Audience: Retirement Wellness Basics

The Dangers of Buy Now, Pay Later

Posted on September 7, 2023 by - Financial planning

In recent years, the trend of using BNPL (Buy Now, Pay Later) services has grown exponentially, with millions of people taking advantage of the convenience of these services. However, while BNPL services may seem like an attractive option for many, the truth is that these services can be harmful to your financial health, contributing to increasing consumer debt and financial insecurity.

According to data from the Federal Reserve, consumer debt in the United States has risen to record levels in recent years, surpassing $14 trillion in 2020. While there are many factors contributing to this trend, the rise of BNPL services is undoubtedly a significant factor.

One of the biggest issues with BNPL services is the high-interest rates and fees associated with late payments. While many BNPL services offer low or no-interest rates for short-term loans, the fees and penalties for missed or late payments can quickly add up. In fact, some BNPL services charge fees as high as 30% for missed or late payments, making it difficult for consumers to get out of debt once they have taken on a balance.

Additionally, BNPL services can encourage overspending and impulse buying. With the convenience of these services, consumers may be more likely to make purchases they can’t afford, leading to further financial strain in the long run.

Another issue with BNPL services is that they may not be a good option for people with poor credit. Many BNPL services require a credit check, and those with low credit scores may not be approved or may be subject to higher interest rates and fees.

The impact of BNPL services on your credit score is worth considering. Late or missed payments can harm your credit score, making it more difficult to secure loans or credit in the future.

While BNPL services may be a convenient option for some, it’s important to consider the long-term consequences before you take on additional debt. Be aware of the fees and penalties associated with these services and consider whether you can realistically afford to take on additional debt. In many cases, it may be better to save up for the things you want rather than relying on BNPL services to make purchases.

With increased consumer debt and potential financial insecurity, it’s important to consider alternative options for financing purchases and to use BNPL services with caution. In most cases, it’s better to save up for the things you want rather than taking on additional debt with BNPL services.

Finally, A Retirement Plan for the Self Employed

Posted on May 20, 2022 by - Retirement Planning

Of the more than 150 million workers in the U.S.,16 million identify as self-employed. That means more than 10% of the working population doesn’t even have the option for an employer-sponsored retirement savings plan. Until now.

What is a Retirement Plan for the Self-Employed?

A retirement plan for the self-employed is a way for people who work for themselves to receive tax benefits for saving for retirement. Previously, this was only available to either employees of companies that offered 401ks or workers who navigated the complicated, and sometimes expensive process of opening another type retirement savings account with a financial institution.

Now, self-employed workers can participate in a retirement plan that is easy to manage, inexpensive and portable. So they never lose access or the ability to contribute to their account, they’ll never need to complete an expensive rollover and they’ll never again experience a lapse in coverage.

Icon is the Ideal Retirement Plan for the Self-Employed

Whether you work for yourself as a sole proprietor or individual contractor, or you have employees, Icon is the ideal retirement plan for you. As a self-employed worker, you don’t have a lot of time and financial resources to manage and administer a retirement plan. And high fees will eat into your savings, which in some cases, could force you to delay retirement. You need something that’s simple to manage, inexpensive to maintain and helps to build your financial security in retirement.

That’s where Icon comes in. You can set up your Icon account in minutes, you receive guided portfolio options based on your answers to a short survey and the low, flat fees allow you to retain as much of your savings as possible. This allows them to grow faster because of compound interest. If you choose to hire employees in the future, there’s no need to switch plans. 

Details You Should Know

  • Contributions to Icon’s IRA are typically tax-deductible in the year they’re made. Distributions made in retirement are subject to the appropriate income tax rate.
  • The annual contribution amount for 2022 is $6,000 for workers under the age of 50, with an additional $1,000 allowed if you’re aged 50+.
  • You always have access to your account and as long as you earn money, you can contribute to it.
  • Your contributions to your Icon account aren’t considered a business expense.
  • Both you and your spouse can open an Icon account as long as you both earn money.
  • You can roll your old retirement accounts into your Icon account.

No, You Don’t Need a 401k Calculator

Posted on May 20, 2022 by - Retirement Planning

Developing a plan to save for retirement can feel daunting. The idea is basic enough: set aside money each month or year, invest it, then use it once you retire. But how much you should set aside and where you should invest it and through which vehicle (e.g. IRA, 401k, etc.), to ensure you’ll have enough money in your golden years is complicated. And the answers change constantly depending on your financial and employment situations.

