Study: Many People are Significantly Behind in Saving for Retirement

Impact of Trump’s Tax Plan on Your Family Income

 

Below is my analysis of how the Trump Administration’s tax proposal may impact American families. I have outlined the dollar amounts the Trump plan may save families in each of the four specified income categories below. Keep in mind that the Trump tax proposal is just that – a proposal, and not law. Furthermore, if tax reform is passed it will likely be a compromise of sorts between Trump’s plan and whatever comes from Congress.

 

Family Income = $75,000.00

Current Federal Taxes = $10,322.50

Trump Federal Taxes = $9,000.00

Savings = $1,322.50

 

Family Income = $125,000.00

Current Federal Taxes = $22,792.50

Trump Federal Taxes = $21,500.00

Savings = $1,292.50

 

Family Income = $200,000.00

Current Federal Taxes = $42,985.50

Trump Federal Taxes = $40,250.00

Savings = $2,735.50

 

Family Income = $350,000.00

Current Federal Taxes = $90,913.00

Trump Federal Taxes = $85,621.50

Savings = $5,291.50

 

**The tax calculations contained herein are estimates based on the tax rates of “Married-Joint Filers,” and do not include deductions or exemptions.

 

Disclosure: Lighthouse Capital, LLC does not provide tax advice. The illustrations contained herein are for illustrative purposes only, and should not be considered fact. For tax advice we recommend you contact a tax professional.

Amazon Furthers Quest for Retail Dominance

This week Amazon took over as owner of Whole Foods, which is arguably the most noteworthy merger of the summer. It was an intriguing move by Amazon, and one which may prove to be very savvy. Or it could be a bust and set them back many years in their quest to take over Wal-Mart as the largest retailer in the world. Aside from the widely reported grocery price cuts, I have detailed some additional observations and thoughts on the move:

  1. By acquiring Whole Foods, it provides Amazon with 466 retail stores across the U.S., Canada, and the U.K.. Amazon is known for being an e-commerce power, and for the first time they will now have an actual physical presence in communities they have already been serving. Accordingly, look for Amazon to use Whole Foods locations as more than just a grocery store (pick up/drop up location for e-commerce purchases, customer service center, marketing opportunities, etc.).
  2. Look for Amazon to transform the way the market orders and delivers groceries in the near-future. Amazon is now the only grocery store provider who also owns their own artificial intelligence device (Amazon Echo); therefore, it seems as though Amazon may have a distinct advantage over other grocery store providers in this regard. Additionally, one of the first moves Amazon made when taking over Whole Foods is they slashed the price of their Echo by 33% and put it on sale in all Whole Foods stores. Amazon’s aggressive push to get their AI device in the hands of as many Whole Foods shoppers as possible seems like a logical first step in transforming the process of acquiring groceries.
  3. The move has increased competition, as just this week Wal-Mart announced a partnership with Google. Google has their own version of the Echo, and Wal-Mart customers will soon be able to place orders through Google’s version. It is likely not a coincidence that Wal-Mart’s partnership with Google was announced on the same week that Amazon took over Whole Foods.
  4. Off-line retail is likely not dead, and this deal is proof of such. The deal seems to be more of an indication that a hybrid model is necessary to be a top retailer, and some think Amazon is uniquely positioned to outpace Wal-Mart in a hybrid retail world. Wharton marketing professor, David Bell, noted, “from my experience, companies that start in the digital world and slowly and surely add offline have been more successful than companies that started in the offline world and added digital.”
  5. It’s being reported that Amazon intends on utilizing its $99 per year Amazon Prime service as the rewards program for Whole Foods shoppers. At-least in the near term, this will likely provide a shot in the arm to increasing Amazon Prime membership.
  6. The impact this move will have on small retailers remains to be seen. Presumably, some smaller retailers will be phased out of the market in due-time, as they will have trouble remaining competitive with Amazon and Wal-Mart. However, some smaller retailers, especially current vendors of Whole Foods, may find Amazon’s 3rd party online marketplace as a boon to business.
  7. If Amazon and Wal-Mart both maintain the same revenue growth of the past five years, Amazon will surpass Wal-Mart’s revenue by 2023. This is a big if and by no means a sure thing, as the gap is still quite large. Wal-Mart produced $350 billion more in revenue than Amazon did in 2016, but Amazon is riding a wave of momentum in closing this gap.

