Episode 106: How to Become a Millionaire with Ariel Ward

Episode 106: How to Become a Millionaire with Ariel Ward

Financial Planning
Financial Planning
Episode 106: How to Become a Millionaire with Ariel Ward
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This week I sat down again with Ariel Ward, CFP® to talk about how to become a millionaire and some of the small steps you can be taking now to help you down the road.

Ariel Ward, CFP® joined Workable Wealth in 2018 as a Financial Planner and in March of this year, made the move to Abacus Wealth Partners with me as a Financial Planner. She and I work closely together on our clients. She has 11 years of experience in the field of personal financial services and in helping clients develop financial clarity. She is passionate about helping professionals understand their financial lives and make better decisions with their money. Ariel is married to a pilot and spends as much time as possible exploring the US with her husband and 2 children. She enjoys working with clients in the aviation industry to make the most of their employee benefits and map out a plan for personal financial strength. She is a member of NAPFA, the XY Planning Network and the Financial Planners Association.

Ariel works virtually out of Charlotte, NC. She enjoys North Carolina’s mountains, beaches and everything in between. In her free time you can catch her walking to one of Charlotte’s excellent breweries, playing Scrabble or building Lego houses with her kids.

HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:

  • The first thing to do to start growing your net worth
  • The question I like to ask all of my clients to help judge progress
  • How being debt conscious can be an important step toward millionaire status
  • How student loans play into your plan of millionaire status
  • How critical employer-sponsored retirement savings accounts can be
  • Leveraging a Roth IRA or a backdoor Roth IRA
  • If you’re paired up, is maxing out two 401(k)s enough for retirement
  • A few items millionaires have leveraged to get to that status
  • Other areas to focus on beyond investments when working to become a millionaire
  • One of your most valuable assets to help you increase your net worth
  • How lifestyle inflation can delay your ability to become a millionaire
  • What a $5,000 raise could do to your net worth over 20 years
  • A fear small business owners have that could be hurting their millionaire status
  • Where a budget plays into your millionaire goal
  • The difference between saving a percentage of income vs. a specific dollar amount

LINKS WE MENTIONED ON THE SHOW

GET SOCIAL WITH ARIEL AND LET HER KNOW YOU HEARD ABOUT HER HERE

ENJOY THE SHOW?

10 Things to Know About Your 401(k)

10 Things to Know About Your 401(k)

If you’re a member of the modern workforce, you likely have access to a 401(k). A 401(k) is a retirement savings vehicle sponsored by your employer. Through your 401(k), you’re able to contribute funds and invest them according to your risk tolerance and retirement timeline. The goal is to grow a sizable retirement nest egg for yourself over the course of your career by leveraging compound interest as you continue to contribute to your 401(k).

As a financial planner, one thing I’m always surprised by is how many people have access to a 401(k), but don’t necessarily know what to expect from their plan (or how to use it). In fact, many people contribute on auto-pilot without updating their investing preferences, if they contribute at all. 

It’s time to change that. Let’s go over ten unique things about your 401(k) that you may not have known before – and how they benefit you and your retirement savings. 

#1: Your 401(k) is Directly Connected to Your Employer

The contributions you make to your 401(k) are 100% yours, but the account itself is technically sponsored by your employer. To contribute to a traditional 401(k), you’ll need to find out if your employer offers a plan, and set one up through them. Your 401(k) is funded by contributions deducted from your paycheck, which can be a great way to automate your retirement savings. 

#2: You’ll Want to “Roll Over” your 401(k) If You Change Jobs 

Because your 401(k) is connected to your employer, you’ll want to roll your 401(k) over when you change jobs. Usually, you have a few options for how you want to use your old 401(k) when making this transition:

  1. You can leave your 401(k) alone, stop contributing, and let the funds continue to grow tax-deferred. 
  2. You can “roll” your 401(k) to your new employer’s 401(k) plan and continue to contribute there.
  3. You can “roll” your 401(k) to a Traditional or Roth IRA. If you choose to roll it to a Roth IRA, you will have to pay income tax on the funds that you roll over. This will give you greater flexibility around your investment options.

