Looking for a Simple Way to Reward Employees?

Getting from point A to point B should be simple
Putting a retirement plan into place for your employees should be Simple. [image credit: eglobalis.com]
Ever wonder how some of your peers offer expensive benefits packages to their employees and manage to stay afloat? Have you thought about putting a retirement plan into place to reward your employees, but gotten stuck navigating complicated filing requirements and trying to make sense of confusing language like ERISA, Third Party Administrator, and Form 5500?

The IRS recognizes that it can be both costly and time consuming to set up a 401(k) plan if you’re a small business. Complicated rules such as avoiding being “top-heavy,” choosing between profit-sharing options versus matching options, and high startup costs can be seemingly insurmountable hurdles to putting a retirement plan into place.

For those businesses looking to avoid the complicated, the IRS has a solution – the (appropriately named) Simple IRA. Simple stands for Savings Incentive Match Plan for Employees. It is intended to be an easy, cost-effective way for employers with fewer than 100 employees to reward them and provide access to a retirement plan for their future security.

Unlike the traditional 401(k), a Simple IRA has no annual filing requirements. This might not sound like a big deal, until you see what the form 5500 looks like. Not a lot of fun to have to think about every year. And potentially even less fun to pay someone (a third party administrator) to do.

In addition, most Simple IRAs can be set up with no start up fees to the employer. It’s not uncommon for a mutual fund company to to charge a flat fee in addition to what the third party administrator charges for its services for a 401(k). If an employer intended to offer a match, that’s two gatekeepers she has to pay just to offer her employees free money. Not so with a Simple IRA.

Drawbacks

For all their simplicity, there are some trade-offs employers should consider carefully before establishing a Simple IRA.

When establishing Simple IRA plans, employers have the choice to either offer every employee 2% of his pay, or a 3% match if he puts in 3%. For example, if Joe employee makes $50,000 per year, the employer has the option to a) put in $1,000 (2% of Joe’s pay) on top of Joe’s salary, or b) match up to $1500 if Joe puts in $1500 of his own money. Either way, the employer is on the hook to make contributions, and can only reduce the match twice in a 5 year period.

Additionally,  all employees are always 100% vested. That means that the match the employer makes is the employee’s to keep forever, even if they leave the next day. This is quite a contrast to vesting schedules in 401(k) plans, which are designed to give employees incentive to stay – or risk losing some of their 401(k) matching. The even bigger pitfall here is if an employee leaves mid-year and the employer is offering a flat 2% non-elective contribution, because the employer is required to make good on that contribution.

While higher than IRAs, Simple IRA contribution limits are lower than those of 401(k) plans – $13,000 for 2019, compared to $19,000 for 401(k) plans. If there are quite a few employees over the age 50, then you’ll want to consider whether the lower catch-up contribution limit would be detrimental to those getting started saving late.

It’s important to weigh the costs and benefits to any type of retirement plan you’re considering – Simple IRA, 401(k) or otherwise.

The Bottom Line

We’ve only scratched the surface of the ins and outs and of Simple IRAs, their pros and cons, and how they compare to 401(k) plans. If you’re an employer, it’s important to weigh your options carefully before implementing a retirement plan. Not sure where to get started? Check out “Help with choosing a retirement plan” on the IRS’s website, or contact us today to get answers so you can decide what type of plan is best for you.

Time Can Be Your Enemy or Your Friend

Like in a sand timer, a few small things add up to something big if enough time has passed. This is a great metaphor for compounding interest.
Image source: www.videoblocks.com

In the 1973 classic Time, Pink Floyd member David Gilmour eloquently states how time can slip away, working against us if we aren’t careful:

You are young and life is long and there is time to kill today

And then one day you find ten years have got behind you

No one told you when to run, you missed the starting gun

These lyrics sum up an interesting point about life and how we move through it. As humans, we tend to focus on the immediate, and find thinking too far ahead difficult. The consequences of this are that by the time we get into a “distant” future, we take look around and have no idea how we got there. My hope is that after reading this article, you may feel empowered to not end up ten years older, trying to get your bearings and feeling broke, but rather happy that you took the time to be a diligent saver.

