment options that align with your retirement goals and needs is important for a successful financial plan. According to Vanguard, the average 401k plan has 27.2 investment options for employees to choose from1. This is a positive for 401k investors to avoid choice overload, but not always optimal for distributions. Compared to a 401(k), IRAs provide for much greater flexibility on the types of investment options available. The flexibility of investment options in an IRA can help to build a customized investment strategy to align with someone's retirement needs/goals. The shortlist of investments an IRA can hold are Individual Stocks, Mutual Funds, Exchange Traded Funds (ETFs), Bonds, US Treasuries, CDs, and Annuities.

Strategizing Distributions

Saving money in a retirement account is not a means to an end. There is a purpose to it, and for most the goal is retirement. We put money into a retirement account so that we may withdraw it someday when we are no longer receiving a paycheck. When building an efficient distribution strategy, flexibility is key.

While most 401(k) plans can administer distributions in retirement, there is often less control of how the money comes out of your account. As an example, let's assume you have two different investment options inside of your 401(k) account. One investment is geared for growth and the other for conservation (short-term needs).

With a 401(k), there is less flexibility than an IRA when choosing which investment you can choose to sell to take a cash distribution. Let’s say 50% of your 401(k) is in your growth investment and the other 50% is in your conservative. For every $1,000 you take out of your 401k, $500 will come from the sale of your Growth Investment and the other $500 from your conservative investment.

What happens when your growth investment loses 10-20% of its value due to normal market volatility? When you need your next distribution, your 401k will sell both the conservative investment as well as the growth investment (whose value has just decreased). By taking money out of a 401(k) during normal market volatility, you are violating the first rule of investing: buy low, sell high.

If 401(k) distributions are an entrée, an IRA is an a la carte. With an IRA you can choose which investment to sell to fund your distribution needs. If your growth investment has lost some of its value, you don't have to sell. You can use more of your conservative investment while you wait for the market to rebound. While in a good market where your growth investment increases in value by 10-20%, an IRA gives you the flexibility to sell high on your growth investment.

Tax efficiency

If not taken into consideration, taxes can squander someone's retirement account balance. It is important to withhold and pay the correct amount as you take withdrawals from your tax-deferred retirement account. Here is how 401(k)’s and IRA’s differ with regards to tax withholding:

For 401(k) distributions, the IRS requires a mandatory withholding of 20% for Federal Income Tax purposes. The account holder can request more to be withheld federally, but not less. The account holder can also withhold applicable state income tax. For example, say the account holder needs to withdraw $1,000 (net) from their 401(k). The plan provider will make sure there is 20% withheld for federal tax purposes. For every $1,000 needed, the account holder will withdraw $1,250 (The calculation: $1,000 ÷ 0.8 = $1,250). This mandatory withholding can be very convenient. However, what happens if taxes owed in retirement are less than 20%? The extra withholding will likely come back to you as a return once you file taxes. Unfortunately, there may be an opportunity cost. By withdrawing too much, the tax-deferred compounding growth on these dollars is lost.

An IRA provides flexibility to withhold (or not withhold) at a lesser amount to avoid selling unnecessary investments from a retirement account. If the federal tax owed is 11%, 11% can be withheld from the IRA. This saves the account holder 9% or $126 from being withheld, comparing to the 401k example above ($1000 ÷ 0.89 = $1,124). If this account holder withdrawals $1,000 each month, there is an additional $1,512 withheld each year. IRA’s provide a higher level of efficiency with the flexibility in tax withholdings.

Account Type Matters

Which account is right for you in retirement? Well, it depends. If you are you planning to retire earlier than age 59 ½, 401k plans offer some advantages (See "Rule of 55"). For most, however, an IRA makes sense. An IRA can provide superior flexibility to someone in retirement that cannot be matched by company-sponsored retirement plans like 401(k) plans. This is not a knock on 401(k)’s, rather a promotion of the benefits provided by an IRA. Consider the pros and cons of different account types to make sure they match up with your investment goals.