That’s why 401k calculators are functionally useless.

What is a 401k Calculator?

A 401k calculator is a tool that many financial institutions provide to show you how much you should be saving each month in order to reach a certain retirement goal. It usually takes into account basic inputs like: 

  • Your age,
  • Your 401k balance (if any),
  • Annual income,
  • Percent contribution,
  • Employer matching,
  • Retirement age,
  • Average rate of return,
  • Investment fees as a percent. Note: they typically leave out administrative fees which can be substantial.

Then the calculator will spit out a combination of the following predictions:

  • Your monthly costs in retirement,
  • Your 401k balance when you retire,
  • How much of your monthly costs your 401k will cover, and sometimes
  • How much you’ll pay in fees over the course of your working life.

What a 401k Calculator Actually Shows You

You might look at the above list, and think, “That’s useful information.” And it is in the sense that it’ll give you a basic idea of what happens to your savings as you continue to contribute and invest it in the market, and just how far fees can erode your savings. But here’s the hard truth: a 401k calculator is only a snapshot of what your retirement savings journey looks like right now using a standardized set of assumptions. 

For instance, you might live in a high cost of living state during retirement, in that case you might need more per month in living expenses than the calculator predicts. Conversely, you might own your home outright and have very low monthly expenses at retirement. It also doesn’t take into account any other investments you might make over the course of your working life or health issues you could develop that need managing. So the calculator’s predictions can only give you a vague, general idea of what your financial situation in retirement could, potentially, maybe look like if everything stayed exactly the same as it is right now. 

We don’t have to tell you that this is an unrealistic expectation because, to quote the Greek philosopher, Heraclitus, “Change is the only constant in life.” As you earn raises, suffer unemployment, experience highs and lows in the market, change employers and your contribution percentage, change investment portfolios or perhaps roll your savings into a different savings vehicle, that original snapshot becomes outdated and therefore, irrelevant.

What’s Better than a 401k Calculator? Understanding How Compounding Affects Your Balance

The important thing to understand about saving for retirement is: the more you save (and the earlier you start), the more you earn in the market because of something called “compounding”. Compounding is what happens when the interest you earn on your principal contributions earns interest.The more frequently your money compounds, the faster it grows without any additional contributions.

It’s all about compound interest. Use the slider to see how what you set aside today can grow over time.

$1 Yearly Max
$1

What you set aside today

$7

Adds up over time with compound interest*

Another Important Thing to Understand: High Fees Erode Savings Quickly

Employer sponsored retirement savings plans are often subject to two types of fees: investment fees and administrative fees. Investment fees are what the financial institution charges for managing your portfolio of investments. The average investment fee ranges from 0.58% to 1.2% of the portfolio balance, depending on the type of fund you’re invested in. 

In addition to investment fees, employers typically pass on the cost of managing the plan (i.e. administrative fees) to account holders. The administrative fees charged to individual account holders will depend on the employer, the financial institution investing the retirement plan, the company that’s actually managing the plan (this could be the employer, the financial institution or a third party), and the portfolio the savings account is invested in.

How Do I Make Sure I’m Saving Enough?

There are a few different philosophies out there and each espouses a different ideal budget percent allocation. What some people do is, take your total monthly take-home pay for your household (for 1099 employees, this is your gross pay net of taxes, for W-2 employees, this is your paycheck), and allocate the money accordingly:

  • 70% for expenditures (needs + wants)
  • 20% for saving (retirement savings and saving for big purchases like a house)
  • 10% for your emergency fund (for unexpected crises like unemployment or a medical emergency), debt repayment or donations

This isn’t a hard and fast rule and your actual percentages will likely fluctuate depending on your current circumstances. But aiming to save some of your income is a good way to build financial health and ensure that you’ll not only be taken care of in retirement, but in a crisis as well.

The Saver’s Tax Credit Is The Ultimate Retirement Savings Incentive

Posted on April 11, 2022 by - Retirement Planning

For some people, allocating even a small amount of their monthly budget for retirement is difficult. That’s where the Saver’s Tax Credit comes in. It rewards you for making retirement account contributions by giving you a dollar-for-dollar break on your tax bill, doubling the retirement savings incentive.

