Author Archives: Claire Harrison

Claire Harrison
Claire Harrison is a Campaign Manager at blooom. A high-fiver, thinker, and coffee drinker, Claire loves the Oxford comma and clean design. She’s werkin’ hard to help people learn about their retirement savings and how easy blooom is to use.

3 Ways to Generate Passive Income

When it comes to building wealth, you can only do much through saving.

Don’t get me wrong – saving money is important. But it’s only the start.

You want to make sure you’ve cut out all the frivolous spending. You’ll want to contribute as much as you can into a 401(k) or some other retirement account. You’ll want to make sure you’re keeping your rent to a third of your income and pay down all your high-interest debt.

But once you’ve optimized the savings side of the equation, it’s time to look elsewhere.

The key to building wealth is discovering and cultivating additional streams of passive income. Getting a second job helps in the short term but if you’re trading time for money, you’re going to burn out. You only have 24 hours in a day and you’ll need some of that to sleep and recuperate.

What is passive income? Passive income is what you can earn without actively trading your time for money. When you go to work, you’re paid for your time. You may be salaried and not paid by the hour, but you’re still being paid for your time and your contributions to the company.

These are investments that pay you even though they don’t require daily attention. It’s often said that millionaires have 7+ streams of income and that’s only possible with passive income.

What are three great ways to generate passive income?

1. Real Estate

Real estate has long been touted as the path towards wealth. While you’re never guaranteed a positive return, in real estate or in any other type of investment, having a diversified portfolio of property has often been one of the most reliable ways.

If you buy property, it’s not passive. Being a landlord can be lucrative but requires quite a bit of work, from making repairs to handling phone calls to finding tenants for your rental. You take care of a lot of these problems by working with a property management company, but even that can be expensive and risky.

If you want to become involved in real estate and be truly passive, you must invest in real estate investment trusts (REITs) or crowdfunded real estate investment properties.

A REIT is a mutual fund that invests in property. The big funds own shopping malls, commercial districts, and storage facilities. They’re required by law to have the bulk of its assets and income connected to real estate investment and they must distribute 90% of its taxable income to shareholders each year as a dividend.

Another option for passive income in real estate is to invest in crowdfunded real estate. These are platforms that help curate real estate deals and let you invest in a share of a new property. It could be in the form of a note to the developer or even include some equity in the project. Some platforms have themes, like single-family homes or single-tenant commercial properties, while others only invest with certain types of developers, such as retired military.

Whatever the case, it offers the ability to invest in real estate without having to own any property.

2. Dividend Stock Funds

One of my favorite ways to generate passive income is by investing in companies that pay dividends. When it comes to truly passive income, it doesn’t get much better than dividend stocks. You simply buy the shares and collect the dividends!

What makes this even more powerful is that dividends are taxed at a lower rate than ordinary income, sometimes much lower depending on your tax bracket. If you follow a few simple rules, you pay the same as long term capital gains rates.

If you are nearing or in retirement, buying low volatility dividend stocks can help you build a monthly dividend paycheck that rivals some pensions. If you can handle the swings of the market, it’s a great strategy.

As a younger investor, I look to invest in dividend growth stock funds. These are funds that invest in strong blue-chip companies that regularly increase their dividend payouts each year. By increasing the dividend, usually faster than inflation, I can build a portfolio of stocks that pay out a large dividend relative to my cost basis.

Much like real estate, this stream of income isn’t without risk. The stock market is volatile, and your investments can lose value. If you have a long-term outlook, for me that means greater than five years, I feel like I can weather the downturns and wait until stocks recover.

And if stocks are volatile to the upside, even better!

3. Rent Out a Spare Bedroom

How big is your place? Is it in a popular area?

And do you have a spare bedroom?

Consider renting it out on a website like AirBnB for some extra income.

Renting a room on AirBnb is super simple and it’s a great way to earn a few hundred dollars, to a few thousand dollars depending on how popular it is, a month.

