Beat Inflation with Dividend Stocks | Fidelity Viewpoints

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“Stocks that can boost dividends during periods of high inflation may outperform.” Fidelity Viewpoints

Key takeaways according to Fidelity Viewpoints

  • Dividends aren’t just nice to have, they’re essential to the stock market’s return—accounting for approximately 40% of overall stock market returns since 1930.
  • During periods of high inflation, stocks that increased their dividends the most considerably outperformed the broad market, on average, according to Fidelity’s sector strategist, Denise Chisholm.
  • Dividend-paying stocks’ regular, scheduled payments also may help to reduce the volatility of a stock’s total return.

The economy is gradually recovering from its pandemic-related slowdown and shutdowns, and inflation has hit its highest rate in 39 years. People are emerging from the pandemic and are spending money they saved or money they’re getting from the government. Thus, a combination of soaring pent-up consumer demand and persistent supply chain disruptions has tarnished an otherwise robust economic recovery.

The Bureau of Labor Statistics said the Consumer Price Index of food, energy, goods and services rose by 0.8 percent in November, pushing annual inflation above 6.8 percent. The level is the highest since 1982 and it also marked the sixth consecutive month in which annual inflation rates have exceeded 5 percent.

Currently, approximately 70 percent of Americans rate the economy negatively, with nearly half of Americans blaming Biden for inflation, according to a recent Washington Post-ABC poll.

This combination of economic challenges and consumer worries may make this an especially good time to consider investing in stocks that pay consistent dividends.

A few important things for investors to know about dividend stocks:

  • Dividend payouts typically happen quarterly, although there are a few companies that payout monthly.
  • Many high-quality companies routinely raise their dividend payouts, helping hedge against inflation.
  • A stock’s dividend yield moves in the opposite direction of its stock price, all else being equal, so a high yielding stock may be reason for caution.

Fidelity research finds that dividend payments have accounted for approximately 40% of the overall stock market’s return since 1930. What’s more, dividends have propped up returns when stock prices struggle.

Dividends account for about 40% of total stock market return over time

US stock returns by decade (1930–2020). Over various decades, dividends have remained a fairly steady component of stocks’ total returns amid more highly volatile stock prices. Past performance is no guarantee of future results. Source: Fidelity Investments and Morningstar, as of 12/31/2020.

To invest successfully in dividend stocks, one of the keys is finding companies with strong balance sheets and with secure payouts that can grow consistently over the long haul. Moreover, it’s important to understand the concept of dividend yield, which investors use to gauge how much dividend income their investment will produce.

Investing in dividend stocks

When selecting dividend stocks, it’s important to keep dividend quality in mind. A quality dividend payout can grow over time and potentially be sustained during economic downturns. It’s the primary reason investors must not focus solely on yield.

Steve Goddard, founder and chief investment officer of Barclay, prefers companies with high returns on capital and strong balance sheets. “High return-on-capital companies usually by definition will generate a lot more free cash flow than the average company would,” he says. And cash flow is what pays the dividend.

Although overall dividend health has improved markedly since 2020 and looks good heading into 2022, it’s equally important to check a company’s dividend policy statement so you know how much to expect in payment and when to expect it. Dividend yield is a stock’s annual dividend expressed as a percentage of its price.

It’s crucial to recognize that a stock’s price and its dividend yield move in opposite directions, as long as the dollar amount of the dividend doesn’t change. Investing in the highest-yielding shares can lead to trouble, notably dividend cuts or suspensions and big capital losses

This means a high dividend yield may be a red flag of a problem with the underlying company. For example, a stock’s yield may be high because business problems are weighing down the company’s share price. In that case, the company’s challenges may even cause it to stop or reduce its dividend payments. And before that happens, investors are likely to sell off the stock.

Fidelity Investments’ research has found that stocks that reduce or eliminate their dividends historically have underperformed the market by 20% to 25% during the year leading up to the cut.

Also consider the company’s payout ratio—the percent of its net income or free cash flow it pays in dividends. Low is usually good: A low ratio suggests the company may be able to sustain and possibly boost its payments in the future.

“As a rule of thumb, no matter what the payout ratio is, it is always important to stress test a company’s payout ratio at all points in the business cycle in order to carefully judge whether it will be able to maintain or increase its dividend,” says Adam Kramer, portfolio manager for the Fidelity Multi-Asset Income Fund.

“It all depends on the stability of the cash flows of a company, so it’s more about that than the level of payout. You want to test the company’s ability to pay and increase the dividend under different scenarios. In general, when the payout ratio is more than 50%, it’s a good reminder to always stress test that ratio,” Kramer explains.

Be sure to diversify as you build a portfolio of dividend-paying stocks. To help manage risk, invest across sectors rather than concentrating on those with relatively high dividends, such as consumer staples and energy.

