Welcome to Make your Money Matter, the show that aims to change the way we think about financial advice. So, you can make better decisions.
Brad Barrett is a managing director and partner at One Capital Management, a wealth management firm serving nearly 1500 clients nationwide. With over $2.5 billion in assets, they’re a group of advisors dedicated to ensuring their clients achieve their investment and retirement goals. And now here's your host Brad Barrett. [00:26.1]
Brad: Welcome to Make your Money Matter, the show dedicated to helping you create a better relationship with your money. I'm your host, Brad Barrett, and it's my goal to help you distill the best ideas when it comes to your finances so you can make more confident money moves. Here at One Capital Management, our mission is simple to help our clients and you listeners take control of your finances and build the life you deserve. Friends, today the challenge is no longer the access to information, but rather it's finding the right information, and more importantly, how that information applies to you. And that's my commitment to you here today on the Make your Money Matter podcast, because after all your money matters and knowing how to plan your financial future is vital to your financial success.
Before we get started on this week's episode, if want to find out more about myself or any one of our advisors here at One Capital Management, you can go to our website at onecapitalmanagement.com or give us a call. You can call us at (805) 410-5454 or text us. Text the word TRACK right now. T R A C K to that same number (805) 410-5454 and we’ll reach to you to set that time to go through what we call our retirement track review. It’s complimentary, it’s for you. For each of you listening right now, who haven't sought out that counsel, that advisor who wants more information on investing and planning and what it means for your wealth forecasting.
Heading into a new year. I wanna talk about some of the changes and most notably the changes that come up or that we think about are some of the limits, if you will, or the IRA and 401k contribution limits for 2022 and how those are changing. And we all know saving for retirement and as you hear me say each and every week, retirement doesn't mean you need to be 55, 60 or 65, it just means to be living financially free without having to work. So, whether that's in your forties or your thirties, good it for you, but either way the retirement or saving for that time period, you know, it can seem like a daunting task, but one of the things you hear me say often here on the program, but also for any clients listening that we talk about is utilizing 401k type of assets or IRA assets, tax deferred, or ROTH like retirement savings vehicles is one of the best ways and most taxed friendly ways to build a nest egg. So, you should start saving on a 401k count as soon as you can, if your employer offers that because the IRS limits how much you can contribute each year.
Now for 2022, those limits went up from 2021. Workers who are younger than age 50 can contribute a maximum of 20,500 to a 401k in 2022, that is up from 19,005 last year. Now, if you're age 15 older listening, right now, you can add an extra 6,500 per year in what's called ketchup contributions, bringing your total 401k contributions for 2022 to $27,000. So, contributions to a 401k they're generally due by the end of the calendar year. So again, as we're listening to this, maybe on December 31st, you have literally probably hours, but it's more important to look ahead as we all know in life than look behind. And that's where we're gonna be focusing on here today. And one of the questions that comes up around savings and retirement and things like that is the big question of how much you should save for retirement in a 401k.
So, you can Google this, you can white paper, you can talk to your friends, your colleagues, family members, but there's a consortium, if you will, of experts that recommend that workers save at least 15% of their income for retirement, including any employer match. So, for instance, if your employer contributes 3% as a match in your 401k plan, then you would need to save an additional 12% to get to what the experts are recommending at a 15% of your income. Now, if you aren't saving that much, right now, increase your contributions each year until you reach that goal. One of the things I talk about heavily when it comes to planning and especially for those in our categories of clients that call in that haven't put together a plan yet, all of a sudden, they get this almost coffee, like buzz rush. When we build this plan like, oh, Brad, it looks great, we're gonna do this, this and this. And I tell them, it's okay to have a few years to build this out. We don't want that instant overnight situation. This is an oatmeal here, right? We wanna let this bake, we wanna let this go for it. We'd also wanna make sure that we don't cut our nose to spite our face, right. So, it's okay to have that gradually increase, it's just the mindset of having that goal there to actually do so.