#3: There are Contribution Limits

In 2020, you can contribute up to $19,500 to your 401(k). If you’re 50 or older, you can increase that to an annual total of $26,000 by leveraging the “catch up” contribution limit. Usually, you contribute to your workplace 401(k) by allocating a percentage of your paycheck. 

If you want to max out contributions this year, make sure you have your percentage contribution dialed in so that you don’t go over the limit. If you do, you’ll be subject to a 6% excise tax. 

#4: Anyone Can Participate

There is no income minimum for opening and contributing to a 401(k) through your employer. Some employers even offer their 401(k) to part-time employees. In other words, it doesn’t matter if you’re a brand new employee or if you’ve been there for 10+ years – you’ll be able to leverage your 401(k) to save for retirement no matter what! 

There’s also no income maximum for contributing to a traditional 401(k). Unlike similar Roth accounts, your income has no bearing on how much you’re allowed to contribute according to the IRS.

#5: You Have to Start Withdrawals at Age 72

Although the funds in your 401(k) are yours to use as you please once you hit retirement, you can’t just let them sit in your account forever. There are specific withdrawal requirements you have to meet as you age.

According to the new SECURE Act, retirees must start taking Required Minimum Distributions (RMDs) from their 401(k) by age 72, which is up from the original age limit of 70½. This new withdrawal requirement gives retirees more flexibility when creating a retirement income strategy. It’s especially useful as more and more pre-retirees are choosing to work well into their 60s or 70s (and want to continue contributing to their 401(k)s, not withdrawing from them).

#6: You Can’t Withdraw (Without Penalties) Until Age 59½ 

Just like there are specific rules about when you have to start withdrawing from your 401(k), there are also specific rules around what age you’re allowed to start taking withdrawals. If you take a withdrawal from your 401(k) before age 59½, you’re subject to regular income tax on the funds you withdraw and a 10% penalty – ouch. 

Of course, there are a few exceptions to this rule. If your 401(k) is set up through the employer you’re retiring from, you may be able to start taking withdrawals at age 55. There are also rules in place that allow you to leverage your 401(k) for disability and specific medical expenses. These special circumstances are referred to as “hardship withdrawals” and they help you sidestep the 10% early withdrawal penalty if you use them for:

  1. Medical expenses exceeding 7.5% of your annual gross income.
  2. Permanent disability.
  3. Substantial equal periodic payments.
  4. Separation of service. 

 

Some plans also allow you to take out a loan against your 401(k). You pay the loan back through additional payroll deductions. However, as appealing as this may sound, you need to think carefully before pursuing a 401(k) loan. If you’re unable to pay the loan back before you change jobs, or before age 59½, you’ll likely owe income taxes and the 10% early withdrawal penalty on the funds. 

Additionally, 401(k) loans essentially “rob” your retirement to help you achieve a short-term financial goal. The money you take out of your 401(k) now loses any potential capital gains or growth that could be achieved through investing. 

#7: You Can Contribute to a Roth or a Traditional 401(k)

There are two different types of 401(k)s – Traditional and Roth. Usually, employees choose to contribute to a traditional 401(k) through their employer. However, many employers offer a Roth 401(k), as well. This type of account is funded with contributions that have already been taxed. 

As a result, the funds grow tax-free until you retire, at which time you can take withdrawals without paying income taxes. It’s often wise to diversify the type of taxable (or non-taxable) accounts you have to pull a retirement income from, so if a Roth 401(k) is available through your employer, you may want to start contributing there, as well. 

#8: There Are Fees Associated With Your 401(k)

As is the case with many investment accounts, your 401(k) will be subject to a set of fees for maintaining the account. Your 401(k) fees will cover the setup of your account and ongoing management. Fund fees, on the other hand, are fees directly related to the investments within your account. 

The company that holds your plan charges these to run your account on an ongoing basis. It’s important to familiarize yourself with the fees you’ll be paying because they can add up depending on the investments in your portfolio! 