 

 

Important Disclosure: The above information is not a recommendation or offer to invest in any particular investment and/or strategy. Investing involves risk which may result in a loss.

Five Simple Steps to Improve Your College Savings

  1. Organize a budget. Determine how much your family can contribute monthly to college savings. And make it a priority. As you line-item your monthly budget you will likely find expenses which you could eliminate or reduce, which are additional dollars that you can direct towards your college savings.
  2. Open a 529 college savings account. Saving through a 529 College Savings account is the best way to save for your child’s college, generally. These accounts provide tax benefits and investments like your 401k, which may provide substantial growth in your account. Also, relatives and friends can contribute to your child’s 529 account.
  3. Start Saving ASAP. The sooner you start saving for college, the better off you will be in the long-run. Whether your child was just born, or going to college in a few years, don’t put it off any longer. *For example, if you start saving $100 per month, you could potentially have $43,000 in your college savings account by the time they turn the age of 18.
  4. Familiarize yourself with the financial aid process, and scholarship opportunities. Don’t wait until the last second to get familiar with FASFA, or potential scholarship opportunities. You may be leaving free money on the table.
  5. Explore student loans. Student loans are almost always a part of a college students experience, and making sure you utilize student loans most efficiently may save you substantial money.

 

*Based on 18 years of saving $100 per month and receiving a 7% annual return on your investment.

GENDER PAY GAP ISSUE COMPOUNDED BY IRS REGULATIONS

This month, the authors of our Monthly Newsletter shed additional light on the gender pay gap issue and the impact it has on women saving for retirement. Citing statistics from the US Department of Labor, women are more likely to work part-time jobs than men, and part-time jobs are far less likely to offer a 401k plan. I find this troubling. Why do we have a system that makes it so difficult for a part-time worker to save for retirement, yet so accessible for a full-time worker? Is the part-time working mom’s retirement less important than the full-time worker’s?

This is one of the many reasons that the 401k system is ripe for significant reform and should be done with an aim towards making 401k plans more widely available to all workers. Right now, a significant portion of the IRS regulations are designed to encourage business owners to make contributions on behalf of employees. This is without question a noble goal, but the way the regulations are currently written has resulted in many unintended consequences. I have witnessed firsthand many small business owners walk away from offering a 401k plan altogether once they are informed on the cost and the complexity that accompanies having to follow all the IRS rules. This needs to change. Our system should encourage business owners to offer 401k plans, not burden them with costs and administrative tasks. Even SIMPLE IRA plans, which require less administrative work than 401k’s, are still costly as the employer is required to contribute to the employees account at either 2% or 3% of the employees salary. Unfortunately, many small businesses do not have bank accounts flush with cash to assume such risk. Considering that small businesses are such a significant part of the American economy, you would think there would be more urgency to address the fact that 67% of Americans are not contributing to 401k plans. Reforming the 401k regulations with an aim towards making 401k plans more widely accessible to all American workers would without question increase retirement savings, especially for the part-time working mother.

MANY ACTIVE MUTUAL FUNDS OUTPACING THE RETURNS OF INDEX MUTUAL FUNDS, ACCORDING TO RECENT DATA

Over the past several years there has been an on-going debate over whether investors benefit more from using index mutual funds or actively managed mutual funds. Most of the published news on this subject has supported the case for index funds. Heck, even Warren Buffet is on record supporting index funds, even though he uses an active investment approach at his investment/holding company, Berkshire Hathaway. But according to recent data, there appears to be a trend supporting the case for active funds, as they have significantly outpaced index funds during the time periods we analyzed.