Now I want to dissect this 15% to be fair. Now, again, the maximum limits we have there for some listening right now, those maximum limits may not be that hard, based on your overall income and what's more important in that regard is your disposable income. But for those that see those limits as really lofty and high, it's really important to make sure that we focus on the more granular details, which is how much per paycheck you should be saving. But that all has to do with what I talk about quite often here, as those who are frequent listeners know that we talk about distribution rate ultimately in retirement or said differently, your percentage of spending relative to your liquid assets. Something we do here at One Capital Management is when we build our black book, which is our wealth forecast, our financial plan, if you will, for our clients, we focus heavily on accumulating your assets relative to the goals and objectives you have in retirement. So, what does that mean?
If you're sitting here in your thirties and your forties listening to this, we wanna forecast that out 20, 30 years using conservative assumptions, meaning higher, maybe inflation numbers, lower rate of returns under promising overdelivering essentially, we wanna make sure this is needs based, not wants based. Those are two very important four-letter words when it comes to financial planning. We wanna focus on the needs of what you need to bring in to keep the lights on yourself, right? And we focus that as relative to your investments and your savings. That gets a, on my opinion, to a more specific number than some broad stroke, 15% that's generalized based on a bunch of experts across the country. Focus on your number, tailor your investments, the same way you would tailor your planning.
Believe it or not most people don't do that. They wanna focus on, oh, I have this stock or, or this investment. But the reality is if you're gonna tailor that you should really also be tailoring your goals and your objectives relative to your planning, focus on what you need, not what you neighbor needs. So, this 15% of your income as a generalization, that's fine. But what I'm trying to say is also empower each of you, listening to go a little bit more further into is 15% enough. Maybe it's too much. In fact, odds are, it might be higher than what you actually need to save, based on other assets or other assets you might have in your overall planning, whether that's real estate assets, maybe it's social security that people aren't factoring in here that'll come into play or maybe you are lucky enough to have a pension nowadays. All those need to be considered, when you're really looking at the question of how much you should save for retirement. The easy answer ladies into gentleman is max out. I understand that every enrollment meeting I've ever done for a company that we put a 401k plan in for this question comes up.
Every client that we build a plan for this question comes up. Whether they ask it or we bring it up, because it's an important one. But I wanna say something very clearly here. There is not one right answer there isn't. It has to be tailored; it has to be custom. It has to, because your planning, your monies, your wants and goals and objectives will be different than the next person. You know that. So, we wanna make sure that you're planning follow suit. And heading into next year, 2022, I also wanna touch on a few things other than the contribution limits that have changed, but also focusing on taxes. Taxes are a really important factor to consider how into next year with what many are perceiving and we're seeing as higher income tax brackets. So, it's really important to make sure you have a coordinated team with your advisor and your tax preparer that are looking at what I call the bracket game, making sure that we maximize the most out of the lowest bracket you can be in.
And it matters when you have a marginal tax bracket system, as we do. So, although taxes are going up, you can still be strategic when it comes to tax planning, because you might be thinking, why is a financial advisor or an investment manager focusing so much on taxes. Taxes has a large part to, to do with the efficiency and the effectiveness of your income in retirement. And as you've heard me say, week in and week out, retirement is largely about income. Again, retirement means being financially free, whether you are retired, receiving income from assets that you've saved or have enough save to distribute your assets in your thirties and forties, that's retired technically, or you may be the traditional side where you are worked for 25, 30, 35 years in a job, and you're in your sixties and you are traditionally retired either way, focusing on taxes has a lot to do with this.
Do you know how much you should be contributing to your deferred compensation plan? Are you getting the most out of your current investment options? Looking at entering or about to exit the DROP program? Go to onecapitalmanagement.com to find out how we can help.