#9: Your Employer May Have a Matching Policy

Many employers have a standard contribution matching policy for their employees who fund a company 401(k). This type of incentive helps you to grow your retirement nest egg on your employer’s dime! Contribution matching may range anywhere from 3-6% of your salary. 

If you aren’t currently contributing up to your employer’s match, you should adjust accordingly to take advantage of this perk. If you don’t, you’re essentially leaving free money on the table – which is never a wise financial move. 

#10: You Get to Select Your Own Investments

In most 401(k) plans, you have the flexibility to select your investments. Some plans have more availability than others, but you should be able to (at a minimum) select a risk tolerance level based on your retirement horizon and set your plan up accordingly. When you are a long way from retirement, your risk tolerance will be higher than when you are a few years out. 

That’s because the more time you have before retirement, the more time you have to recover from any dips in your portfolio that happen as a result of higher-risk funds. However, you also have more time to take advantage of potentially higher returns from those same higher-risk investments. As you get closer to retirement, you want to minimize your risk to maintain and protect your nest egg. 

Have Questions?

Have questions about your 401(k)? Contact us today! We’re here to help you organize a retirement savings strategy that matches your unique goals.

What’s a SEP IRA and How Does it Work?

What’s a SEP IRA and How Does it Work?

Retirement planning for the self-employed can seem complicated and, often out of reach. Without a traditional workplace 401(k), many business owners and freelancers aren’t sure how to start putting money toward retiring someday. There are, of course, individual options available, specifically Roth and Traditional IRAs. However, their contribution limits may limit your ability to save effectively – especially if your goal is to save 10% or more of your total annual income. 

Enter: the SEP IRA. This specific type of IRA (Individual Retirement Account) opens up your options significantly when it comes to building your retirement nest egg. This retirement savings vehicle is perfect for small business owners or freelancers who are looking for a tax-efficient way to start saving. 

What’s a SEP IRA?

A Simplified Employee Pension Individual Retirement Account (SEP IRA) acts similarly to how a traditional IRA would work. However, there are a few key changes that make it extra-appealing for small business owners. First and foremost, the business owner makes all contributions to a SEP IRA. That’s right, the funds come directly from the business – not out of your paycheck. 

The other big change to keep in mind is that the contribution limits are notably higher than other IRAs. For example, both a Traditional and a Roth IRA have a contribution limit of $6,000 in 2020, or $7,000 if you’re over 50. A SEP IRA, on the other hand, allows contributions up to 25% of your earnings, or $57,000 – whichever is lower. 

This is impressive, as it even outshines the contribution limits of traditional workplace 401(k)s – $19,500 in 2020 if you’re under 50. For a small business owner who may be behind when it comes to building their retirement savings, this option is often an excellent fit. 

How to Calculate How Much You Can Contribute

To know how much you can contribute to your SEP IRA, you have to start by calculating your earnings. If you have a Schedule C for tax filing purposes, start here. In general, you can contribute up to 25% of your net-earnings (per your Schedule C income report) minus any deductions. This may sound complicated, but the IRS conveniently outlines how to calculate your retirement contributions and deductions here. However, if you earn over $285,000 per year, your contributions are capped at $57,000. 

It’s also important to note that contributions do not have to be a consistent earnings percentage year over year. Theoretically, you could contribute 10% one year, and reduce it to 5% another year. 

If you’re a solo business owner, this flexibility is very important. When your income fluctuates, being able to pivot and save more (or less) toward retirement can give you more breathing room to pay your bills and save for other short-term financial goals.

Who Qualifies to Use a SEP IRA?

All businesses qualify to open a SEP IRA. It doesn’t matter if you’re a sole proprietor or a multi-million dollar corporation. However, it’s important to remember that almost all employees are eligible to enroll. In order to participate, they must:

  • Be 21 years or older
  • Earn over $600 per year
  • Have worked for the company for three out of the past five years

The rule is that the employer has to contribute the same amount for every employee who qualifies. So, if you want to contribute up to the full 25% limit to your account, you’d be on the hook for contributing up to 25% of everyone’s salary toward their respective SEP IRAs – yikes.  This rule may mean that the SEP IRA isn’t the best fit for you and your business at this time. 