Our neighbor has an in-law suite in her basement and rents it out for $100 – $120 a night. It has separate access from the patio, so they almost never have to interact with guests, which is a plus.

We live in the Washington D.C. area and the suite is almost always rented out on the weekends. All she must do is launder the sheets, pick up a little bit, and the extra income is hers.

Of the three options on this list, this one is the least passive because you’ll have to list your bedroom and attend to the guests who arrive, but it’s monetizing something extra that you already have.

Once you’ve taken care of and optimized the basics, start looking to build additional streams of income to help build wealth that you can pass down to future generations.

 

About the Author

Jim Wang is the founder of Wallet Hacks, a personal finance blog where he shares his strategies for getting ahead financially. Jim uses his engineering background to break down complicated personal finance topics into easy to understand pieces so you can better manage your money.

The information is provided for discussion purposes only and should not be considered as advice for your investments. The information does not represent a recommendation to buy or sell securities. Please consult an investment advisor before you invest. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed. Even diversification doesn’t guarantee a profit and can still result in losses in declining markets.

Read More

3 Ways to Save for Retirement Without an Employee-Sponsored 401k

Retirement advice always starts out like this: “Put 15% of your gross pay in your 401(k) — and be sure to get that company match!” 

Okay, sure. I mean, not everyone has an employer-sponsored 401(k), but thanks for the tip?

Here’s the thing about that advice: Not everyone works for an employer that offers a 401(k). And contractors, freelancers and small-business owners certainly don’t! That’s why it’s important to find alternate methods of saving for retirement when you don’t have access to a 401(k) or that sought-after company match. 

You can still put away money for your retirement if you don’t have a 401(k). There are actually a bunch of ways to do it, depending on your situation, your income, and your goals. 

Here are the top 3 ways to save for retirement outside of an employer-sponsored 401(k).

1. Get an IRA and max it out

The best advice for saving for retirement without a 401(k) is to sign up for an IRA and max out your contributions. These accounts are fairly simple to set up, give you lots of choice when it comes to investments, and have their own particular tax advantages.

Traditional IRA 

You can open a traditional IRA (Individual Retirement Account) at most brokers, even online ones. Contributions are tax-deductible, although when you retire, you’ll have to pay taxes on the distributions. Contribution limits for a traditional IRA are $6,000 if you’re under age 50 and $7,000 for age 50 and older.

Roth IRA

A Roth IRA works a little differently: You get no tax deduction on your contributions when you make them, but when you collect the distributions later they are tax-free. As with the traditional IRA, the limits are $6,000 for under 50 and $7,000 for 50 and older.

Spousal IRA

If you or your partner is a stay-at-home parent, they can still save for retirement, too, with a Spousal IRA. 

2. Try a SEP-IRA or a Solo 401(k)

Just because you don’t have an employer-sponsored 401(k) doesn’t mean you can’t have a 401(k) at all! Solo 401(k)s are perfect for a company of one: the self-employed. Also known as a one-participant 401(k), these accounts are for business owners who have no employees. The IRS will let you use the plan to cover your spouse, though.

Solo 401(k)s have a contribution limit that makes IRAs look like small potatoes — $56,000 in 2019. If you’re older than 50, the IRS permits additional catch-up contributions of $6,000 a year. Plus, contributions can reduce your taxable income. There is such a thing as a Roth 401(k), which doesn’t reduce your tax liability now but allows you to take distributions tax-free down the road. However, know that the IRS will level penalties for distributions before age 59 ½.

SEP-IRAs

Similar to a Solo 401(k) is a SEP-IRA, but with a couple key differences. A SEP-IRA is also great for small-business owners with few or no employees, A SEP-IRA also has contribution limits of $56,000 total. And a SEP-IRA’s contributions are tax-deductible. However, a SEP-IRA differs from a Solo 401(k) because, as a small-business owner, you may have employees and, if they’re eligible, you must contribute to their plans as well. That means, if you contribute 10% to your plan, you must contribute 10% of an employee’s gross pay to their plan as well.