Sources

 1 The Vanguard Group, How America Saves Report - 2020.

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As 2020 comes to an end, our team is sharing seven charts that help summarize some of the puzzling financial activity we experienced this year. We have been including these charts in our group education meetings as visual aids to help explain 2020’s market volatility. For the readers who did not attend one of these meetings, we made this post for you to reference in the future.

2020 was a year that represented a disconnect between the stock market and the economy for many investors. On one hand, the stock market (represented by the S&P 500) is up over 14% this year. On the other hand, many local businesses and industries have been devastated by the pandemic. Investors had a difficult time sorting out those two facts, especially between late March and September.

In order to rationalize 2020 market returns, we look to the five largest companies in the S&P 500 (in chart 1 and 2) that have led the charge in terms in performance. Specifically, these five companies are Microsoft, Apple, Amazon, Google, and Facebook. Compared to industries like airlines, hotels, and restaurants, these five companies were able to offer services and be agile in the pandemic. Couple that with those five companies making up over 21% of the stock market (the largest piece of the pie chart in the last years) and you can create a narrative of why the market has performed well while areas of the economy have struggled.

Repeat after me, past performance does not guarantee future results. It’s important to remember that now more than ever because 2020 produced some impressive returns. Combine that with 2020 being a year where Robinhood investors, or in other words younger investors who had more free time on their hands, became interested in the stock market, options trading, crypto currencies, and other investments. What’s interesting about 2020 is that many of the names or asset classes that people are familiar with or use every day happened to be some of the best performers of the year. Years like this don’t always play out this way, but Peter Lynch’s quote of “Invest in what you know” certainty paid off this year with individual’s taking products that they own/use frequently and investing in them. The above provides a sampling of some of top performers of 2020. As you can see you probably interact with of these line items daily. 

While what we have experienced nationally (and globally) this year has been unprecedented, in the context of the last 40 years of market returns it is not abnormal. Since the start of 1980, the S&P500 (excluding dividends) has returned an annualized 9%. Despite having average intra-year drops of 13.8%, the market has finished positive 75% of the time. Short-term market volatility has paved the way to long-term investment returns, and 2020 has proven no different.

For us investors, this is a reminder to remain invested through the market turbulence. Patience is a requirement for long-term success. Warren Buffet said it best with his quote, 

“The stock market is a device for transferring money from the impatient to the patient.” - Warren Buffet

This chart illustrates the consequences of hitting the “panic button” when we experience market turbulence. If we buckle up and hang on tight, there is potential to see long term growth versus throwing on the parachute and cashing out (hitting that proverbial panic button). 

Opportunists unite. With historically low interest rates, many people have taken this opportunity to refinance their mortgages. By refinancing their mortgages, individuals and families have improved monthly cash flow, decreased the amount of interest paid over the life of their loan (often saving tens of thousands of dollars over a 15-, 20-, or 30-year period), and shortened the length of their mortgage. To join the rest of the opportunists, see our post Refinancing Your Mortgage: A How to Guide. 

In March alone, the number of initial unemployment insurance (UI) claims increased by more than 3,000% as businesses closed to slow the spread of the coronavirus. People have suffered this year, and none of us will look back at this time and wish we did less.

This graph focuses on unemployment, but we know that hospitalizations, closures, and fear also increased in the first half of 2020. In a time of desperation, our communities responded to the suffering in an inspiring way. Specifically, the number of small charitable donations ($250 or less) increased 19.2% over the first six months of 2020 compared to 2019. You know someone who has been unemployed this year, and you also know someone who used dollars to alleviate some of the widespread grief.

We hope these visuals help you digest some financial information from this past year. We don’t know how 2021 will unfold, but we do know that market timing is dangerous and most of the time impossible. Staying the course is candidly a boring investment strategy, but one that typically yields the best results.  

