Six years, three months, and fourteen days. If you have a countdown clock like this for your retirement, you might be a Police Officer. Law enforcement can be a rewarding and fulfilling career. On the other hand, that fulfillment can also come with stress, missed family gatherings, and unpredictable schedules.

For all the pros and cons of a career in law enforcement, an officer typically knows when it is time to hang it up and join the retiree club or the “check of the month club” as some like to call it.

Preparing to join this club is one of the most critical parts of your career. However, it is also one of the most overlooked aspects of your career. Not having a proper retirement/financial plan can be a recipe for disaster and ruin your future.

We will look at some of the most important aspects you should plan for and why police officers and law enforcement typically require more sophisticated financial advice than the average retiree.

Be sure to stick around until the end to see how you can get a free, personalized pension report (so long as you a member of a public, state pension system in any one of the fifty states – this includes any public employee).

Understanding Your Pension

A career in law enforcement can present some unique opportunities in retirement. The biggest opportunity is most retirees will often be entitled to receive a defined benefit pension payment.

It is critically important you fully understand what type of income your pension will provide to you in retirement. You must learn how it is taxed, and if there are any choices you will need to make when electing your benefit, such as beneficiary/survivor options.

Calculating Your Benefits

Most law enforcement pensions are calculated using a mathematical formula consisting of years of service, final salary, and sometimes age. However, the actual formula will vary significantly by state. Many pension systems are now moving towards a hybrid system for new members, which consists of a lower defined benefit pension plan combined with a separate investment account (similar to a 401k style plan).

The individual investment account is a defined contribution plan, meaning it typically will not pay a guaranteed or pre-determined benefit when you retire. It will be the retiree’s responsibility to convert those funds into income if they so wish.

Basically, you will simply have a lump sum in this account at retirement. This type of account is often held in mutual funds or annuities and may be subject to market volatility.

Why are pension plans doing this?

To shift the burden of having to provide guaranteed income from them over to YOU. It is now the responsibility of the officer to figure out how to make that money last their entire life. This has been happening in the private sector for years.

Tiered Retirement Systems

Additionally, many pension systems now also have a tiered system. With the tiered system, each tier will have its benefits, which are generally determined by the date of hire. For example, an officer hired before the year 2012 may only have to work twenty-five years to receive a full pension while an officer hired after the year 2012 may have to work thirty years to get full retirement. Again, these tiers are determined by the respective pension boards and will vary widely by state.

This is why we will be providing any reader with a personalized pension report if they would like to see the details of their plan!

Unknown Legislation Reforms

It is also vitally important to remember that even though pension plans are defined benefit plans, changes can still be made through legislation. This has happened in several states for both active and retired pension members.

Simply put, this means lawmakers can make changes to your pension, and there isn’t a whole lot that can be done about it. This seems to happen during and after major economic situations. Add the fact that many pension plans have billions of dollars in unfunded liabilities, and this just adds fuel to the fire.

I am worried about what pension legislation the future holds in the aftermath of the Covid-19 economic crisis. Just remember, pension reform usually indicates particular pension funds are not faring well or the economy is struggling.

Dealing With Inflation

Speaking of pension reform through legislation, many states are also eliminating the cost of living adjustments for retired officers. This will reduce the buying power of your pension as you get further into retirement because of inflation.

Inflation averages 2-4% per year. If a retiree begins drawing their annual pension of $50,000 in the year 2020 and never receives a cost of living increase, that same $50,000 pension will not have nearly the same buying power in the year 2030, 2040, and so on. With each state being unique, it is essential you fully understand your pension plan inside and out before retirement.

Will Guaranteed Income Be Enough?

One of the great benefits of a pension is the guaranteed income for life. However, these pensions also create an unusual problem that is unique to police and fire pensions. Law enforcement and public safety careers are generally “short” when compared to other professions and lines of work.

In New Jersey, for example, where I am a police officer, a Tier 1 Police & Fire Pension Member can receive sixty-five percent (65%) of their final year’s salary after twenty-five years of service. This creates a unique problem if you want to retire completely and never work again. You will only have twenty-five years to build a supplemental nest egg to your pension.

The problem is many first responders fall into the mindset that they do not need to save for retirement because they will receive a pension benefit. In reality, this is a dangerous mindset, and nothing could be further from the truth.