Taxes

All contributions made to a SEP IRA are pre-tax. In other words, you deduct the contributions now, and pay income tax on them when you withdraw in retirement. If you’re considering a SEP IRA, it’s in your best interest to reach out to a tax professional to help you maximize your deductions.

Are My Contributions Vested?

All contributions made by the business are immediately vested and available to employees.

How Do I Withdraw Funds?

You can’t withdraw funds from your SEP IRA until you’re age 59 ½ or older. If you do withdraw funds early, you’re subject to a 10% penalty and ordinary income tax on the funds. Let’s look at an example:

You have $10,000 in your SEP IRA. Of the $10,000 balance, only $2,000 is taxable. You’d pay ordinary income taxes on the taxable $2,000 and a 10% penalty for the full $10,000. 

Depending on how much you have saved in your SEP IRA, this could result in a hefty tax bill. Of course, there are a few withdrawal exceptions that help you sidestep the withdrawal penalty. These include:

1. Death or disability.
2. A payment plan of “substantially equal payments” over your lifetime.
3. Medical expenses that are non-reimbursed, and total over 7.5% of your annual income.
4. Medical insurance (under special circumstances only).
5. Qualified higher-education expenses.
6. Home purchase or renovation up to $10,000. 

However, if you are nearing retirement, you should know that while you qualify to take withdrawals from your SEP IRA at age 59 ½, you aren’t required to take them until age 72. This can help you extend the life of your savings, especially if you plan to continue working (and contributing) beyond age 59 ½. 

Rolling Over Your SEP IRA

If for some reason you join a company or stop earning self-employed income, you can roll your existing SEP IRA over to a Traditional IRA tax-free. 

Can You Contribute to Other Retirement Accounts and Your SEP IRA?

In a word – yes! Whether you have access to a Traditional or Roth IRA, or a workplace retirement account like a 401(k), you can continue to contribute to your other retirement savings accounts. However, if you’re planning to contribute to both a personal IRA and your SEP IRA, you may be limited when it comes to how much of your contributions you can deduct.

Having access to a SEP IRA means that, technically, you’re covered by an employer-sponsored retirement plan. This reduces the total income limit that allows you to deduct Traditional IRA contributions to $65,000 (single) or $104,000 (married filing jointly). 

When Would a SEP IRA Be a Good Fit For You?

If you’re a solopreneur or a small business owner with no other W2 employees, a SEP IRA is something you should absolutely explore. When you only have yourself to worry about, taking the deduction and funneling a large percentage of your earnings toward retirement is often a good financial move. 

This is especially true if you’ve spent a number of years as a freelancer or solopreneur without contributing toward retirement. Self-employed women, in particular, need to be thinking ahead when it comes to funding their retirement. Studies have shown that self-employed women face a 28% wage gap when compared to their male peers

Having a potentially lower income from the onset of your self-employment journey can negatively impact your ability to save effectively for retirement. This is true both because there’s less total income to contribute toward your retirement savings goals and because there’s often a lack of willingness to part with income because of other, seemingly more pressing, financial obligations.  

Combine that with the fact that only 6 out of every 10 self-employed individuals have retirement savings, and female entrepreneurs are at a notable disadvantage when it comes to building a nest egg for retirement. This makes the concept of a SEP IRA even more attractive to female entrepreneurs who are needing to play a bit of “catch up” with their retirement savings.

Setting Up Your SEP IRA

A SEP IRA is relatively easy to set up. You start by creating a SEP plan with a written agreement. The government even has an agreement template for you to get started

If you’re the only qualifying employee at your company, you can move forward with setting up your very own SEP IRA through a financial institution of your choice. If you have employees, you’ll need to distribute a copy of the SEP plan agreement you’ve written, and make sure they each open their own SEP IRA, and choose their own investments.  