References:

  1. https://www.fidelity.com/learning-center/trading-investing/inflation-and-dividend-stocks
  2. https://www.barrons.com/articles/quality-dividend-stocks-51639134001
  3. https://news.yahoo.com/inflation-pinch-challenges-biden-agenda-200620196.html

Past performance and dividend rates are historical and do not guarantee future results. Diversification and asset allocation do not ensure a profit or guarantee against loss. Investing in stock involves risks, including the loss of principal.

Healthy Aging and Eating

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“Making a plan to eat healthy can keep you healthy and active for longer.” National Institute on Health

“Aging—not cancer or heart disease—is the world’s leading cause of death and suffering. In spite of this, we accept the aging process as inevitable”, writes Dr. Andrew Steel, longevity expert and author of “Ageless: The new science of getting older without getting old“.

Dr. Steel suggest a list of proven life-extenders, such as don’t smoke, exercise, get vaccinated, take care of your teeth.

Strauss Zelnick, author of Becoming Ageless, and who successfully rejuvenated his metabolic health believes that, “You can eat to be younger.” He implores his readers to focus on what He calls “Forever Fuel.” He suggests that you do not have to forego eating your favorite foods; you’re just getting the best versions of them.

  • Unlimited Foods—Lean Protein, Salads, and Vegetables—eat as much as you want. I love bison, light tuna, chicken, eggs, grass-fed beef.
  • Limited Foods—Some fruits and dried fruits, nuts, and cheese—in moderation.
  • Highly restricted foods—no processed foods, fried foods, or added sugars. Processed foods account for 70% of the calories that Americans take in. They don’t just make you fat; they age you.

While humans wither and become frail after a mere seven or so decades, capturing the trait known as ‘negligible senescence ‘ has become the holy grail of aging research. A 2015 study, published by the Mayo Clinic, found that using a combination of existing drugs reversed a number of signs of aging, including improving heart function”, according to the Guardian.

Dr. Sanjay Gupta, Chief Medical Correspondent for CNN, adds that, “During medical school we were taught that aging is a natural process and that people can simply die of old age. The thinking was that age wasn’t just a turning of the clock but an accumulation of mutations, cancer, arthritis, heart disease and dementia. Have you ever wondered, however, if it was possible to address those diseases not just individually, but collectively, by addressing the underlying process of aging itself.”

The role of carbs and added sugars

When you have sugar molecules in your system, they bombard the body’s cells like a meteor ­shower—glomming onto fats and proteins in a process known as glycation. This forms advanced glycation end products (AGEs), which cause protein fibers to become stiff and malformed. The connective-tissue damage and chronic inflammation resulting from sustained high blood sugar can lead to debilitating conditions, such as cataracts, Alzheimer’s, vascular tightening, and diseases of the pancreas and liver.

From a dietary standpoint, forswearing white sugar, high-fructose corn syrup—which studies have shown increases the rate of glycation by 10 times, compared with glucose—and simple carbs is a no-brainer. “Even though all carbs get converted into sugar, when you eat the good ones, like brown rice and whole-grain bread, you get less glucose, and you get it more slowly,” Karcher says.

Carbohydrates (Carbs) — like fiber, starches, and sugars — are important for your health. They are your body’s main source of energy and are a basic nutrient your body turns into glucose, or blood sugar, to make energy for your body to work. But eating too many carbs can cause your body to store the excess as fat.

The fruit, vegetables, dairy, and grain food groups all contain carbohydrates. Sweeteners like sugar, honey, and syrup and foods with added sugars like candy, soft drinks, and cookies also contain carbohydrates.

You should try to get most of your carbohydrates from fruits, vegetables, dairy, and whole grains rather than added sugars or refined grains.

Nutrients like protein, carbohydrates, and fats can help you stay healthy as you age.

Many foods with carbohydrates also supply fiber. Fiber is a type of carbohydrate that your body cannot digest. It is found in many foods that come from plants, including fruits, vegetables, nuts, seeds, beans, and whole grains. Eating food with fiber can help prevent stomach or intestinal problems, such as constipation. It might also help lower cholesterol and blood sugar.

A very low-carb diet, like keto, triggers your body into nutritional ketosis. This stored energy is released in the form of chemicals called ketones. Your liver starts to make ketones — a fuel that kicks in when your body uses up glucose and glycogen, and doesn’t have enough sugar to run on. It does this by breaking down the energy reserves stored in fat. 

These chemicals, ketones, help cells—especially brain cells—keep working at full capacity. Some researchers think that because ketones are a more efficient energy source than glucose, they may protect against aging-related decline in the central nervous system that might cause dementia and other disorders.

Ketones also may inhibit the development of cancer because malignant cells cannot effectively obtain energy from ketones. In addition, studies show that ketones may help protect against inflammatory diseases such as arthritis. Ketones also reduce the level of insulin in the blood, which could protect against type 2 diabetes.

But too many ketones in the blood can have harmful health effects.