Gone are the days of your pension being sufficient and your sole source of retirement income. Times have changed far too much, and the importance of additional retirement savings cannot be stressed enough.

Supplement Your Pension

As mentioned earlier, many states are eliminating the cost of living adjustments for retired officers, which is creating a clear need to have a supplemental nest egg. This is especially true if you retire at a young age. Some officers will be able to leave with a pension as young as thirty-eight years old.

As you have a short window to build this nest egg, it is essential to start as early as possible and contribute as much as possible. It is equally important to pay attention to your additional investments, to make sure the assets are suited to your goals and risk tolerance, and to make sure the investments are appropriately allocated.

Generally, as you near retirement, your investments should usually become more conservative and less volatile because you may not have time to recover from significant losses. Significant events such as 9/11, the 2008 financial crisis, and the recent coronavirus pandemic highlight the importance of having a well-diversified and risk-appropriate portfolio.

We never know when an economic crisis will hit, and the last thing that you want is for your retirement portfolio to take on significant losses as you enter retirement. No one can accurately, successfully, and consistently time the market.

Choosing The Best Supplement

To maximize the value of any additional accounts to your pension, it also becomes vitally essential to take advantage of tax-advantaged accounts. These accounts can include a traditional IRA, Roth IRA, 457b, or deferred annuity.

A traditional IRA or 457b is funded with pre-tax dollars, offering instant tax savings, but a tax liability will be due when withdrawing any money. A Roth IRA is funded with post-tax money and will be tax-free upon withdrawal as long as the withdrawals are within IRS guidelines.

If you are unfamiliar with the advantages and disadvantages of each type of account, it is important to consult with a financial professional (ideally an independent fiduciary) who can assist you with choosing the right account and investments. In fact, in most cases, it is possible to have more than one tax-advantaged account.

Don’t Ignore Life Insurance

Another great benefit of many state pension plans is they usually provide their members with a group life insurance benefit. This is a great added supplemental benefit while you are still in your working years. However, this benefit is usually inadequate or non-existent in retirement.

Life Insurance is often a much-overlooked piece of the retirement puzzle. It can provide income replacement, cover final expenses, and help with estate planning needs. Also, life insurance can provide a legacy to children and other heirs, help with college funding, and even provide tax-free retirement funds if appropriately structured by an expert. Your run of the mill life insurance agent usually will not be able to do this type of specialized policy design.

Life Insurance During Employment

As we said, during your working years, most departments and pension systems will provide a group life insurance benefit to you at no cost. This policy will strictly offer a death benefit and will generally be based on your current salary.

For example, in New Jersey, a Police & Fire Pension member’s beneficiary will receive a benefit equal to 3.5X the member’s salary. Again, this is purely a death benefit, and these group policies do not offer any cash value, living benefits or long-term care benefits, and could be taxable.

Life Insurance After Retirement

Upon retirement, this benefit will generally cease or significantly reduce. To stay consistent with our New Jersey example, once a member retires that benefit equal to 3.5X the annual salary drops to half of the member’s final salary, or 50%.

To put this in perspective, we will assume a member retires making $100,000 per year. During their working years, their group life insurance benefit would be $350,000. However, when they retire, it drops to $50,000. That is a big difference and often not nearly adequate for most people’s situations or needs.

Some pensions systems will allow you to continue full coverage at a cost in retirement. Unfortunately, this cost is often far too expensive concerning the benefit(s) being offered. Again, in this scenario, you are merely purchasing the group policy, which will provide significantly few benefits other than a death benefit and will usually be overpriced at this point.

Many officers find they can obtain similar coverage, with additional living benefits at a cheaper rate, by using their own privately owned life insurance policy. If we are honest, who wants to pay for life insurance that can only be used if they die? Call me selfish, but I like the idea of owning life insurance that can also benefit ME while I am still alive.

Obtaining The Proper Coverage

It is also important to sit down and analyze how much coverage you need as this figure will most likely be different than the standard “three and a half times salary” provided by your employer.

This is different for everyone and depends upon your situation.

Another benefit of obtaining your insurance is purchasing a policy with riders for long term care or an accelerated death benefit. There are so many “what if’s” in retirement relating to health and wellness, and your retirement accounts should not act as an emergency fund in case you need long-term care or other medical treatments.