3. Use a Regular Taxable Investment Account

Finally, a regular old taxable investment account is another option for saving for retirement. It’s not tax-advantaged like retirement-specific accounts, but you can certainly sock away a healthy nest egg until your golden years. 

If you don’t have access to an employer-sponsored 401(k) and want to invest more than the $6,000 cap of an Roth IRA, then a simple taxable investment account could help you get your retirement savings to 15% of your income. Plus, a regular investment account doesn’t come with rules about required distributions or tax penalties if you withdraw before age 59 ½.

Taxable investment accounts are simple to start and can be opened online at a number of online investment sites. You can choose your investments yourself, work with an advisor or even let a robo-advisor do the heavy lifting.

Depending on your allocations of stocks, bonds, mutual funds and other investments, you can successfully balance your portfolio, minimize risk and maximize any potential gains. 

Don’t let the lack of an employer-sponsored 401(k) hold you back from saving for your future. Depending on your situation, your income and your goals, you can definitely put away a healthy sum and invest in your golden years without one.

 

About the Author

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

 

The information does not represent a recommendation to buy or sell securities. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed. Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.

Read More

Is Refinancing Your Home The Right Choice? Possibly.

With the recent volatility in mortgage rates, you might be wondering whether or not it might be a good time to consider refinancing your home.  If this advice feels a bit deja-vu, you are probably right. Mortgage rates have had just enough volatility these past few years to have created several opportunities for homeowners to refinance and save money on their monthly mortgage payments.  

 

If you currently have a mortgage rate above 4.0% we highly encourage you to read on. Then, take a moment to see if you could benefit financially by refinancing your home.  

 

A Quick Mortgage Refinancing Example 

 

Of course, every situation is different, but the best way to demonstrate why refinancing your home makes good financial sense is to walk through a simple illustration.  

 

Let’s assume that you purchased your home a few years ago for $300,000 and at the time you secured a mortgage rate at 4.50%. We will assume you made a 10% downpayment at the time of purchase which means you borrowed $270,000. If you secured a 30-year mortgage your monthly principal and interest payment would be $1,368. (Taxes and insurance on top of that).  

 

Today, given where rates are, you might be able to secure a new 30-year mortgage rate of 3.50% by refinancing.  This new lower rate means that your new monthly mortgage payment will drop to $1,167, a $200 per month savings! 

 

Alternatively, if you are feeling really financially motivated and have room in your budget, you could consider refinancing to a new 15-year mortgage. Although your monthly payment will likely increase – this is where the massive interest savings kicks in. Back to our example above. Today, you might be able to secure a 15-year rate as low as 3.125%.  In this case your new monthly payment would increase from $1,368 to $1,811 (an increase of $443 per month) BUT…hold on to your hats, over the life of the 2 loans, the 15 year mortgage with the lower interest rate would save you nearly $150,000 in interest cost over the old 30 year loan!

 

In reality, most people do not stay in the same house long enough to see it too full payoff.  Nevertheless, by lowering your interest rate (either with a better 30-year rate or a much lower 15-year rate) more of your monthly payment is going to paying down the principal of your loan instead of the interest. In other words, more of your money is going into your house equity instead of the pocketbook of the bank that holds your loan!

 

 

Refinancing Rule of Thumb: 2 Years AND No Junk Fees

At Blooom, we generally advise our clients to look into refinancing their mortgage if they are planning to stay in the home for at least the next 2 years AND if they use a lender that does not layer in “junk fees.”  There are lenders out there that will refinance your mortgage for next to no fees – but you might need to shop around a bit. Some of the fees that you need to be on the lookout for are lender fees, origination fees or underwriting fees. It is a very competitive mortgage market which is good for you, the homeowner, and don’t be afraid to negotiate. In many cases, these extra fees can be negotiated away entirely. One final word of advice, the big national mortgage companies that do the most TV advertising may not offer the best deals to refinance. It costs a lot to advertise all over TV and those expenses need to be recouped somehow!