What is the Saver’s Tax Credit?

The Saver’s Tax Credit is a tax break the IRS gives to low and moderate income taxpayers who make contributions to their retirement accounts. The tax break is a dollar-for-dollar reduction in your tax liability based on how much you’ve contributed, your adjusted gross income (AGI), your tax filing status and a couple of other factors. 

It’s important to note that this is not a tax refund. It’s a subtraction from your tax bill. That means if you owed $1,000 in income taxes for the year, and your tax credit was $500, you would still owe $500 in income taxes. In this scenario, the Saver’s Tax Credit could still result in a tax refund if, over the course of the year, you paid more than $500 in taxes. If that was the case, you would receive the difference between what you paid and what you owe in the form of a tax refund.

Who is Eligible for the Saver’s Tax Credit?

To be eligible for the Saver’s Tax Credit you must:

  • Be at least 18 years of age by the end of the tax year.
  • Not be a full-time student.
  • Not be claimed as a dependent on someone else’s taxes.
  • Pay income taxes.
  • Have an AGI that falls within the IRS guidelines.
  • Have contributed to a qualifying retirement account.

The following are the types of accounts which qualify for this retirement savings incentive:

  • Traditional and Roth IRA
  • 401(k)
  • 403(b)
  • SIMPLE
  • SEP
  • Government issued 457
  • SARSEP
  • 501(c)(18)(D)
  • ABLE

How Do I Calculate my Savers Tax Credit?

The amount of the credit you can receive depends on your adjusted gross income (AGI). The credit can be 50%, 20%, or 10% of your contributions to a retirement plan or IRA, up to $2,000 if filing single or $4,000 if married and filing jointly.

For 2022, the adjusted gross income (AGI) eligibility requirements for the Saver’s Tax Credit are:

Credit RateMarried Filing JointlyHead of HouseholdAll Other Filers*
50% of your contributionAGI not more than $41,000AGI not more than $30,750AGI not more than $20,500
20% of your contribution$41,001- $44,000$30,751 – $33,000$20,501 – $22,000
10% of your contribution$44,001 – $68,000$33,001 – $51,000$22,001 – $34,000
0% of your contributionmore than $68,000more than $51,000more than $34,000
*Single, married filing separately, or qualifying widow(er)

When determining your annual contribution amount the following are excluded for the purposes of the Saver’s Tax Credit calculation:

  • Rollover contributions.
  • Any distributions you’ve taken during that tax year.
  • Any contributions made that were in excess of the annual limit.

Here is an example:

Dylon earns $32,000 in 2022 and contributes $1,000 to her Icon account. When filing her taxes, assuming Dylon doesn’t have any other write-offs, her AGI is $31,000 and it qualifies her to claim a Savers Tax Credit of $100 (10% of her $1,000 annual contribution).

Why You Should Claim this Retirement Savings Incentive

Claiming your Savers Tax Credit is as easy as filling out Form 8880 and submitting it along with your income tax filing. And doing so doubles the retirement savings incentive. Most retirement savings plan contributions result in a tax exemption in the year they’re made, which reduces the amount of income on which income taxes are assessed. By claiming the credit, you can reduce your tax liabilities dollar-for-dollar by the credited amount.

Employer matching contributions–Don’t leave anything behind!

Posted on June 6, 2020 by -

It’s not very often in life that someone will pay you to save money, but a 401(k) match is one of them. A 401(k) match is when an employer contributes, dollar-for-dollar, the same amount you put into your 401(k). Many employers offer this benefit up to a certain limit (e.g. 6% of your annual compensation).

That means the more money you contribute each pay period (up to the limit), the more of a match you get. And the more of a match you get, the more money you have to invest and the faster your investments grow because of compound interest. So if your employer offers any type of matching, you should try to contribute up to the matching limit so you don’t leave any money on the table.

Alternatively, your employer is not required to match your 401(k) contributions or it might require you to work for the company for a minimum period of time before you get to keep all of the contributions they’ve made on your behalf. The process of releasing the contributions made on your behalf is called vesting. Many companies will have incremental vesting thresholds, so the longer you work for them, the greater the percentage of their contributions you “own”. 