Need help? Reach out to our team! Our team specializes in working with breadwinning women and entrepreneurs and would love to help you start making empowered decisions about your retirement savings.

What’s Your “Enough” Number?

What’s Your “Enough” Number?

Do you remember the ING commercials that asked consumers: What’s your number?

The idea was that everyone has a “number” that defines how much they need to retire. While it’s absolutely true that you need to set clear retirement savings goals for yourself, it’s also true that you have a “number” right now as a working professional. 

That’s right, in this stage of your life, you have an “enough” number. That number defines the total income you need in order to meet your basic needs, reach your goals, and enjoy life. 

It’s key to define what your “enough” number is, and how that goal aligns with your personal and professional priorities. When you have financial goals that are actually tied into your lifestyle goals, you’ll be able to start working with your “why” in mind. 

Defining “Enough”

Too often, people fall into the trap of setting arbitrary salary goals for themselves. While it may sound amazing to have a $100,000 salary or to run a million-dollar business, you have to ask yourself whether those numbers will actually move you toward the life you want to build. 

Sometimes, the arbitrary financial goals you set for yourself are coming from a place of vanity. For example, a seven-figure business may sound better to you than a business that grosses $300,000-400,000 each year, but do you actually need that much revenue to support yourself and your team? 

If you’re a W2 employee, it may feel better to have a $100,000 salary, but will that income be enough to move you toward your goals? You may find your “enough” number is actually more or less depending on your unique vision for your life.

In order to calculate your “enough” number, start by reflecting on your goals and priorities both during this season of life and in your future. Prior to setting these priorities, it can be helpful to do a values check-in. Jot down the 4-6 core values you live your life by. Not sure where to start? Take five minutes to run through a free program like Life Values Inventory to determine what you value most. You can also look at a longer list of values (like this one) and pick the ones that stand out to you. 

You may find that you value:

With those values in mind, you can start to clarify your priorities and set clear financial goals that support them. Looking at the values list above, you may find that your priorities are:

  • Having a job that allows you to spend more time with your family.
  • Having flexibility to travel once a year minimum both now and in the future.
  • Earning enough income to successfully send your kids to college debt-free, and to go back to school yourself to earn your Masters.
  • Being able to donate to charity, or support family members in need, as part of your annual financial plan.

Once you prioritize your goals, you know what “enough” looks like, and you can work backward to determine your “enough” number. 

Determining Your “Enough” Number

Wondering how to create a clear income goal based on your priorities? Start by adding dollar values to the priorities you’ve already set. Carrying on our example, you might say:

  • Having the flexibility to travel at least once a year both now and in the future. $6,000/year for a big trip for your whole family now through retirement.
  • Earning enough income to successfully send your kids to college debt-free, and to go back to school yourself to earn your Masters. $60,000 for each of your kids in the next 5-15 years (depending on when they graduate high school), and $40,000 for you to earn your masters in the next 5 years.
  • Being able to donate to charity, or support family members in need, as part of your annual financial plan. $5,000 per year dedicated to charitable donations. 

There are, of course, other ways to achieve these financial goals beyond just setting a salary you want to achieve. For example, your employer may be able to cover the cost of your continuing education or offer a charitable matching program that could increase the impact of your giving. Given these possible options, determine how much your goals will truly cost on an annual basis. Then, add those figures to your other financial goals (like retirement savings or debt repayment), and current living expenses. Your equation should look like this:

(Annual Priorities Costs) + (Annual Living Expenses) + (Annual Emergency/Retirement Savings + Debt Obligations) = Your “Enough” Number

Sometimes, this number may be more than you expected. Other times, you might find that your current salary is actually more than enough. Let’s look at an example:

Annual priorities: $20,000/year

Annual living expenses (including taxes): $70,000/year

Annual emergency/retirement/debt obligations: $30,000

Your “enough” number would be:

$20,000 + $70,000 + $30,000 = $120,000

If your salary or income is currently $120,000, you’re on the mark! If you’re lower, you’ll want to aim to increase your earning potential. 