The need for long term care can quickly cripple even any well-funded retirement portfolio. Therefore, it is critical to factor the possibility of needing long term care into your plan. However, this could be a topic for an entire article.

How To Use Life Insurance While You’re Alive

The takeaway here is these riders will allow you to access your death benefit while you are alive to use for long term care costs, serious illnesses, and other serious injuries. Nearly all accelerated death benefit riders will allow you to access your death benefit if diagnosed with a terminal disease. This allows you to decide how the money is distributed and utilized and also can cover medical expenses if needed. There are other ways to fund long-term care needs through separate policies that focus mainly on long-term care and nursing home needs.

Two Pensions?

Another strategy to implement during retirement is creating your supplemental pension or an entire second pension if you will. This is because many law enforcement officers will not be eligible for social security. This will depend upon your state and sometimes your agency as well.

Creating this additional income stream can be done by utilizing a deferred or immediate annuity with a guaranteed lifetime withdrawal benefit. When the guaranteed lifetime withdrawal benefit is activated, the annuity will provide income for life just as your pension does. The only difference is that the payments are made to you from a company rather than the state, county, or city.

Surprisingly enough, many of these annuity companies are in much better financial shape than the state pension plans. Go figure…

Consider An Annuity

These guaranteed payments can be made monthly, quarterly, or annually. If the funds that were contributed to the annuity were held in a Roth IRA account, then the payouts will typically be tax-exempt.

Having a portion of your retirement assets in a guaranteed payout account will act as your own cost of living adjustment. This payout will help you weather any market volatility and will reduce the temptation of making emotional, financial decisions in low markets.

Annuities can be a complex financial product and payout will vary from company to company. It is best to consult with a true fiduciary to choose the best annuity for you and not the best annuity for the financial professional.

Some annuities will also offer additional benefits such as an increased payout if the owner is confined to a nursing home or continued payments to a spouse upon the owner’s death. Annuities can also be used for things like college funding and wealth transfers to heirs.

Learning Who To Trust

If you are uncomfortable with financial concepts and strategies, it is best to plan for retirement with the help of a trusted financial professional and one that specializes in working with law enforcement and public safety. Throughout your career, you should discuss your goals annually and adjust your finances accordingly.

I like to use a simple concept with my clients:

Plan,

Prepare,

Execute,

And Evaluate.

Each year we plan what we want to accomplish financially over the next year and throughout the client’s career.

We then prepare by setting up the proper accounts and develop a contribution schedule. Funding supplemental retirement accounts are often not as hard as people may think.

The execution is continuing the contributions throughout the year.

At the end of a year, we evaluate the progress and adjust accordingly as we reenter the “planning stage.” We also make sure that our financial plan covers any possible “what if” in retirement.

Every dollar has a purpose and covers a need, goal, or want. This simple concept allows me to work with my clients as a team, ensuring their financial objectives are met. As a police officer myself, please remember you should only be working until you are 90 because you want to, not because you financially have to.

Retire Like You Deserve

Even with a pension, I have encountered many retired law enforcement officers who struggle in retirement. They are forced to work during a time when they should be relaxing and reaping the benefits after years of a stressful and challenging job. You only get one shot at retirement, so make sure you get it right the first time. There are no do-overs.

To Your Retirement…

Bonus Content:

These are the most common retirement questions I get:

How much should I invest in my supplemental accounts?

What should I be invested in? When should I make changes?

How do I decide when I should retire? Am I going to be safe in retirement?

Is my group life insurance enough to keep my family safe?

Where should I keep my retirement funds after retiring?

How can I keep more of what I’m earning?

How do I decide on my pension benefits?

How do my benefits affect my taxes and Social Security?

What should my spouse be doing?

If you are wondering the same, have similar questions, or would like personalized advice, you can schedule a one-on-one call with Gary.

Don’t forget to contact us for your free, personalized pension report as mentioned above. We can show you potential income at different ages, factor in social security income if applicable, show the details or your particular plan, and determine any income gap.

About Gary D’Alessio

Gary D’Alessio is a police officer with 12 years of law enforcement experience in New Jersey. He is also a financial advisor and co-founder of Thin Line Financial Group. His mission is to educate and help public sector employees plan for their retirement and be well prepared for their futures.

Find more resources & tools, including a free retirement webinar at: https://thinlinefinancialgroup.com/

**This information is meant to be educational and informative. It is not meant to replace or substitute personalized or individual financial, investment or tax advice.