 

A Summary in Refinancing Your Home

If your current mortgage rate is above 4.0% we would consider looking into your mortgage refinancing options. Rates are lower than they have been in previous years, which could mean big savings for you and your family. 

 

Blooom members know, we are here to offer unbiased, un-conflicted advice on all things important to you regarding your money. No, we do not make any revenue by you refinancing your mortgage. (But, good for you for asking!)  We are always on the lookout for smart ways to save money and refinancing your home may be just the thing to do. 

 

Feel free to reach out to us if you have questions specific to your own mortgage situation, we would be happy to help. 

 

 

The information is provided for discussion purposes only and should not be considered as advice for your investments. Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.

Read More

Q3 2019 PastCast: Mild Temps. Dense Fog. Earmuffs.

 

Here’s all you need to know. (If you’re in a rush.)

  • US stocks rose nearly 2% in July, declined nearly 2% in August, and then rose nearly 2% again in September. In other words, if you look simply at the start and finish of the quarter, stocks did practically nothing, despite weeks of sharp, sometimes nerve-racking ups and downs in between.
  • As expected, the Federal Reserve cut interest rates in hopes of boosting a slowing economy that continues to be impacted by global trade uncertainty.
  • Despite talk of recession, further interest rate cuts, no end in sight to trade tensions with China, and more political scandal and election uncertainty in Washington, most fundamental economic figures remain strong, as we enter what is often one of the strongest quarters of the year for the economy and the stock market.
  • Pro tip: If reviewing performance of any investment account, make sure you understand the context of the time frame you are evaluating, especially when we’re talking short periods of time (which you really shouldn’t be doing very often!). For example, 1-year performance can be much different than year-to-date performance, particularly when you look back on the most recent 9-12 months we’ve experienced. For more on this, keep reading…

And now for the long(er) version…

While there were plenty of ups and downs in between, the last three months left US stocks almost exactly where they were to begin the quarter. There were more headlines of possible recession, the largest single-day spike in oil prices ever after an attack in Saudi Arabia, more China/US trade “Will they? Won’t they?” talk, interest rate cuts, and now even a Presidential impeachment inquiry by Congress (in case you haven’t heard). The outlook for any of this getting sorted out by the end of the year, is foggy at best.

Despite all of this, the historic bull market in US stocks has held strong and there are still very few fundamental economic signs that we are currently in, or nearing, an actual recession in the coming months.

August was probably the biggest test of investors’ will-power, as we saw several significant declines during the month, that had the feel of a pre-recession crash for some. Yet, here we are in October, basically unchanged from the end of June.  

While the stock market was essentially flat for the most recent quarter, we can also look back much further and see that major US stock indexes are currently sitting about exactly where they were on this same day LAST YEAR! 

Although the stock market has risen close to 20% for 2019 so far, that isn’t the full picture your returns are likely telling you. Confused yet? Good. Stay with me. Visuals to come.

 

Short-term performance: It’s all how you look at it. 

As we enter the 4th quarter each year, we often notice an uptick in clients looking for help understanding their returns for the year so far. A common question we get from clients goes something like the following:

“Hasn’t the stock market been doing extremely well this year? If so, why am I noticing that my account is only up 2% this year, when my co-worker was talking about getting 15-20% on his/her account?

When logging into any 401k account, many will stumble upon a return percentage, front and center, with a “YTD” or “year-to-date” reference next to, or below it. Others may find a percentage with “1-year” next to or below it. 

  • Year-to-date The performance of your account from January 1st of the current year through today (or the most recent business day).
  • 1-year – The performance of your account over the last 12 months.

While you might assume these two numbers should be similar, there are times when adding or removing just a few months from the equation can end up showing you VERY different results, which in turn will make you feel two very different ways about how your account is doing. 