In analyzing recent return data, we reviewed the performance of top actively managed mutual funds and also that of poorly performing funds, and compared them to the performance of the S&P 500 index. One of the stronger active funds, the Dodge & Cox Stock fund (ticker: DODGX), has significantly outpaced the S&P 500 index to the tune of +6.39% over the past year. While critics may suggest that the Dodge & Cox Stock fund is an outlier to have outperformed the index by such a large amount, the research suggests that Dodge & Cox is hardly alone. Even many of the poorly performing active mutual funds are also outpacing S&P 500 index funds. For example, the Fidelity Stock Select All Cap fund (ticker: FDSSX), is an active fund ranked only in the 69th percentile of fund performance within its large cap growth peer group, yet they are still beating the S&P 500 by over 3% on a year to date basis. In other words, 962 of the 1,395 funds in the “Large Cap Growth” category are outpacing the S&P 500 index by at least 3 percentage points, year to date. This is quite significant, and contrary to much of what has been published on this subject by various news outlets.

While these are brief time frames to assess which strategy may be better, there certainly appears to be a recent trend supporting actively managed mutual funds. Perhaps the flight of assets from active to index funds in recent years has motivated active managers to step up their game. Whatever the case may be, there still appears to be strong value in utilizing actively managed funds.

 

Disclosure: This is not a recommendation to buy and/or sell a particular investment strategy. The above information is for illustrative purposes to showcase the difference in recent performance of active and index/passive investment strategies. If you are considering a change to your investment strategy we recommend you contact an investment professional.

Five Simple Steps To Improve Your Retirement Savings

  1. Create a Budget. Being organized and sticking to a monthly budget is essential to maximizing your retirement savings. As you line-item your monthly budget you will likely find expenses which you could eliminate or reduce, which are additional dollars that you can direct towards your retirement plan.
  2. Maximize Your Employer Match. If your company provides an employer match, be sure that you are taking full advantage of it and not leaving free money on the table. For example, if you are currently contributing 5% of your salary to your 401k, but your company offers a match up to 6% of your salary, then you should consider increasing your contribution to 6%, as you would then be maximizing your employer match.
  3. Avoid Withdrawals. Some retirement plans allow you to take a loan, or withdraw your money from the plan, and this can be tempting. However, taking a loan or withdrawal is generally a bad idea as it may stunt the long-term growth of your account.
  4. Rebalance. Rebalancing your investments on an annual basis allows you to take advantage of market dislocations and is a best practice of many successful investors. Think buy low, sell high. And re-balancing is one way to accomplish this.
  5. Know Your Expenses. Many retirement savers think their retirement plan is free, but that is certainly not the case. Although low expenses do not guarantee a higher return, it is recommended that you familiarize yourself with the expenses of your retirement plan and be sure they are reasonable, as excessive fees can significantly impact your savings.

Many Fidelity 401k Plans may be in Violation of New DOL Fiduciary Rule

According to a report, Fidelity, the largest 401k provider in the country, will now act as a plan level investment fiduciary to certain 401k plans. However, many advisors feel as though Fidelity has an inherent conflict of interest in acting in this capacity which may expose plan sponsors to a violation of the new DOL Fiduciary rule. The new DOL regulation aims to reduce/eliminate conflicts of interest in providing investment advice to retirement investors.

Here is where the potential problem lies. Fidelity offers an “open architecture” 401k platform, which allows Fidelity funds and non-Fidelity funds to be utilized as plan investments. With Fidelity offering hundreds of their own proprietary mutual fund products, logic suggests it will be difficult for Fidelity to be unbiased when determining whether a Fidelity or non-Fidelity fund is in the plan’s best interest. Many advisors think this is a poor business practice for Fidelity to roll out, as it may confuse plan sponsors into thinking that they are exposed to less risk than they are, and potentially result in Fidelity not serving their clients best interest. At the very least, Fidelity may have just created an appearance of a conflict of interest, which could be problematic.