While there’s insufficient evidence to recommend any type of calorie-restriction or fasting diet. A lot more needs to be learned about their effectiveness and safety, especially in older adults. In the meanwhile, there’s plenty of evidence for other actions you can take to stay healthy as you age:

  • Eat a balanced diet with nutritious food in moderate amounts. Avoid or limit consuming refined sugars and carbs, and processed foods.
  • Engage in regular physical exercise (150 minutes per week).
  • Drink alcohol in moderation or not at all.
  • Don’t smoke or take illegal drugs.
  • Maintain an active social lifestyle and build close relationships.
  • Get a good night’s sleep.

Finally, older adults may have different vitamin and mineral needs than younger adults. Find recommended amounts and information on calcium, sodium, vitamin D, and more.

“People are living longer, staying healthier longer and accomplishing things late in life that once seemed possible only at younger ages.” –David Brooks, The New York Times

The American Heart Association recommends no more than six teaspoons of added sugar a day. The sugar found in whole foods like fruits and veggies, says Kimber Stanhope, PhD, a nutritional biologist at the University of California, Davis. “These naturally occurring sugars come packaged with good-for-you vitamins, minerals, fiber, and other nutrients.” Eliminating or reducing your intake of added sugar and carbs can result in you gaining some significant healthy aging benefits, according to the American Heart Association.

References:

  1. https://www.webmd.com/diet/ss/slideshow-what-happens-when-you-stop-eating-carbs
  2. https://andrewsteele.co.uk/ageless/
  3. https://www.amazon.com/Becoming-Ageless-Secrets-Looking-Feeling/dp/1940358175/ref=nodl_
  4. https://www.dexafit.com/blog2/10-ways-to-improve-your-metabolic-health
  5. https://www.elle.com/beauty/makeup-skin-care/tips/a2471/sugar-aging-how-to-fight-glycation-614621/
  6. https://www.nia.nih.gov/health/calorie-restriction-and-fasting-diets-what-do-we-know
  7. https://www.nia.nih.gov/health/important-nutrients-know-proteins-carbohydrates-and-fats
  8. https://www.msn.com/en-us/health/nutrition/scientist-reveals-tips-for-slowing-down-the-aging-process/ar-BB1fWqe4
  9. https://www.theguardian.com/science/2021/jan/03/observer-magazine-do-we-have-to-age-biologist-andrew-steele
  10. https://www.heart.org/en/healthy-living/healthy-eating/eat-smart/nutrition-basics/carbohydrates

Historic Inflation Worries Americans

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Worries by Americans over historic inflation level and higher retail prices are now larger than concerns about the coronavirus pandemic, according to recent polls from Monmouth and AP-NORC.

The U.S. consumer price index rose 0.8% in November from October. The Labor Department said consumer prices grew last month at an annual rate of 6.8%, which is the highest in 39 years since President Carter administration. The growth in prices were led by cars, food, gasoline, electricity and fuel oil.

As the bulk of Americans cite inflation and paying their bills as their top concerns, President Joe Biden’s job approval ratings fell to new lows with 69% disapproving of how he is handling inflation, according to an ABC/Ipsos poll.

Additionally, inflation concerns could potentially cost the President and Democrats’ their coveted social and environment legislation. It is believed that adding additional fiscal spending to already exploding government debt that adds juice to the economy might worsen inflation critics assert.

Most economists agree that the Build Back Better bill would add to inflationary pressures in the short run, however, they differed over its effects on inflation over the long term. Furthermore, most economists see inflation coming down sometime next year, but the debate is over how soon and by how much.

The bill will probably increase demand over the next few years, Harvard University professor Doug Elmendorf said. “That will tend to push up GDP and employment and inflation — which is not the policy impulse we need right now,” he added. Elmendorf served in the administration of former Democratic President Bill Clinton

References:

  1. https://www.barrons.com/articles/two-thirds-of-americans-polled-disapprove-of-how-biden-has-handled-inflation-51639331904
  2. https://www.bloomberg.com/news/articles/2021-11-17/top-economists-see-biden-s-spending-plan-adding-to-inflation

Staying Active Gives You a Longer, Healthier Life

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“Exercise is the most important activity we can do to keep our brains healthy, it’s important to simply move, whether that be casual walking or a workout.” Sanjay Gumpta

It important to understand that you can proactively take steps to avoid, delay, and mitigate dementia and mental decline as you age. Just thirty minutes daily of moderate physical activity, such as walking around the block, can make a significant difference in improving your brain health.

In the process of neurogenesis, creating brain cells does not stop when you age and get older. Neuroscientific research shows that the brain can make new brain cells, and forge new neural connections, at any age.

Additionally, adequate sleep also has a major effect on brain health. Recent research has shown that your brain remains very active while you sleep, because it can make full use of the energy that is diverted elsewhere when you are awake.

When you sleep, the brain turns information into knowledge, consolidates your memories, and cleans itself. This is why everyone needs at least eight hours of sleep, states Gumpta and you shouldn’t convince yourself that you don’t.