Let’s start by looking at the year-to-date returns of US stocks for 2019 so far, as measured using the S&P 500 Index…

Year To Date Change

19% is actually the best 9-month start to any year since 1997. Not too shabby. But now let’s look at the 1-year returns for US stocks. See if you notice the reason for the huge difference…

1 Year Change

S&P 500 Index: Oct. 1, 2018 – Sept. 30, 2019

As you can see, when we zoom out wider to a 12 month view, one of the worst quarters for stocks in the last decade suddenly comes into the picture. That downturn at the end of 2018 ends up erasing a huge chunk of the gains you saw on the YTD chart. 

By simply changing the starting point to last October, the resulting percentage drops by more than 16%. If this was an investor’s account and not the S&P 500 index, which of these two numbers do you think they’re going to share at the water cooler? Probably not the 2.15% number. So what is the average investor supposed to do with this information? 

 

The lesson… None of this actually matters

Getting caught up in the 9 month or 1 year returns of an account that should be globally diversified (not just US stocks/bonds) for the long-term, is just a recipe for more unneeded stress in your life. 

The longer our timeframe gets, the more we see that the shorter periods are basically meaningless. But don’t take our word for it. Here are several return numbers for US stocks using numerous timeframes, for all periods ending 9/30/2019:

US Stock Returns:

1-day: +0.50%

1-month: +1.72%

1-year: +2.15%

5-years: +50.93%

30 years: +1,505%

 

First and foremost, it’s important to remember that a properly diversified portfolio should contain much more than just US stocks. But just for fun, let’s say you’re retiring today (congrats!) and looking at a chart of your nest egg balance over the last 30 years. You see that over the past 30 years, your diversified portfolio was able to grow by about 1,500%, hypothetically. On any chart showing that growth, you’re likely to see many peaks and valleys along the journey to today. 

Now ask yourself this. Do any of those small, or even big dips in this imaginary chart upset you right now? My guess is, no. But in the moment, each decline may have actually felt like true doom and gloom.

 

The road to retirement is the scenic route.

What happens in one month or one year is just a small bump in the road when you’re able to eventually look back on your journey to retirement. The road to get there is never a straight line. It’s more of a winding scenic route. So why bother worrying if you have a proven long-term strategy in place?

Take it all in along the way if you want, but stay focused on the destination. As long-term, disciplined investors, we understand that we don’t get to build the road we travel. The market does that for us. We just need help finding, and then staying on, the best route for us. 

We may get frustrated or tired here and there and take an exit that throws us off course, thinking we know a better way. But then we learn from each detour and find our way back on the path that’s best for us. Or at least, that’s the idea.

 

In Summary: Ear muffs!

Our 24 hour news cycle has a daily impact on stock market movements. That’s undeniable. But the noise of one day, one month, or one quarter, fades into the next and markets sort through the chaos over time. 

It’s precisely BECAUSE the market is so chaotic in the short term, that patient long-term investors benefit and are able to experience better outcomes than those that let the noise of the world distract them. 

Whatever it is you need to do to get your hands on some metaphorical noise-cancelling headphones, do it now. With a Presidential election and potential impeachment proceedings around the corner, the noise will only be getting louder from here. Your future self (and specifically his/her ears) will thank you.

 

 

 

————————

 1. As measured by the S&P 500, per CNN Money https://money.cnn.com/data/markets/sandp/

2.  Total return includes reinvested dividends. Source: https://dqydj.com/sp-500-return-calculator/

Source for all charts: CNN Money https://money.cnn.com/data/markets/sandp/

 

The information is provided for discussion purposes only and should not be considered as advice for your investments. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed. Investors should consider their ability to continue investing through periods of fluctuating market conditions.

Read More

3 Ways to Screw Up Your 401k (And How To Avoid Them)

Your 401(k) offers a pretty effortless way to build up enough money for a comfy retirement at home, out of state, or maybe on a beautiful island somewhere.