This post originally appeared on Arrest Your Debt.

Leadership is a famously difficult duty.

Whether you want to become the big shot or you’re already the boss, you’ve got work ahead of you. Let’s look at our most famous leaders and their motivating guidance. These inspiring leadership quotes are sure to illuminate your road ahead.

Leadership is Learning

While leadership styles vary, the core characteristics of effective leadership do not. For example, many famous leaders place an extra emphasis on education.

“Leadership and learning are indispensable to each other.” -John F. Kennedy

Perhaps this quote is so often recited because JFK didn’t say it. He wrote it and was scheduled to say it during a speech on November 22, 1963. That speech never came, and the rest is history.

But Kennedy’s words are alive and well. Leadership often takes place at the cutting edge, as a new territory gets explored. Launching into new space requires bountiful curiosity and the ability to learn.

Just think about it! In 1900, an engineer said, “Now Abel, I want you to dismount your horse and give this motor carriage a try. Mind the bumps!”

Sixty years later, that same kind of engineer said, “Now Neil, we’re gonna strap you real tight to this aluminum tube full of explosives. But don’t worry. We’ve already got the coordinates for the Moon typed into the GPS.”

Wait…that’s not how GPS works…

The Audacity to Learn

Enough digression! The point is, it takes major league audacity–from individuals, organizations, or entire societies–to make that kind of technological leap in 60 years. Innovation distinguishes the lead group from those behind.

JFK would go on to write that “ignorance and misinformation can handicap…progress.” It’s now 57 years after he said that, but I’d say he hit the nail on the head. The importance of learning is that it acts as armor against ignorance and allows us to discern real facts from fake. Learning yields progress for the individual and the group.

Knowledge is a magical resource. Why? It can be given away ad infinitum, yet still, be retained by the owner. Leaders are generous in this way. Leaders want to learn and want others to understand. It’s the main reason I love writing detailed breakdowns of complex topics (e.g., what happened during the Big Short, anyway?)

When I ask you to envision a true leader, is she enlightened or in the dark? Does he fight adversity with wisdom or with ignorance? Does she let her intellect guide her? Is he a slave to emotion?

The fact is, leaders are always willing to learn. A curious and open mind is what earns the respect of their followers.

“It is necessary for us to learn from others’ mistakes. You will not live long enough to make them all yourself.”— Admiral Hyman G. Rickover

This quote is impressive because of its simplicity. It’s just basic math and the logistics that follow. There have been hundreds of generations of humans before you. Those billions of people have screwed up in various ways–we all know it happens. You can choose to use their mistakes as a starting point, or you can put on blinders.

If you want to lead–to be at the cutting edge–then you cannot afford to repeat the mistakes that others have already made. The cutting edge has no room for error.

Mistakes –> Learning

At best, repeating previous mistakes is a waste of time. At worst…well, I’ll leave it up to your imagination.

You’ve got to learn from others’ mistakes. The keyword is learn. This leadership quote is just like that saying, “Those who do not learn from their mistakes are doomed to repeat them.”

If you’re scientifically inclined, you could even think about this quote through the lens of natural selection. Successes are selected, whereas failures are not. Therefore, avoid the behaviors that lead to failure. If not, they might lead to failure again, and you might be the one that ends up not being selected.

“I am still learning.” -Michelangelo

I don’t know if Michelangelo was a leader of people. But he was a leader of culture, and amazingly still is 450 years after his death.

Perhaps you know him by his sculpture? He’s known for the beautiful range of work that is still on display across the internet and in museums.

It’s more likely that you know Michelangelo because of the Sistine Chapel. Not only is it beautiful, but it’s also 133 by 46 feet in size: one man, four years, and one wonder of the world.

He was also an illustrator, architect, and poet. Michelangelo (along with Leonardo da Vinci) is the reason for the term “Renaissance man.” Michelangelo wasn’t a Renaissance man – he was the Renaissance man. That’s him!

The Best Still Get Better

I don’t mean to worship the guy, but I want to properly explain just how talented, experienced, and learned Michelangelo was. When he says, “I am still learning,” it carries extra weight. It’s like the leadership quotes you might see from world-class athletes who say, “I still practice.”