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A combination of recent tax cuts, swelling government debt and changing political winds have many concerned about increases in future tax rates.  This has created a growing interest in strategies that can lower and mitigate future income taxes. One such strategy is available and often missed by many Nike employees within their 401(k) plan, known as “Mega Backdoor Roth 401(k) contributions”. While the name often elicits laughter at first, it can in fact be a serious and tangible way to save on future income taxes. 

What is the Nike Mega Backdoor Roth 401(k)?

The Mega Backdoor Roth 401(k) provides the ability to make additional tax-advantaged contributions to the Nike 401(k) plan above and beyond the typical employee limits of $19,500, plus catch-up contributions of $6,500 for ages 50+ (2020).  The additional contributions are in the form of “after-tax” contributions of up to 3% of income.  This applies to base salary and any PSP bonus. The total contribution amount will have a cap based on annual IRS limitations: $8,550 for 2020 and $8,700 for 2021.  The after-tax contributions can then be converted to Roth dollars within the plan, which allow them to grow tax-free and be distributed tax-free* in the future. 

How to Execute the Strategy

The process starts by electing to make after-tax contributions within the Nike 401(k) plan of up to 3%.  Once the after-tax contributions have been made, it is important to then convert these contributions into tax-free Roth funds* by periodically electing to do an “In-Plan Roth Conversion”.  To complete the In-Plan Roth Conversion, the employee will need to call the Nike 401(k) phone line and make the request verbally.  Be prepared to spend 10-15 minutes on the phone for the conversion process to be completed.     

The In-Plan Roth Conversion is important because the growth of the after-tax contributions will become taxable as ordinary income upon distribution if the conversion is never completed. However, if you convert those funds into Roth dollars, then the future growth and distributions will be tax-free*. We recommend that the In-Plan Roth conversion be completed on a periodic basis to make sure that the funds are converted before any significant growth occurs.  Any growth of the after-tax contributions at the time of this conversion will be taxable income, but if completed regularly, the growth and subsequent tax is typically minimal.  Ideally the conversion would be completed after every payroll or monthly, but practically speaking, one to two times per year should be sufficient to effectively execute the strategy.

Is this Strategy Right for You?

Nike’s robust benefit options can leave many unsure of which savings plan is best for them.  Whether it is 401(k) contributions, ESPP, Deferred Comp or Mega Backdoor 401(k) contributions, there are only so many dollars available out of a paycheck.  The order of priority is different for each person based on their personal tax situation, time frame at Nike, and plans for the future.  We believe that the best way to determine the priority of one plan over another is through financial planning projections. Through the financial planning process, we take your financial considerations today and project them into the future. While this does not predict the future, it does allow you to measure the impact of each savings option and find the optimal course of action.

Solution to Cash-Flow Problem

A potential solution to the cash-flow challenge of participating in the Mega Backdoor Roth 401(k) contributions is to repurpose other funds.  Available options that we have identified include existing after-tax accounts like Individual, Joint or Trust investment accounts, extra cash in the bank, or cash that you have from selling and diversifying out of Nike RSUs, ESPP, or Stock Options.  You can use these accounts to supplement your cash flow while the Mega Backdoor Roth contributions are coming out of your paycheck. 

Lower Your Tax Burden

While this strategy may not make sense for every Nike employee, it is a unique opportunity to get significant dollars into a Roth account that might not otherwise be available.  Whether or not income taxes actually do increase in the future, the Nike Mega Backdoor Roth 401(k) is a very effective way to lower your long-term tax burden and should be considered as part of your financial plan.

If you want to know more about how to take advantage of the Nike Mega Backdoor 401(k), please get in touch.

You can schedule time with me on Calendly, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

*Assumes first Roth contribution made at least 5 years before withdrawal and withdrawals occur after age 59½.

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In March, we were inundated with updates about the coronavirus and the unknown ramifications to follow. In the same month that the NBA was postponed, children were sent home from school, toilet paper fled the grocery store shelves, the US stock market had three of the worst days in US history.