The money comes off the top of your paycheck before you even see it, you often get free money from the boss (thanks to an employer match), and there are tax benefits. Taxes are put on hold until you withdraw the money in retirement, when you’ll likely be in a lower bracket.

But retirement accounts aren’t foolproof. It’s easy to get snagged by pitfalls that could wind up costing you thousands of dollars in penalties and lost earnings.

Avoid these common and potentially very costly 401(k) flubs.

1. Not contributing enough

To receive the maximum benefit from your retirement account — the fattest possible nest egg,  grown through investments — you want to put the maximum amount into your account each year.

The 2019 limit on 401(k) contributions is $19,000, or $25,000 if you’re 50 or older. (That additional $6,000 is called a catch-up contribution, designed to help those who missed out on saving more when they were younger.)

At the bare minimum, you should be kicking in as much as it takes to get the full matching amount from your employer. Your company will likely put as much money into your 401(k) as you do, up to a certain percentage of your salary.

It’s not any kind of a requirement, but employers often do it — and not just because it’s good karma. It helps them hire and hold onto talented people (like you!), they have to keep up with competitors who match, and it gets them tax breaks.

On average, companies in 2019 are matching employee contributions to a record 4.7% of salaries, according to Fidelity Investments. Put another way, workers with 401(k)s received an average $1,780 extra from the boss during the first three months of the year — so this is one time that being all matchy-matchy would indeed be considered very fashionable.

2. Contributing too much

Funding your 401(k) is like the bidding on “The Price Is Right”: You want to hit your contribution limit without going over.

If you exceed the threshold, it can be almost as bad as going home from a game show empty-handed — without a new dinette set or billiard table.

IRS rules state that if your contributions go beyond the limit in any year, you have to remove the excess amount from your account by April 15 of the following year. The overage becomes part of your taxable income for the year when you went breezing past the boundary. Any investment earnings on that money become part of your taxable income for the year when you make the withdrawal.

But at least you won’t get dinged with the usual stiff penalty for withdrawing money from your 401(k) too early. More on that in a moment.

If you don’t pull the offending amount out of your account by the April 15 deadline, that money will be subject to double taxation — which is just as ugly as it sounds. The excess is considered part of your taxable income at the time the contribution was made, and then again whenever you eventually do make that withdrawal. Ouch, and ouch.

So, know the limit, and be careful that you don’t break through it.

 

3. Touching the money too early

This is one that snags far too many retirement savers. Raiding your 401(k) too soon gets very expensive, because you can owe federal and state taxes on the withdrawal plus a 10% IRS early withdrawal penalty.

What do they mean by “early”? You’ll get slapped if you touch the money before you turn age 59 ½. (How’s that for an odd birthday?)

Research shows that a third of account holders do cash out early, and that includes most younger workers between ages 18 and 34. People often do it when they change jobs, find themselves out of work, or are suddenly facing a huge car repair bill or other financial emergency.

This is why it’s so important to have emergency savings (enough to cover three to six months of living expenses), in addition to retirement savings. It’s tough, but it’s just part of the whole “adulting” thing.

Note that there are several exceptions to the 401(k) early withdrawal penalty. You might not have to pay it if:

  • You’re disabled.
  • You have high out-of-pocket medical expenses.
  • You lose or leave your job when you’re 55 or older.
  • You want to use the money for higher education.
  • You’re buying your first home.

But, in other cases, think very, very carefully about whether it would be worth it to tap your 401(k), no matter how badly you think you need the money. The consequences can be costly.

 

About the Author

Doug Whiteman is the editor-in-chief and analyst for Wise Publishing, Inc., and its flagship personal finance website MoneyWise.com. Previously, he was an analyst and editor covering mortgages, insurance and related topics for Bankrate.com, and was the consumer news reporter for Associated Press Radio. He has been quoted by The Wall Street Journal, USA Today and CNBC.com, and has appeared on ABC Radio, Fox Business and the syndicated TV show “First Business,” among other outlets.

 

Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.

Read More
1 2 3 12