Michelangelo likely became who he was because he was always learning. It only makes sense that he maintained that attitude even after he “reached the top.” That’s a leadership quality worth emulating.

Leadership is Action

While leaders shouldn’t be rash, they also can’t afford to be indecisive. Leaders lead. Leaders act.

“The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails.” -John Maxwell

The one has that Goldilocks “magic of three” vibe to it. You don’t want to be too “this” or too “that.” You’ve got the be just right. The more time I spend in this world, the more I think this quote is a home run.

Talk is easy. Complaining about a situation or expressing hope for change is low effort. Anyone can do it, and just about everyone does do it. Leadership, however, is not a low effort task.

Leadership requires action. A leader identifies when the winds are changing, understands how the new gusts affect them, and works towards saving the boat. Heck, sometimes those winds even propel the ship faster than ever before!

When Life Throws You Lemons

I talked about this idea in one of my first articles after the COVID-19 pandemic came to American shores. Take what life gives you and prepare for what’s next. The Stockdale Paradox would tell us that you have to balance hope with the stern ability to face present-day facts. That is Stockdale’s version of “adjusting the sails.”

I’m also reminded of the story of two Chicago programmers working on solving problems for apartments.com.

After many late nights debugging code, they realized that their primary problem had changed. Apartment searches were easy compared to the issues they were having with quality late-night take-out food. As funny as that problem is, it’s what inspired Matt Maloney and Mike Evans to start GrubHub. Their winds changed, and they adjusted their sails.

“Anyone can hold the helm when the sea is calm.” –Publilius Syrus

Another boat metaphor? I know, I know. But it makes sense. Boats need captains. Good boats need good captains. And good captains are good leaders.

My youth baseball team had a captain that became a complete tyrant at the slightest hint of unrest. He found it easy to be our “leader” when everything was going according to his plan. That’s because the sea was calm. But a ripple of discord would rip his hands from the helm as he lost his cool. That’s not real leadership.

When the Going Gets Tough

A good leader, on the other hand, stays in control even when the surf gets choppy. And that means that leaders sometimes make tough decisions i.e., when the going gets tough, the tough get going.

As you see, when your star rises into a leadership role, remember that it’s often these challenging situations that will define you as a leader. A true leader is forged in the heat of difficulty.

“Whatever you are, be a good one.” –Abraham Lincoln

If the world was full of middle managers, then who would make the coffee?

Not everyone can be a leader at all times. There’s another oft-repeated quote along these lines: “a good leader can be a good follower,” or “a good leader knows when to follow.” Honest Abe is highlighting this idea. Even if you find yourself in a “follower” position, be good at what you do. That’s what a leader does.

Show Me Your Chops!

Just imagine someone who would try to convince you, “I will only put effort into any team in my life if I’m the unquestioned leader.”

One of the many natural responses I’d have is, “Do you have the chops? Where’s the proof?” In other words: good leaders put in the legwork.

Be good at the entry-level position until you’re given small responsibilities. Be good at taking notes until you start running the meeting. Work your butt off on the JV team until they have no choice but promote you to varsity.

There will be many steps in your journey, and you will not be at the front of the line for most of them.

Leadership is About Others

What good is a general with no soldiers? A leader takes people and lets them do the most extraordinary things. A good leader is nothing without the people who follow their lead.

“Leadership is the art of giving people a platform for spreading ideas that work.” –Seth Godin

Leadership–especially in modern times–involves the network effect. The capability of everyone far outweighs the ability of a single person.

Great leaders attract great people, and then let those great people spread their wings (and their ideas). One of my first bosses micromanaged me through every task–even mundane chores like ordering paper supplies. I’ll never forget that feeling. Any potential I had was cramped inside a tiny cage.

A genuine leader props up those around them. Seth Godin’s writing is all about unlocking people’s potential. That’s what this leadership quote is all about.

“You take people as far as they will go, not as far as you would like them to go.” –Jeanette Rankin

Of all the leadership quotes here, Jeanette Rankin’s reminds me of “the single most important trait” for a person to have (that’s a Gary Vaynerchuk claim). What trait? Emotional intelligence.

Emotional intelligence involves the ability to control and express one’s emotions but also to “handle interpersonal relationships judiciously and empathetically.” The second half of this definition is a prerequisite of good leadership, according to Rankin.