“There is a rinse cycle that happens in your brain when you sleep,” says Gumpta. “You are basically clearing out metabolic waste. That happens when you are awake, but the process is close to 60 per cent more efficient when you are asleep.

Key takeaway is that staying physically active, proper diet. adequate sleep and social interaction are all key to longer life.

And you’re never too old to start exercising.

References:

  1. https://amp.scmp.com/lifestyle/health-wellness/article/3129163/brain-health-and-how-avoid-dementia-eat-and-sleep-well-be
  2. https://www.scmp.com/lifestyle/health-wellness/article/3089731/ageing-well-why-staying-active-key-longer-life-youre

Navy Wins!!! Army – Navy Football Game

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Navy wins first, sings second…the winning football team sings its alma mater song second after the losing team has sung its version first.

Navy Midshipmen (4 – 8) defeat Army Black Knights (8 – 4) by the score of 17 – 13 in the 122nd edition of Army – Navy Football Game played at MetLife Stadium in East Rutherford, NJ.

Army entered the football game rivalry following a 15-0 victory in the 2020 matchup.

Navy Midshipmen lead the all-time series against Army 61-53-7 and are 3-1 against the Black Knights in games played at MetLife Stadium. Navy has won the last two games played in New Jersey by a combined score of 97-19 (58-12 in 2002, 39-7 in 1997).

While Navy cannot win the Commander-In-Chief’s Trophy outright this season due to losing to Air Force, the Midshipmen can prevent Army from winning it with a victory.

The Commander-In-Chief’s Trophy is presented annually to the winner of the football competition among the three major service academies — Army, Navy and Air Force — and is named in honor of the President of the United States (POTUS). Navy has won the trophy 11 of the last 18 years and has won 27 of the last 38 Service Academy games against Air Force and Army.

When there is no outright winner, the trophy remains with the winner of the previous year’s competition (Army).  The trophy is sponsored by the West Point Association of Graduates, the Naval Academy Alumni Association and the Air Force Association of Graduates. The year in which the trophy is won outright, it is engraved on a plate gracing the respective academy’s side of the trophy.

Upon U.S Naval Academy graduation in May 2022, the 25 seniors on the Navy football team will serve in the nations’s armed services…(14 will be commissioned Ensigns in the U.S. Navy, while 11 will be commissioned 2nd Lieutenants in the United States Marine Corps).

Go Navy!!!

References:

  1. https://navysports.com/news/2021/12/6/122nd-edition-of-army-navy-football-game-slated-for-saturday-at-metlife-stadium.aspx
  2. https://armynavygame.com

Calculating Net Worth

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Calculating net worth involves adding up all your assets and subtracting all your liabilities.  The resulting sum is your net worth.

The value of your primary residence is not included in your net worth calculation.  In addition, any mortgage or other loan on the residence does not count as a liability up to the fair market value of the residence.  If the loan is for more than the fair market value of the residence (i.e., if your mortgage is underwater), then the loan amount that is over the fair market value counts as a liability under the net worth test.

Further, any increase in the loan amount in the 60 days prior to your purchase of the securities (even if the loan amount does not exceed the value of the residence) will count as a liability as well.  The reason for this is to prevent net worth from being artificially inflated through converting home equity into cash or other assets.

The following table sets forth examples of calculations under the net worth test for being an accredited investor:

Accredited Investor table

References:

 

Tax Planning | NerdWallet

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“You work hard, so it’s important to understand how taxes affect your income and personal finances.”

Tax planning is assessing your financial situation in order to maximize tax breaks and minimize tax liabilities in a legal and efficient manner.

Taxes can have a major impact on your financial future and investing plans. Planning ahead for these costs can make your financial plan much more tax efficient. While many people only think about taxes when they’re filing in the spring, tax planning should be a year-round matter, since all financial and investment decisions you make have a tax impact – even if that impact won’t be felt right away.

Tax rules are complicated, but taking some time to know and use them for your benefit can change how much you end up paying (or getting back) when you file. Here are some key tax planning and tax strategy concepts to understand:

1. Understand your tax bracket

You can’t really plan for the future if you don’t know where you are today. So the first tax planning tip is get a grip on what federal tax bracket you’re in.

The United States has a progressive tax system. That means people with higher taxable incomes are subject to higher tax rates, while people with lower taxable incomes are subject to lower tax rates. There are seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

No matter which bracket you’re in, you probably won’t pay that rate on your entire income. There are two reasons:

  1. You get to subtract tax deductions to determine your taxable income (that’s why your taxable income usually isn’t the same as your salary or total income).

  2. You don’t just multiply your tax bracket by your taxable income. Instead, the government divides your taxable income into chunks and then taxes each chunk at the corresponding rate.