The fiduciary investment advice which Fidelity will provide will only occur at a “point in time” (at plan set-up) and they will NOT be providing on-going monitoring of plan investments, which will be a duty left to plan sponsors.

Strategy: Considering downsizing your home to boost your retirement income?

(Source) – It’s a seller’s market in much of the country. Real estate is a hot commodity, with properties in some areas being snatched up virtually as soon as they are listed. 

That’s good news for sellers who can command a higher price for their homes. At closing, they may find themselves with extra money in their pocket. But finance experts say not to be too hasty in spending that cash.

Like any windfall, there is no one right way to spend the proceeds of a house sale. “It boils down to your priorities for the intended money,” says Keith Bernhardt, vice president of retirement and college products for Fidelity. To maximize it, you need to consider a couple of factors, including the taxes you might have to pay….A bank account can be a poor place to keep money that isn’t going to be needed for a while. “It will lose value over time,” says Bernhardt. The minimal interest offered by savings accounts lags far behind the rate of inflation. 

Even if you have enough from a home sale to purchase a new house with cash, Steven Azoury, [a chartered financial counselor from Michigan,] suggests only paying what’s needed for the down payment. The interest rates for mortgages are still low enough that it might make more sense to finance a house sale and invest the rest. You can read this entire article by clicking here

Our take – Downsizing your home and using the profits to supplement your retirement income is a popular strategy among retirees. However, it is crucial that you plan it out accordingly and make the right investment with your profits. Don’t go it alone – we can help! Contact us at info@lighthousecapllc.com to connect with one of our financial advisors.

Another 401k Lawsuit Denied by Federal Court

(Source) – A federal judge has for the second time dismissed a lawsuit seeking class action status alleging that Chevron’s retirement plan overpaid Vanguard in recordkeeping fees.

The claim, brought last year by Schlichter, Bogard & Denton, asserted that the $19 billion plan violated the Employee Retirement Income Security Act in part by paying Vanguard asset-based recordkeeping fees rather than a consistent, per-account charge and by failing to put the contract out to bid.

Oakland, Calif., federal court Judge Phyllis Hamilton granted Chevron’s motion to dismiss in August for lack of evidence, but she left the door open to the plaintiffs’ amending the complaint. The plaintiffs did subsequently refile, and in a decision last week Hamilton dismissed the claims again — this time “with prejudice,” meaning they cannot be refiled. Click here for the full article. 

Our take – Not often do you hear the words excessive fees and Vanguard in the same story, but despite setting the industry standard for low cost investments, Vanguard is compensated quite handsomely to gain access to their 401k record keeping platform. However, and fortunately, charging a fee for a service is not against the law and the court acted accordingly.

Study: Many People are Significantly Behind in Saving for Retirement

(Source) – While many Americans know if they’re putting money aside for retirement, few can tell with confidence how much money they should accumulate to maintain their lifestyle after they stop working. Over 80% of Americans say they don’t know how much money they’ll need for retirement, according to the final report from a four-year-long study of 50,000 people aged 25 and older, and released recently by Merrill Lynch with aging consultants Age Wave. Retirement costs 2.5 times the cost of the average American home, it found.

The median amount of saving for households age 65 to 74 was $148,000, less than three times the median U.S. salary of $55,775, according to 2015 Government Accountability Office report, and far below the required amount that would ensure a comfortable lifestyle. People should have 10 times their current salary by the time they’re 67, according to Fidelity Investments. Click here for the full article. 

Our take: How much should you save for retirement? This is one of the most frequently asked questions that we receive, and the answer is entirely dependent on your particular situation. It all depends on your goals, determining what your needs will be in retirement, and your investment risk tolerance. Getting organized and assisting individuals map out their road to retirement is a frequent task that we engage in with our client’s. Contact us at info@lighthousecapllc.com to help plan your retirement.

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