For example, for our younger clients who are looking to be financially free earlier on by put aside more upfront while they're working, living well below, their means to put aside enough there maybe diversifying their selves into some real estate with some cap rate income and rental income coming in, things like that. Focusing on qualified assets may not be the best move because taking from those will have early for all penalties. So, putting a plan together for those has a lot to do with this. In fact, I just met an individual a couple weeks ago from our radio program that was 28 years old. And he basically said very clearly in our planning meeting is my goal is to be financially free, in his words ‘retire’ by age forty. So, our focus shifted largely from making sure we put aside some for him later, cause forty is very young, right. Put aside for him later in retirement, true retirement years as the government puts it out there in terms of NRA, normal retirement age in your sixties, whether you're 66 or 67, which has moved up a little bit depending on your birth date.
So, we have to have that set aside, but we needed to shift his planning and be custom again, back to that word and why we tailor our plans for each of our clients individually, because we need to make sure he had had enough after-tax savings to make sure that he can support his lifestyle during his forties and fifties, before 59 and a half when the government allows him to take money from his qualified assets without unearly withdrawal penalty. So that shifts not only the planning, but it also shifts the investments focusing on investments that may be tax free, like municipal bonds and items of that nature. Also managing tax loss harvesting each year, harvesting losses and gains realized and unrealized throughout a calendar year. All those matter in an increasing income tax environment like we will be seeing in 2022 as well as making sure that the net effect that efficiency and effectiveness I talked about a few minutes ago works. You have to make sure that all those works, when it comes to investments.
You can say loud and clear, Hey, I'm making a 6% rate of return, but in reality, if you're paying a bunch of taxes on that ordinary as short term, that may be like three, three and a half or 4%, depending on your income bracket, it matters. The net matters. So, taxes in 2022 have a lot to do, should have a lot to do with your planning and your investments. And that brings up the last thing I wanna talk about today on this week's episode, around traditional 401ks versus Roth or traditional IRAs versus Roth. Now a 401k works best for someone who anticipates being in a lower income tax bracket at retirement than they're in now. Now conversely Roth is the opposite, right. They're assuming that taxes are going to be higher when they're in their retirement years, their true retirement years of sixties, therefore they'd rather pay taxes now and contribute to Roth on a post-tax basis now to receive that income later tax free because they perceive they're gonna be in a higher tax bracket than they are now.
For example, on a traditional 401k, let's say someone is currently in the 32% or 35% tax bracket, but they're able to retire maybe in the 24% tax bracket. Well, the numbers would shake out, that'd say, okay, I'd rather defer at a higher tax bracket and pull out at a lower tax bracket. There's one big thing that needs to be brought up here though, is we don't know what our retirement years hold. We can assume and I think we all can agree. You can get a bunch of economists together, a bunch of financial gurus together, and a bunch of just general people together and line up and say, do you think pragmatically and logically thinking we're going to be in a higher tax environment in the next 10 or 20 years? I think a large part of people will think that the answer is yes to that, but we don't know. So, employers have been increasing tax diversification in their retirement plans by adding Roth 401ks for those that actually think they're gonna be in a higher tax bracket in retirement.
And these accounts combine features of Roth IRAs and 401ks. So, contributions that go into a Roth 401k after you've paid taxes on that money as I mentioned, you're contributing with post-tax dollar. You can withdraw contributions and earnings tax and penalty free if you're at least age 59 and a half and have owned the account for five years or more, basically the same rules as a Roth IRA. Now you'll also be required to take minimum distributions from a Roth 401k once you turn 72, which is different, cuz you might be able to avoid RMDs, if you can move the money from the Roth 401k to a Roth IRA, which is not subject to RMD, that gets in a little more granular details. That's where I would seek counsel and advice as I share each and every week to make sure that you talk about those things because you wanna make sure that you know, which account type is right for you.
Now with that, a question comes around sometimes that these limits you speak of Brad, these, these limits that have increased in the 2022 does that mean I can defer a maximum of 20,500 if I'm under 50 to a traditional 401k and do an additional 20,500 to a Roth 401k? No, if you invest in both 401k and a Roth 401k, the total amount of money you can contribute to both accounts cannot exceed the annual limit for your age. Again, either 20,500, if you're under 50 or 27,000, if you're over 50 for 2022. Now, if you do exceed that, believe it or not, the IRS might hit you with a 6% excessive contribution penalty, kind wild if you think about it, but it is there. So, as we sum up this week, talking about the contribution limits heading into the new year, some retirement savings tips.