Matching formulas and policies vary from company to company so if you have any questions about your company’s plan, reach out to your manager or HR department.

* This illustration is a hypothetical compounding example that assumes biweekly deferrals (for 30 years) at a 7% annual effective rate of return. It illustrates the principle of time and compounding. It is not intended to predict or project the investment results of any specific investment. Investment returns are not guaranteed and will vary depending on investments and market experience. If fees, taxes, and expenses were reflected, the hypothetical returns would be less.

Fired or laid off? What you should do with that 401k

Posted on June 6, 2020 by -

Losing a job is a stressful experience. Adding to that stress is the decision you’ll have to make about what to do with your 401(k). The good news is that retirement plans are portable. That means you can take your nest egg with you when you leave a job. Let’s look at the options available to you:

Transfer to your new company’s plan. When you start a new job, you can move the money from your previous employer to your new employer’s retirement savings plan (if they offer one). Not all plans accept rollovers, so you’ll need to check with your new employer.

Roll over your old plan to an IRA. You can move your retirement savings from a previous employer to an IRA without paying taxes or penalties. If you roll your money over to an IRA, you can continue to save for retirement while you look for new employment or start working for yourself.

Icon is an IRA and accepts rollovers. You need to first open an Icon account and then we can help you with the process of rolling over your funds.

Don’t cash out. Whatever you do, don’t cash out your savings, even if you think it’s a small amount. Not only will you have to pay taxes and an extra 10% early withdrawal penalty, but you’ll also lose out on your future savings.

 

* This hypothetical example assumes the following: (1) One annual $5,500 IRA contribution made on January 1 of the first year, (2) annual rate of return of 7%, and (3) no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees, or inflation. If they did, amounts would be lower. Earnings and pretax (deductible) contributions from a traditional IRA are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax free, provided certain requirements are met. IRA distributions before age 50-1/2 may also be subject to a 10% penalty. Systematic investing does not ensure a profit and does not protect against loss in a declining market. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have potential for a 7% annual rate of return also come with risk of loss.

Auto-escalation–A great idea

Posted on June 6, 2020 by -

Many companies are now offering auto-escalation in their 401(k) plans. With auto-escalation, your contribution level is automatically increased at regular intervals, typically 1% a year, until it reaches a preset maximum. 

Another version of this is a program called SMarT, which stands for Save More Tomorrow. Under the SMarT program, employees agree today to increase their 401(k) contribution rate in the future, generally when they receive their next raise. SMarT is an easy, painless way to set yourself up for regular contribution increases that coincide with pay increases, so you don’t feel the pinch of saving more.

If either of these automatic savings options sounds attractive to you, ask your employer whether your plan has an auto-escalation or SMarT feature.

 

The impact of high fees on savings

Posted on June 6, 2020 by -

We often associate high cost with high value, and while this can work for cars, phones, and other goods and services, it is not true for the fees you pay to manage your investments. In fact, high fees have a corrosive impact on your savings.

Over time, high fees will eat away at the value of your account, leaving you with less money in your retirement years. To understand how fees affect you, the individual investor, consider the following example:

Types of fees

If you are in an employer-sponsored plan such as a 401(k), 403(b), or 457 plan, you can expect to pay the following fees.

Investment fees. These are the fees charged by mutual fund companies to pay for the costs of managing 401(k) plan investments. These are the largest fees you pay and are charged annually as a percentage of your account balance.

A typical percentage is 0.63%, but it isn’t uncommon to find fees ranging from the low end of 0.25% to well over 1.3%.

Plan administration fees. These are the expenses involved in the day-to-day operation of running a 401(k) plan, including recordkeeping, accounting, online access, and customer service. The administration fees may be charged by the financial company that manages your plan investments (the “plan provider”) or by an outside company hired by your employer to handle the administration of the plan.

To ensure you have the most money available to you in retirement, you want to look for an investment vehicle with low annual fees. If your employer doesn’t offer a 401(k) fund with low fees, consider rolling your savings into a low-cost IRA like Icon.

 

* All figures in 2012 dollars. Workers are assumed to begin saving at age 25 and retire at age 67. Example reflects median salary of $30,502 when worker starts saving at age 25. Example provided by CAP.