For example, let’s say you’re a single filer with $32,000 in taxable income. That puts you in the 12% tax bracket in 2020. But do you pay 12% on all $32,000? No. Actually, you pay only 10% on the first $9,875; you pay 12% on the rest. If you had $50,000 of taxable income, you’d pay 10% on that first $9,875 and 12% on the chunk of income between $9,876 and $40,125. And then you’d pay 22% on the rest, because some of your $50,000 of taxable income falls into the 22% tax bracket.

2. Tax deductions and tax credits

Tax deductions and tax credits may be the best part of preparing your tax return. Both reduce your tax bill, but in very different ways. Knowing the difference can create some very effective tax strategies that reduce your tax bill.

  • Tax deductions are specific expenses you’ve incurred that you can subtract from your taxable income. They reduce how much of your income is subject to taxes.

  • Tax credits are even better — they give you a dollar-for-dollar reduction in your tax bill. A tax credit valued at $1,000, for instance, lowers your tax bill by $1,000.

3. Standard deduction vs. itemizing

Deciding whether to itemize or take the standard deduction is a big part of tax planning, because the choice can make a huge difference in your tax bill.

What is the standard deduction?

Basically, it’s a flat-dollar, no-questions-asked tax deduction. Taking the standard deduction makes tax prep go a lot faster, which is probably a big reason why many taxpayers do it instead of itemizing.

Congress sets the amount of the standard deduction, and it’s typically adjusted every year for inflation. The standard deduction that you qualify for depends on your filing status, as the table below shows.

What does ‘itemize’ mean?

Instead of taking the standard deduction, you can itemize your tax return, which means taking all the individual tax deductions that you qualify for, one by one.

  • Generally, people itemize if their itemized deductions add up to more than the standard deduction. A key part of their tax planning is to track their deductions through the year.

  • The drawback to itemizing is that it takes longer to do your taxes, and you have to be able to prove you qualified for your deductions.

  • You use IRS Schedule A to claim your itemized deductions.

  • Some tax strategies may make itemizing especially attractive. If you own a home, for example, your itemized deductions for mortgage interest and property taxes may easily add up to more than the standard deduction. That could save you money.

  • You might be able to itemize on your state tax return even if you take the standard deduction on your federal return.

  • The good news: Tax software or a good tax advisor can help you figure out which deductions you’re eligible for and whether they add up to more than the standard deduction.

4. Popular tax deductions and credits

There are hundreds of possible deductions and credits out there, and they all have their own rules about who’s allowed to take them. Here are some big ones (click on the links to learn more).

Tax break

What it’s generally for

Adoption credit

Costs of adopting a child

American Opportunity credit

College education costs

Capital loss deduction

Losses on stock sales (to offset capital gains)

Charitable contributions

Giving money, cars, art, investments, household items or other things to charity

Child and dependent care credit

Day care and similar costs

Child tax credit

Being a parent

Credit for the Elderly or the Disabled

For people or their spouses who retired on permanent and total disability

Earned Income Tax Credit

Money for people below certain adjusted gross incomes

Home office expenses

A portion of your mortgage or rent; property taxes; utilities, repairs and maintenance; and similar expenses if you work from home

Lifetime Learning credit

Undergraduate, graduate or even non-degree courses at accredited institutions

Medical expenses

Unreimbursed medical costs over a certain threshold

Mortgage interest

The interest portion of mortgage payments on a primary home

Property taxes

Property taxes on real estate

Residential energy tax credits

Installing things that make a home energy-efficient

Saver’s credit

Contributions to an IRA for people with incomes below certain thresholds

5. Tax records

Keeping tax returns and the documents you used to complete them is critical if you’re ever audited. Typically, the IRS has three years to decide whether to audit your return, so keep your records for at least that long. You also should hang onto tax records for three years if you file a claim for a credit or refund after you filed your original return.

Keep records longer in certain cases — if any of these circumstances apply, the IRS has a longer limit on auditing you:

  • Six years: If you underreported your income by more than 25%.

  • Seven years: If you wrote off the loss from a “worthless security.”

  • Indefinitely: If you committed tax fraud or you didn’t file a tax return.

Category

Items

Income

Expenses & deductions

  • Receipts.

  • Invoices.

  • Alimony paid.

  • Statements from charities.

  • Gambling losses.

Home

Retirement accounts

  • Form 5498 (IRA contributions).

  • Form 8606 (nondeductible IRA contributions).

  • 401(k) statements.

  • Distribution records.

  • Annual statements.

Other investments

  • Transaction data (including individual purchase or sale receipts).

  • Annual statements.

6. Tax strategies to shelter income or cut your tax bill

Deductions and credits are a great way to cut your tax bill, but there are other tax planning strategies that can help keep the IRS’ hands off your money. Here are some popular tax planning strategies.

Tweak your W-4

A W-4 tells your employer how much tax to withhold from your paycheck. Your employer remits that tax to the IRS on your behalf.

Generally, the more allowances you claim on your W-4, the less money will be taken out of your pay to go toward taxes. Claim fewer allowances on your W-4, and more of your pay should appear on your check.