Three Lives, Three Different Choices

Let’s imagine three friends – Chris, Susan and Bill – graduate from college. They each enter into their respective career fields, fully employed. Their incomes are the same. Their decisions are drastically different.

Out of the three of them, two (Chris and Susan) begin saving right away.

Susan saves money for ten years, and then stops – perhaps she gets married, has kids, and her spouse is the sole bread winner.

Chris saves the same amount, but instead of stopping ten years from now, he continues to save all the way to age 65.

Bill doesn’t worry about saving. He decides that he needs to focus on paying down student loan debt. He uses this as an excuse not to keep a budget. Because he doesn’t budget, he unwittingly spends lots of money on drinks, shopping, and new furniture.

All three of them:

– Save $5,000 annually

– Earn the same rate of return

– Retire at age 65

Who comes out ahead?

The Results

Susan saves $50,000 over her lifetime. Bill saves $150,000 over his lifetime – and he didn’t begin until 10 years after Susan – when he realized that he needed to spend less money on partying. What does this mean for their retirement? Astonishingly, Susan will have over $60,000 more than Bill, who saved three times as much.

Now consider Chris, who started saving right away, and didn’t stop until he retired. By saving $50,000 more than his college friend over the course of his career, he ended up with over $1 million – nearly double both of his classmates.

Of course, this is all just a thought experiment – in real life, each of the three would like have different incomes, different amounts of debt, and different life circumstances. Nevertheless – the choices they made rippled through the years until washing ashore in retirement.

Compounding interest rewards those who begin saving and investing early, as illustrated in this chart from JP Morgan.
Image source: www.jpmorgan.com

The Bottom Line

Time moves quickly, and it’s easy to let it move you forward without being aware of what you’re leaving behind. If you aren’t saving, start now. If you’ve been considering putting away a little more, start now. Review your savings strategy on a regular basis – the difference could be hundreds of thousands at retirement, when you need it most.

What do you think? How have you overcome financial challenges to continue saving? Comment below!

Why Every Young Professional Should Consider a Roth IRA

Roth IRA egg and nest
Image source: Jillonmoney.com

Compounding growth is an amazing thing. Using that that growth tax free? Even more amazing.

If you had contributed to a Roth IRA between December 31st, 2007 and December 31st, 2017, at a rate of $100 per month, you would $19,097* that you could use 100% tax free in retirement. Of course, there’s a catch. First, you must be 59 1/2 or older. Second, you  must have opened your first Roth IRA (not Roth 401k!) more than 5 years ago.

Okay, Scot – the title of this article references young professionals! Why are you talking to me about Roth IRAs if the benefits don’t come until retirement? Here’s why. You can access your contributions penalty and tax free, regardless of age or waiting period. Basically, you can double up on having an emergency fund and retirement savings in one go. That’s the short-term reason.

The long-term reason is this: imagine having two jobs – one which paid you taxable income, and the other which paid you tax free income. How much extra you might you take home by having a tax free income source? Less taxable income means less taxes for two reasons: one, tax-free income isn’t taxed. Two, taxable income is taxed at a much lower rate.

Not convinced? Here are some more reasons to consider a Roth IRA as a young professional:

  • You could eventually be phased out. It might some crazy now, but there may come a day where you have to worry about making too much money. At $120,000 of income, single earners start to be phased out ($189,000 for married earners filing jointly.) This means that the amount you are allowed to contribute to a Roth gradually decreases. You are fully ineligible at $135,000 and $199,000, respectively.
  • A Roth 401k is not enough. If you leave your job and roll your Roth 401(k) to a new Roth IRA, you have to wait 5 years – no matter how long your Roth 401k has been there. Those taking advantage of Roth options through group 401ks would be advised to open a Roth IRA today, even if it’s only funded with a few hundred dollars.
  • It’s a great way to leave a legacy. If you die, you can leave your Roth IRA as a tax free legacy to your spouse, your kids, and even their kids. In theory, it could last generations.
  • Tax laws can change. Will Roths be around forever? It’s hard to say. There’s no better time than today to get started.