Behind the scenes

Unlike the year 2020, your 401(k) account is routine and emotionless. If there is no user interference (yes, that is you), your account will continue to invest in the stock market every paycheck. A 401(k) account can help alleviate market-timing decisions by adopting an investment strategy called dollar-cost averaging. Instead of waking up in the morning and deciding “is today a good day to buy some stock?”, your 401(k) systematically makes those timing decisions for you.

To review the ease of these timing decisions, I wanted to show investors what happened if you made a $50.00 contribution to your 401(k) account every paycheck during 2020. In this scenario, we assume employees were paid every two-weeks (starting on January 3, 2020) and invested in the Vanguard Target Retirement 2055 (VVFVX) fund.

Slowly building a foundation

These dollars represent the trading value of the Vanguard Target Retirement 2055 (VVFVX) on specific days. In this exercise, the lowest trading price was $31.16 on March 20th, and the highest trading price was $48.55 on November 27th.

Thank you, automation.

As you can see, the best time to invest in the stock market this year (March) was also arguably the most uncertain and scary time to be an individual investor. From a February 21st paycheck to a March 6th paycheck, the price of this target date fund dropped 9%. From a March 6th paycheck to a March 20th paycheck, the price dropped 21%.

When prices were falling, your 401(k) account bought shares at a lower price without panicking, consulting the news, or making impulsive decisions. For that reason, we should give 401(k) accounts a standing ovation for being a reliable, unemotional investment vehicle this year.

Let 2020 be a reminder that if your boxes are checked, outsourcing and automating your account is one way to ease your emotions.

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Perhaps now more than ever, it makes sense to increase your deferral to the SERPLUS deferred compensation plan. The following chart compares current tax rates to the proposed tax rates by the new administration.

Though we are uncertain when the tax changes will be implemented, we do know that tax rates will increase. If taxes increase, your deferred compensation benefits may become even more important for your tax planning.

TAP INTO Significant Tax and Income Benefits

Deferred compensation plans provide an opportunity to receive less income today in order to pay less taxes on that income when received in the future. When making annual deferred compensation elections, you have the choice of a 5-year, 10-year, or lump sum payment at retirement (when employment with Intel ends). If you plan to retire at 62, you could elect to receive distributions for 10 years from your SERPLUS plan to stretch out your income and realize it in a lower tax bracket until age 72. With this plan, you have deferred compensation income providing for your first 10 years of retirement. In your early 70’s, social security and required IRA distributions will supplement your steady income stream, and eventually replace your deferred compensation income.  

Spreading deferred compensation income out over 10 years allows you to take it in a lower tax bracket, like 21% for Federal and State combined or 24% combined after 2025. This tax deferral would provide for a tax reduction between 23% and 35%. In a hypothetical scenario, $50,000 contributed per year over 15 years would total $750,000 (without earnings computed). The income deferral could provide $172,500 in tax savings in a conservative example and $262,500 in savings in a more generous example. That is real money in your pocket rather than in the Federal and State governments. 

In the peak earning years of your life, with your 401k maxed out and not providing enough tax deferral and future income, the SERPLUS deferred compensation plan is a great tool to help increase both.

Cash Flow Considerations AND SOLUTIONS

If you do participate in the plan, your current take-home pay will decrease.  If cash flow becomes tight, there are opportunities within your employee benefits that could help provide the needed funds. It may be advisable to sell some company stock (ESPP, RSUs) to supplement your monthly income so that you can participate in the plan and defer income. Keep in mind, your election made in 2020 on salary is for the 2021 income year, whereas the bonus election is for the bonus paid in 2022. A portion of the bonus could be especially important to defer in 2022 considering the proposed tax changes. 

Questions ABOUT YOUR INTEL BENEFITS?

If you have questions about making deferred compensation elections, please schedule a call.

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