Here’s how to use the W-4 for tax planning.

  • If you got a huge tax bill when you filed and don’t want to relive that pain, you may want to increase your withholding. That could help you owe less (or nothing) next time you file.

  • If you got a huge refund last year and would rather have that money in your paycheck throughout the year, do the opposite and reduce your withholding.

  • You probably filled out a W-4 when you started your job, but you can change your W-4 any time.

Put money in a 401(k)

Your employer might offer a 401(k) savings and investing plan that gives you a tax break on money you set aside for retirement.

  • The IRS doesn’t tax what you divert directly from your paycheck into a 401(k). In 2020 and 2021, you can funnel up to $19,500 per year into an account. If you’re 50 or older, you can contribute up to $26,000.

  • While these retirement accounts are usually sponsored by employee self-employed people can open their own 401(k)s.

  • If your employer matches some or all of your contribution, you’ll get free money to boot.

Put money in an IRA

Outside of an employer-sponsored plan, there are two major types of individual retirement accounts: Roth IRAs and traditional IRAs.

You have until the tax deadline to fund your IRA for the previous tax year, which gives you extra time to do some tax planning and take advantage of this strategy.

  • The tax advantage of a  is that your contributions may be tax-deductible. How much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and how much you make. You pay taxes when you take distributions in retirement (or if you make withdrawals prior to retirement).

  • The tax advantage of a  is that your withdrawals in retirement are not taxed. You pay the taxes upfront; your contributions are not tax-deductible.

  • Earnings on your investments grow tax-free in a Roth and tax-deferred in a traditional IRA.

This table illustrates these accounts in action.

ROTH IRA

TRADITIONAL IRA

Contribution limit

$6,000 in 2020 and 2021 ($7,000 if age 50 or older)

$6,000 in 2020 and 2021 ($7,000 if age 50 or older)

Key pros

  • Qualified withdrawals in retirement are tax-free.

  • Contributions can be withdrawn at any time.

  • If deductible, contributions reduce taxable income in the year they are made.

Key cons

  • No immediate tax benefit for contributing.

  • Ability to contribute is phased out at higher incomes.

  • Deductions may be phased out.

  • Distributions in retirement are taxed as ordinary income.

Early withdrawal rules

  • Contributions can be withdrawn at any time, tax- and penalty-free.

  • Unless you meet an exception, early withdrawals of earnings may be subject to a 10% penalty and income taxes.

  • Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty.

Open a 529 account

These savings accounts, operated by most states and some educational institutions, help people save for college.

  • You can’t deduct contributions on your federal income taxes, but you might be able to on your state return if you’re putting money into your state’s 529 plan.

  • There may be gift-tax consequences if your contributions plus any other gifts to a particular beneficiary exceed $15,000 in 2020.

Fund your flexible spending account (FSA)

If your employer offers a flexible spending account, take advantage of it to lower your tax bill. The IRS lets you funnel tax-free dollars directly from your paycheck into your FSA every year; the limit is $2,750 for 2020 and 2021.

  • You’ll have to use the money during the calendar year for medical and dental expenses, but you can also use it for related everyday items such as bandages, pregnancy test kits, breast pumps and acupuncture for yourself and your qualified dependents. You may lose what you don’t use, so take time to calculate your expected medical and dental expenses for the coming year.

  • Some employers might let you carry over up to $550 to the next year.

Use Dependent Care Flexible Spending Accounts (DCFSAs)

This FSA with a twist is another handy way to reduce your tax bill — if your employer offers it.

  • In 2021, the IRS will exclude up to $10,500 of your pay that you have your employer divert to a Dependent Care FSA account, which means you’ll avoid paying taxes on that money. That can be huge for parents, because before- and after-school care, day care, preschool and day camps usually are allowed uses. Elder care may be included, too.

  • What’s covered can vary among employers, so check out your plan’s documents.

Maximize Health Savings Accounts (HSAs)

Health savings accounts are tax-exempt accounts you can use to pay medical expenses.

  • Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, so long as you use them for qualified medical expenses.

  • If you have self-only high-deductible health coverage, you can contribute up to $3,550 in 2020. If you have family high-deductible coverage, you can contribute up to $7,100. For 2021, the individual coverage contribution limit is $3,600 and the family coverage limit is $7,200. If you’re 55 or older, you can put an extra $1,000 in your HSA.

  • Your employer may offer an HSA, but you can also start your own account at a bank or other financial institution

“Filing your taxes can seem overwhelming. But you can tackle tax season one step at a time while you take advantage of money-saving opportunities.”

While many Americans only think about taxes in the weeks before the federal tax deadline, you will need to keep on top of tax planning year-round. By knowing the rules, paying attention to withholdings and keeping an eye out for benefits all year, you’ll be able to maximize benefits and minimize prefiliners errors.