Lastly, remember that Roths are just the brand of clothes, and the cash inside is the person. People come in a shapes in sizes, and so do investments – they can be cash, CDs, stocks, mutual funds, and more. You can start up a Roth IRA with very little investment risk. See the infographic below for more information on investing inside of a Roth IRA.

Roth IRA infographic
Source: bankrate.com

The Bottom Line

If you haven’t opened up a Roth IRA, now is a great time to start. Talk to your investment professional about opening an account.

About the Author

Scot Whiskeyman is Founder and Partner of Providers & Families Wealth Management, LLC., and is a CERTIFIED FINANCIAL PLANNERTM . His primary focus is on retirement planning for established professionals and estate planning for seniors. He can be reached by e-mail at scot@providersandfamilies.com.

*Assumes that your return is compounded annually and your contributions are made at the beginning of each year. The actual rate of return is largely dependent on the types of investments you select. The Standard & Poor’s 500® (S&P 500®) for the 10 years ending December 31st 2017, had an annual compounded rate of return of 8.3%, including reinvestment of dividends.  It is important to remember that these scenarios are hypothetical and that future rates of return can’t be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that investment funds and/or investment companies may charge.

The contribution limits for Roth IRAs referenced in this article are for tax year 2018. For current Roth IRA contribution limits, see IRS publication 590-A, section 2 on Roth IRAs or visit www.IRS.gov.

 

Investing and Speculating are Two Different Things

Chomping at the bit to learn more about Bitcoin? Growing curious about Marijuana stocks?

You won’t find a lot of buzz about index funds (boring) or modern portfolio theory (modern what?) on the front page of the Wall Street Journal, or on CNBC’s flagship morning show “Squawk Box.” You will, on the other hand, read headlines about quarterly earnings results for Tesla, or investment moves made by major hedge fund managers.

If you’re like many Americans out there following financial headlines, investing can feel like walking into a casino filled with table games you’ve never played before. And if you have a 401(k) or other investment account, you might already be playing without knowing if you understand the rules.

Should you be paying attention – or better yet, taking action based on what others are doing or talking about? To answer that, let’s look at the advice of one of the most successful investors of all time. In his book “The Intelligent Investor,” famed value investor and mentor to Warren Buffett Benjamin Graham draws a clear distinction between the behavior of a speculator versus an investor.

“The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations.” – Benjamin Graham, The Intelligent Investor

Speculating is a game of chance. Who is it that can flawlessly anticipate market fluctuations? While theoretically very profitable, attempting to do so is a fool’s errand, and one that is commonly made by investors. It’s part of the reason that the average investor under performs the market by more than 4.5%.

Investing, on the other hand, is a behavior of principles, and avoid reckless, knee-jerk reactions to news headlines. Investors don’t fall into the trap of herd mentality – they simply look for opportunities to own profitable companies at fair prices. Investors are also patient – they look to own companies that they’re comfortable owning for 10, 20, or even 30 years. Just ask Warren Buffett on his philosophy on buying stocks:

“I buy on the assumption that they could close the market the next day and not reopen it for five years.” – Warren Buffett

The Bottom Line

If you want to be a successful investor, you don’t have to gamble. Don’t try to time the market, don’t panic during crashes, and don’t chase hot investments (like Bitcoin or Marijuana Stocks.) Instead, find companies that you’re comfortable owning for a long period of time, especially ones that are established and profitable.

Not sure where to start? No time or energy to the research? An investment professional can help you get on the right track!

Get smart about investing: send us an e-mail and ask about a free one-on-one review of your investment portfolio!

About the Author

Scot Whiskeyman is Founder and Partner of Providers & Families Wealth Management, LLC., and is a CERTIFIED FINANCIAL PLANNERTM . His primary focus is on retirement planning for established professionals and estate planning for seniors. He can be reached by e-mail at scot@providersandfamilies.com.