The first one I want to bring up is find council, find your advisor. I know I preach on this every week, but it is important. In fact, last week we got invited to a neighbor's boxing day party. It's the December 26th, every year, it's a British tradition technically. And it was an interesting party, we started talking about some of the dinner conversations around finances and the world and the economy and things like this. And one of the ladies there, my neighbor was actually talking about how she just retired. She's early seventies, she has a couple 401ks. She was a doctor and she had, she called fidelity a very large custodian, trying to merge them all into an IRA and she just kept getting this script from this guy that was basically trying to upsell her on some things through their custodian. And sadly, I had to say like, that's not that uncommon. So, one of the things she was trying to avoid was RMDs. And understanding the nuances between RM is in a 401k and an IRA, and I remember saying to her the other night saying you summed up a lot of the advantages and values that an advisor can bring to a client to help basically avoid landmines.
These are not the landmines that would show up on a statement showing a rate of return that I know many people we'll judge an advisor on and it's very important, don't get me wrong. Or the other one, which is fees. How much am I being charged? Or how much are you charging me? Right? Those are two important questions, but you also want to ask some of the things that don't show up on paper that are really valuable. Time is the most valuable commodity you and I have; we all know this. So, understanding that her hours she spent of agonizing pain, just trying to do a very simple task, could have very easily been avoided by working with an advisor. So little things like that add up. So, my number one retirement savings step heading into the new year is find counsel, find your advisor, the build that trust.
You also wanna look at maximizing your retirement savings if you can, if it's in your disposable income. And if you don't know again to my question earlier about how much is right for you, again, your advisor can help you with that. Once you turn 50, for those listening, understanding your catch-up limits is really important because if you have more income inside there that you can defer do it, especially if you're doing it in traditional side, because you're able to lower your tax burden, if you're deferring. And again, if your employer offers matches to your contributions, look there first before looking elsewhere because that's essentially free money. So, you wanna make sure that you look at all these safe tips heading to the new year, understanding what works for you. And again, if you haven't found that advisor and as my number one note that I always mentioned about retirement savings is some of the questions that we went through on today's episode, reach out to us. We're happy to help. You can call us at (805) 410-5454. You can also text us. You can text the word track to (805) 410-5454, and we'll reach out to you. We offer a complimentary with no obligation to become an ongoing client, a complimentary retirement tracker review meeting, we will help you build your own black book, your own custom and proprietary financial plan, answering all of these questions for you and having great dialogue and context around how to properly place your investment portfolio, the right asset mix between the types of accounts you own, the stuff that we talked about today. That's how we're gonna build that for you.
So again, you can reach out to us at (805) 410-5454. Again, you can text us at that number to (805) 410-5454, or you can go to our website at onecapitalmanagement.com and there you can set some time with myself or one of our advisors. And as we end this week episode, I wanna wish everyone a Happy New Year. I wish nothing but blessings. And don't procrastinate, start today on all your goals. Everyone goes into the new year, as we all know with new year's resolutions and usually by like January 10th, they're all done. I know I follow a victim of that too, whether it's a diet or a workout or something like that. But when it comes to your answers, don't give up. And the best way to help with that is to have an advocate, have someone there, an accountability partner there helping you that's where an advisor comes in. That's what I would wish each person, whether it's us or someone else in your community, find that person that you can help guide you. That matters to avoid some of those landmines. As my neighbor mentioned the other night, it's really important. Make sure you focus on a lot of those things as it comes to your planning for 2022.
I wanna thank you for listening to pension attention. And remember before acting on anything discussed today, speak with a financial advisor near you about your situation. And if you'd like our help again, you can visit us at onecapitalmanagement.com or give us a call (805) 410-5454. We'll make sure we touch base with you to set that time, to go through your complimentary retirement track review meeting, to make sure you're on track for that happy and healthy retirement. And until next week stay safe.
The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.
To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision.