References:

  1. https://www.nerdwallet.com/article/taxes/tax-planning
  2. https://smartasset.com/financial-advisor/tax-planning

Investors Need to be Patient and Rational

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“It’s a textbook example of why panic is not a[n investment] strategy, unless you’re deliberately trying to lose money.” Jim Cramer, CNBC Mad Money Host

CNBC Mad Money Host Jim Cramer made his comments after the stock market indexes moved higher after a previous major market downturn due to COVID-19 Omicron variant concerns and fear. Wall Street experienced a strong melt-up session led by the technology heavy Nasdaq Index’s 3% jump.

Markets had sold off sharply on November 26, with the Dow, S&P 500 and Nasdaq all losing more than 2% in market cap value as investors knee-jerked reacted to the discovery of the Omicron variant.

“I want you to use it as a reminder that, most of the time, it pays to wait for cooler heads to prevail rather than freaking out in a situation where everyone else is freaking out and lost their heads without complete information,” Cramer said.

“Look, it would’ve been great if you bought stocks something near the lows—that’s what I urged you to do, actually, even if you had to hold your nose because we were simply too oversold. I was relying on technicals,” Cramer said. “But the cardinal sin here was selling stocks out of fear, rather than sitting tight out of rationality.”

The obvious takeaway for investors is that fear and panic are not sound investment strategies, “…unless you’re deliberately trying to lose money.” Never make permanent investment decisions based on temporary market circumstances.

References:

  1. https://www.cnbc.com/2021/12/07/cramer-stocks-recent-rally-shows-need-for-investor-patience-not-fear-.html

Most Valuable Retirement Assets

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“Retirement is like an iceberg, where 90% of what’s really taking place lies below the surface, absent from traditional financial plans and conversations” Robert Laura

For a long and fulfilling life in retirement, you need much more than financial resources and financial security. Consequently, there are more valuable retirement assets than financial.

Retirement planning is typically related solely to financial planning, all about numbers. It centers around one question: Do your financial assets — pension, 401(k)s/IRAs, Social Security, property, sale of a business, etc. — provide enough income to fund your desired retirement lifestyle?

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You’ll need enough money to get by, of course, but you don’t have to be super wealthy to be happy. In fact, life satisfaction tops out at an annual salary of $95,000, on average, according to a study by psychologists from Purdue University. Enough money to never have to worry about going broke or paying for medical care is important. But financial freedom is not the only or even the most important piece of a fulfilling retirement.

Once you have a retirement plan in place, it is essential to focus on all those things money cannot buy. There are non-financial assets that studies show can improve life satisfaction in retirement. According to Kiplinger Magazine, they include:

  1. Good Health (Health is Wealth) – Good health is the most important ingredient for a happy retirement, according to a Merrill Lynch/Age Wave report. Studies show that exercise and a healthy diet can reduce the risk of developing certain health conditions, increase energy levels, boost your immune system, and improve your mood.
  2. Strong Social Connections (Emotional Well-Being) – Happier retirees were found to be those with more social interactions with friends and family, according to one Gallup poll. Further, social isolation has been linked to higher rates of heart disease and stroke, increased risk of dementia, and greater incidence of depression and anxiety. A low level of social interaction is just as unhealthy as smoking, obesity, alcohol abuse and physical inactivity.
  3. Purpose – Retirees with a sense of purpose or meaning were three times more likely to say “helping people in need” brings them happiness in retirement than “spending money on themselves.” Purpose can fall into three buckets, which means getting involved with your place of worship or spiritual pursuits, using your talents in service to others, and doing what you’ve always wanted to do.
  4. Learning and Growing – Experts believe that ongoing education and learning new things may help keep you mentally sharp simply by getting you in the habit of staying mentally active. Exercising your brain may help prevent cognitive decline and reduce the risk of dementia.
  5. Optimistic Outlook – Optimistic people tend to expect that good things will happen in the future. A fair amount of scientific evidence suggests that being optimistic contributes to good health, both mental and physical and may lower risk of developing cardiovascular disease and other chronic ailments and a longer life, and people with higher levels of optimism lived longer. Optimism is a trait that anyone can develop. Studies have shown people are able to adopt a more optimistic mindset with very simple, low-cost exercises, starting with consciously reframing every situation in a positive light. Over time, your brain is essentially rewired to think positively.
  6. Gratitude – People who counted their blessings had a more positive outlook on life, exercised more, reported fewer symptoms of illness and were more likely to help others. Gratitude enhances people’s satisfaction with life while reducing their desire to buy stuff.
  7. Dog Ownership – Older dog owners who walked their dogs at least once a day got 20% more physical activity than people without dogs and spent 30 fewer minutes a day being sedentary, on average, according to a study published in The Journal of Epidemiology and Community Health. Research has also indicated that dogs help soothe those suffering from cognitive decline, and the physical and mental health benefits of owning a dog can boost the longevity of the owner.

Retirement is major transition made up of many financial as well as life decisions. This is why it is important to create and to adhere a retirement plan as early as possible. That way you can spend more time focusing on everything else that equally matters.