How Does Your “Enough” Impact Retirement Savings?

Are some of your priorities going to impact the amount you spend in retirement? If you want to travel the world during retirement or continue to donate to charity as a retiree, you may need to add these expenses to your savings goals. Remember to add them to your total retirement cash flow needs, and plan accordingly. You may find that you need to save an extra amount each month, or set a lump-sum of money aside to achieve your goals as a retiree. 

Having trouble figuring out what your ideal retirement savings is? A good rule of thumb is to estimate that you’ll spend 80% of your current salary during retirement. Ideally, you’ll have paid off your mortgage and other debt to free up additional cash flow. You can also use a retirement savings calculator to estimate the total retirement savings that will fit your needs and life expectancy. Calculators like these will also help you determine how much you need to save each month to meet that goal.

If you find that your priorities don’t fit within an achievable retirement savings goal, consider an option to continue working during retirement in an encore career. You could also make work “optional” and only continue to work in your field, or as a freelancer if you decided those expenses were still a priority for you. In this situation, your current retirement savings would fund basic living expenses, and any additional income earned would be the “extra” that moved you toward your values-based goals. 

What If “Enough” Doesn’t Feel Achievable?

Does your “enough” number feel like an unachievable goal? It’s time to assess what roadblocks are holding you back from your dream life. A few questions to ask are:

  • Does my current employer offer the necessary opportunities for me to earn my dream salary?
  • (If you’re an entrepreneur) What would need to change in my business for me to reach those goals?
  • Do I need additional education or training to level up in my career?
  • Would I be able to bring in more cash flow through passive income, or a side hustle?

You may need to focus on leveling up your own experience or training in order to increase your earning potential or look for a position at another company. Alternatively, if you love your job but won’t be able to make your dream salary there, look at other ways of adding income to your household. A side hustle, or freelance and consulting work, might be a great fit. 

Making a Plan

Once you know what your “enough” number is, you’re able to create a plan with confidence for how you can achieve that income. If you’re uncertain about how to reach that goal, reach out to a financial planner. Together with your advisor, you’ll be able to discuss your current priorities, how they translate into financial goals, and what you need to do financially to move the needle.

Have questions? Contact us today! We’d love to help you talk about your “enough” number, and how you can start leveraging your wealth in a way that aligns with your values.

Episode 101: What Should Your Net Worth Be?

Episode 101: What Should Your Net Worth Be?

Financial Planning
Financial Planning
Episode 101: What Should Your Net Worth Be?
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What Should Your Net Worth Be?

One of the fun parts of being a financial planner is getting to discuss some of the money moves we’ve made in our household knowing clients and readers are going through similar things. In these Work Your Wealth episodes I’ll be taking time to address how we approached the different money situations and the results of our decisions. Today I’m talking about how to track your net worth and some tools and tips to move the needle in the right direction.

HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:

  • One of the most common questions I get about finances
  • The best way to do a health check of your finances
  • How often you should be checking on your net worth and what it can tell you over the years
  • The place to start when calculating your worth
  • Assets and liabilities that you should factor in to your calculation
  • Why you shouldn’t compare your worth with other friends, family, etc.
  • The average net worth for Americans in their mid 30s
  • A big reason the average net worth for a 35 year old is where it is
  • Another way to evaluate your financial health (especially if you are in your 30s)
  • The amount of savings you should have when you reach age 30
  • Where you should be financially at age 40
  • A quick equation to analyze your ideal net worth
  • Understanding how much you need set aside for retirement
  • Things that negatively impact your net worth and how to improve on it
  • If you haven’t started investing, here’s where to start
  • A few resources to help you get started towards savings
  • A few budget savings allocations that can help improve your net worth
  • Two methods to paying off your debt
  • How we keep track of savings goals in our household
  • If you want to go big on growing your finances, here are a few tips

LINKS WE MENTIONED ON THE SHOW

LET’S CONNECT!

ENJOY THE SHOW?