Monthly Archives: July 2016

Thoughts From Willis | Setting Realistic Retirement Goals

One of the most important aspects of a financial plan is your retirement budget. Over the course of retirement, your budget will fluctuate due to various lifestyle goals and other unforeseen occurrences.

To establish a realistic budget the best way, we start by analyzing your current spending. Understanding where you spend money will help you and your advisor identify the things most important to you.

One of the biggest misconceptions is that you will spend less in retirement, but this is rarely the case. Even though your house may be paid off and your children may be finished with their education, grown-up, and married, you become accustomed to a particular lifestyle. Below are a few items you need to think about:

HOME:

What costs are associated with updating and remodeling your current home in preparation for retirement? Also, what will those costs approximate with new furniture purchases?

SECOND HOME:

Would you like a place to escape Houston’s hot summers or a place for a family gathering spot?

VACATION:

When you retire, you will have more time to vacation. Planning a larger travel budget when you first retire is realistic, especially if the travel budget includes family members other than you and your spouse. From time to time, retirees invite their children and spouses, grandchildren, parents, and in-laws along on vacation.

ELDERLY SUPPORT:
Inevitably, you will need to assist elderly parents or other family members during critical years. This could include incurring costs for proper medical care or assisted living costs, as well as travel costs to their hometown to assist them in day-to-day activities like paying bills or taking care of a home.

AUTO BUDGET:

Automobiles will likely need to be replaced in retirement. Often times, I hear clients preparing to retire say that they just paid off their cars and they believe they’re in good shape. But, the reality is there are always costs that creep up for automobile repairs, maintenance, and eventually replacement.

EDUCATION COSTS:
Many retirees will plan on helping grandchildren with education costs such as private schooling and/or college.

No matter what stage of life you may find yourself in, planning for retirement requires a realistic understanding of where and how you spend your money, as well as planning ahead for life’s unanticipated expenses.

Willis Johnson, CFP®

President and CEO

At Willis Johnson & Associates, we take the time to understand you by combining employee benefits expertise and financial planning wisdom with the emotional elements of your life.

Did you know that if you are not participating in your employee stock purchase plan, you could be leaving money on the table?

Employee stock purchase plans (ESPP) allow employees to purchase shares of their employers’ stock, up to an annual limit, and through after-tax payroll deductions.  ESPPs typically have a set plan year and at the end of the plan year, you will receive shares of your employer’s stock.  The price of the shares you receive is either the lower of the price of the stock at the beginning of the plan year, or the price of the stock at the end of the plan year discounted by a certain percentage; typically 15%.  An ESPP is a company benefit you should take advantage of annually after maxing out your pre-tax and after-tax contributions to your 401(k).

A qualifying disposition of the company stock requires you to hold the stock for at least two years after the grant date and at least one year after the purchase date.  If you have a qualifying disposition, you will pay ordinary income taxes on the discount and long-term capital gains taxes on any gain.  Please see an example below:

ESPP FLOW CHART - QD v3

 

A disqualifying disposition can happen if you sell the employer’s stock within two years of the grant date or one year less than the purchase date. If you have a disqualifying disposition, you will pay ordinary income taxes on the difference between the discounted price and the price on the purchase date. The market price on the day of purchase will then become the cost basis for the sale.  Then, you will pay short or long term gains on the difference between the sale price and the cost basis.  Please see an example below:

ESPP FLOW CHART - DD v3

 

Whether you are selling your stock immediately or holding on to it for a qualifying disposition, and if your employer’s stock price is staying flat or rising, you will be able to make a profit by participating in your Employee Stock Purchase Plan.  We encourage you to consider participating in your ESPP, after you max out your 401(k) contributions, if your monthly cash flow allows.

 

Willis Johnson & Associates is a registered investment advisor. While the tax or legal guidance provided is based on our understanding of current laws, the information is not intended as tax or legal advice and should not be relied upon as tax or legal advice. Federal and state laws and regulations are complex and are subject to change. Willis Johnson & Associates does not provide legal or tax advice. Consult with a tax advisor before you exercise options or sell company stock acquired through an equity compensation plan.

 


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Alexis Long, CFP®

Alexis Long is an associate wealth manager at Willis Johnson & Associates. For Alexis, financial planning combines an interest in producing detail-oriented financial plans with a desire to help people obtain their goals, ranging from retiring early, paying for their grandchildren’s educations, buying a second home or leaving a legacy for their children. Understanding what is truly important to a client is key to good financial planning, along with providing solid technical advice.

Alexis earned her undergraduate degree in International Business from Texas Tech University and her Finance M.B.A. from the University of St. Thomas.