References:

  1. https://www.kiplinger.com/retirement/happy-retirement/601160/7-surprisingly-valuable-assets-for-a-happy-retirement

Believe in Yourself and Know What You Want

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“If you don’t know what you want, it’s difficult—often impossible—to create or to get what you want in life.” Paul J. Meyers

People generally think they know what they want, but in practice, they do not. Generally, they don’t know what they really want in life or want to do. Additionally, they don’t know where to start, don’t have a plan, and don’t where to look for help to change that.

American author Mark Twain said he could teach anyone how to get what they want; he just couldn’t find anyone who truly knew what they wanted. Being unclear on what you want is one of the biggest stumbling blocks to getting what you want and success. Paul Meyer, founder of Success Motivation Institute, says if you’re not achieving the success you desire, it’s simply because your objectives are not clearly defined. Your goals need to be written, specific and measurable.

Hundred of thousands of people live there lives without purpose or goals. If you don’t want to spend your life wandering aimlessly, you should dedicate your waking hours determining exactly what you want in life and making plans to achieve those goals.

“Crystallize your goals. Make a plan for achieving them and set yourself a deadline. Then, with supreme confidence, determination and disregard for obstacles and other people’s criticisms, carry out your plan.” Paul J. Meyer

Knowing what you want.

If you don’t know what you really want in life, you’re not alone. While most people may think they know what they want, they’re often wrong.

Positive mindset, attitude and focus are vitally important attributes. The attributes are required to reach your goals and to realize your dreams. Thus, you should have a real understanding that you are responsible and capable of creating your reality regardless of the various obstacles you might encounter along the way. According to Inc. Magazine, here are six steps to help you achieve what you want:

1. Make a decision to have what you want, even if you don’t know how to get it. Most people are tentative when it comes to being specific. Instead, be confident in declaring what you want and be comfortable with the fact that you don’t yet have a plan, but you do know what you want.

2. Be clear about the details of the outcome. You should focus on what you do want, not what you don’t want. Practice visualizing yourself in the situation you want to create. You must be clear about what you want, like financial freedom, finding the perfect partner or a happy life. You must imagine the look, feel and sound of the perfect situation for you in your life.

3. Detach from the process. Not knowing “how” to do something holds many people back. The “how to do it,” instructions will appear after you have clearly defined what you want.

4. Believe in yourself and expect that it will happen. You need to believe in yourself and in the creative process. Winners expect to win. A shortage of belief causes many people to give up or never begin in the first place. Believe and set an expectation that what you want will, in fact, appear. It may not appear in the way you thought or at the precise time. You may even experience frustration, anxiety or impatience trying to control the outcome.

“When you believe in yourself, others tend to believe in you.” Paul J. Meyers

5. Be open to possibility when things don’t go your way. The path to the outcome may show up in ways you never imagined before. Suspend judgment of how things should be done and consider that the very thing you think is a deterrent may be the very thing you need to get what you want. Many times, people, circumstances and resources will show up, but you’ll miss the connection. This is where not knowing how, while keeping your eye on the goal, is important.

6. Practice gratitude. Be thankful for the things you have in your life right now. Look at your challenges as opportunities to grow. When you practice being thankful for specific events in your life, even when you don’t understand why they appear in your life, your ability to manifest accelerates almost to the speed of thought.

Getting what you want is not always simple and easy. Challenges, emotions, other people’s negative views and comments can set you back. But in the end, it all comes back down to your choice, commitment, effort and most of all…attitude. It’s essential to choose what you want, believe in your abilities, trust the process, have faith that it will happen and embrace the right attitude.

That is why “attitude is everything”.

“Attitude is everything,” according to Meyers. “It doesn’t matter where you are or what you’re doing, it all has to do with attitude. And then I have an I will-not-be denied attitude. And that’s an incredible thing to have. I don’t look to my weakness; I look to my strength. I don’t look to my problems; I look to my power. It’s all about attitude.”

“When winners choose a goal, their commitment to achieving it is firm and steadfast,” says Meyers. “When winners are confronted with hurdles or run into stumbling blocks, they go over them or turn them into stepping stones. Winners pursue their goals persistently until they succeed.”

Every day, you should strive for increased clarity around your goals and knowing what you really want. Having clarity about what you want keeps you moving toward it.

References:

  1. https://ninaamir.com/the-importance-of-knowing-what-you-want/
  2. https://www.lifehack.org/articles/communication/7-ways-find-out-what-you-really-want-life.html
  3. http://successnet.org/cms/goals/top-ten-reasons-people-dont-achieve-their-goals
  4. https://www.psychologytoday.com/us/blog/the-second-noble-truth/201711/you-dont-know-what-you-want
  5. https://www.inc.com/stephanie-frank/6-steps-to-get-anything-you-want-even-if-you-dont-know-how.html
  6. https://www.success.com/paul-j-meyer-what-it-takes-to-be-a-winner/