 


 

What Nick’s Reading | Withdrawing Money During Your Retirement Years in the Most Tax-Efficient Way

Published: July 2016

Tax implications you should consider when deciding which bucket of money you should withdraw from during your retirement years

 

The best of three tax-efficient strategies when withdrawing money during retirement

 


“During retirement, which assets should I withdraw first?”

 

Recently, I found myself thinking about this question while reading Michael Kitces’ article on tax planning. Many people, especially recent retirees, ask me this question on a regular basis. Interestingly enough, this can be considered a tax question, an investment question, and also an emotional question. Today, I want to focus on the tax implications of the question.

 

Most of my retired clients withdraw money from these three buckets:

What Nick's Reading July 2016 image 2

 

 

Most retirees initially think to withdraw money from the taxable investment accounts first because withdrawals are tax-free, and then allow the IRA and Roth IRA to compound away. When retirees use this strategy, they are ecstatic during their first few years of retirement because they start out paying very little in taxes. The problem with this strategy lies down the road when Required Minimum Distributions begin at age 70½. Retirees that choose to pull money from the taxable investment account first will most likely pay higher taxes down the road because Required Minimum Distributions force money out of pre-tax IRAs at high tax rates.

 

By comparison, a more efficient strategy is to withdraw money from pre-tax accounts and taxable accounts simultaneously in such a way as to generate additional income during low tax years. By doing so, income can be withdrawn from pre-tax accounts at lower marginal tax rates. Typically, the goal is to target a lower marginal tax bracket than a future expected marginal tax bracket and to withdraw enough from the IRA in order to use up the lower marginal tax bracket. For example, a client that expects to be in the 35% tax bracket during retirement may want to use up the 28% marginal tax bracket at the beginning.

 

What Nick's Reading July 2016 image

 

On the other hand, withdrawing partially from pre-tax accounts and taxable accounts saves taxes over time, but it is often not the best strategy. The reason is because when retirees withdraw money from pre-tax retirement accounts, they are giving up the huge tax-advantaged growth benefits of the retirement accounts. Moreover, the best strategy is to pull out money from the pre-tax retirement accounts at low marginal tax rates, but continue to allow them to grow in a tax-advantaged retirement account. We can accomplish this by utilizing Roth IRA conversions.

 

Furthermore, Roth IRA conversions allow retirees to withdraw money from pre-tax retirement accounts and to convert that money into post-tax retirement accounts. By using this strategy, it allows retirees to utilize their lower tax brackets during early retirement years, by spending down their taxable investments first and allowing the money withdrawn to compound away in tax-advantaged accounts.

 

Click here to read Michael Kitces’ original article and dive deeper into the math behind the power of partial Roth conversion during early retirement.

 

 
Willis Johnson & Associates is a registered investment advisor. Willis Johnson & Associates does not provide tax or legal advice. If converting a Traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted Traditional IRA contributions and on all earnings.  A conversion may place you in a higher tax bracket than you are in now. Because Roth IRA conversions may not be appropriate for all investors and individual situations vary. Please speak to a qualified tax advisor prior to implementing any strategies discussed herein.

 


What Nick's Reading Portrait

Nick Johnson, CFA®, CFP®

 

Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.

 

As Vice President and a Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.

 


 

The Markets (as of market close June 30, 2016)

 

Market Update 2016In the world of equities, the second quarter of the year was anything but dull. April saw the large-cap S&P 500 and Dow make marginal gains, with the small-cap Russell 2000 and the Global Dow leading the way for the month. The Fed left interest rates at their 0.25%-0.50% range, noting that economic growth had slowed since the beginning of the year. May ended up being another good month for equities as each of the indexes listed here posted positive monthly returns headed by the tech-heavy Nasdaq (3.62%) and small-cap Russell 2000 (2.12%). June started out with relatively lackluster returns for stocks as labor added only 38,000 new jobs and the Fed, once again, reiterated its reluctance to raise interest rates based on lagging inflationary trends, weakening in the jobs sector, and sluggish exports.

But the month and quarter ended with quite a bang, primarily precipitated by the UK’s referendum vote to withdraw from the European Union, which sent stocks around the world into a dramatic tailspin, felled the British pound by over 10%, and drastically cut some long-term bond yields (see Japan). Nevertheless, by the last day of the quarter, stocks seem to have weathered the storm and regained much of what they had lost. Of the indexes listed here, only the Nasdaq lost value quarter-to-quarter. On the plus side, the Dow and S&P 500 posted quarterly gains of 1.38% and 1.90%, respectively.

Gold continued to increase in value, closing the month and quarter at $1,324.90. Long-term bond yields hit the skids as investors poured money into bonds, raising bond prices and narrowing yields.

Click for the Full Update

The information provided is not intended to be a substitute for specific individualized tax, legal or estate planning advice. Individual situations will vary. We can assist you in making informed decisions. No single solution meets all investor’s needs. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

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