When to Pump the Brakes

That is one of the many challenges of leadership. You cannot drive your team to exhaustion. But you can’t be so soft as to under-perform the team’s expectations. People feel satisfaction from exploring their limits, but animus multiplies when those limits aren’t respected.

The emotionally intelligent leader is thinking about the personal development of those around them.

“A leader is best when people barely know he exists…when his work is done, his aim fulfilled, they will all say: We did it ourselves.” -Lao Tzu

A young child writes out the entire alphabet for the first time and proudly exclaims, “I did it!”

Of course, we know that child got lots of help across the spectrum of his little life. Timmy didn’t synthesize the alphabet on his own accord. He was taught, he was led, and he had weeks of error-filled practice.

But as good parents and teachers, we want our children to know that they are capable on their own. You did it, Timmy!

From Small Kids to Muscled Men

True leaders empower those around them to become better. They share recognition with their team. It’s not just with children. You’ve seen this before–it happens in every single sports interview ever.

“Well Jim, I couldn’t have done it without the other guys out there. They did all the hard work in the trenches. They set the pins up, all I had to do was knock them down. It was a team effort.”

While I’m tired of every sports interview containing these same platitudes, I understand why they’re (over) used. Deferring the credit to your team is part of being a leader.

That’s why I just want to stay focused on the fundamentals. I’ve got to cross my T’s and dot the I’s. I don’t want to get ahead of myself. I’m taking these best leadership quotes one at a time.

Leadership is Ethical

Above all else, leaders do the right thing, especially when it’s also the hard thing.

“We are what we pretend to be, so we must be careful about what we pretend to be.” —Kurt Vonnegut

Out of all the leadership quotes here, this one stopped me in my tracks.

Kurt Vonnegut is suggesting that our personalities are not innate, but rather are learned behaviors formed by habit. And those formative actions are, essentially, small performances of pretending. We pretend and pretend and pretend, and suddenly it doesn’t quite feel like pretend anymore. It just is. We become what we’ve pretended to be.

We aren’t born mean, friendly, timid, or courageous. Instead, we’re born as the proverbial lump of clay, waiting to be molded. As we mature, the clay is formed in a certain direction via the actions we choose to take.

But even adults who claim to be “stuck in their ways” still possess that malleability. They are merely pretending to be stubborn old dogs. They’re pretending refusal to learn new tricks.

That’s Not Really Who I Am

As a leader, you might face a situation where you feel like acting like a tyrant. Of course, you tell yourself, you’re not a tyrant; you’re just acting like one in this situation. This is the exact scenario that Vonnegut would caution against. It’s all too easy for acting to supplant reality. Life is too short–memento mori–to pretend to be a tyrant.

We can view this leadership quote from another point of view. Namely, there’s the version of you that you see, but there’s also the version of you that everyone else sees.

If you want to lead, you’ve got to show everyone else that you’re a leader. It might not come naturally to you, and that’s ok. Try to take the actions that a good leader would take. While you might see leadership potential inside you, you’ve got to make sure that others see it too.

Even if it feels like pretend at first, you’ll soon be a true leader.

“Management is doing things right; leadership is doing the right thing.” –Peter F. Drucker

Who’s a leader in your life right now? For many, the answer could be your manager at work. But Peter Drucker is asking us to consider the fact that management and leadership can be exclusive of one another. While the two are often intertwined, there’s an important distinction.

Management is procedural. It’s about spellchecking your essay. It’s ensuring that the cogs are meshing as expected, so the whole machine functions with efficiency. Management considers the “resource” in “human resources.”

Leadership is moral. Leaders look for meaning in the essay. They consider the cogs as they exist outside of the machine, perhaps even calling into question the machine itself. Leaders put the human first.

Separate “Management” from “Leadership”

Perhaps you’re looking for a promotion at work. You want to become a program manager, a shift supervisor, or a VP of blogging. I’m right there with you! But I think it’s important to understand the difference between effective management and effective leadership.

It’s certainly easier to become a manager if you’re already seen as a leader, just as it’s easier to share your leadership skills if you’re given a managerial position. But the two should still be seen as mutually exclusive. It’s possible–and impressive!–to become a leader without being any sort of manager.

So use this leadership quote to ask yourself, “Leadership or management…which role are you truly aiming for?”

“The pressure of adversity does not affect the mind of the brave man . . . It is more powerful than external circumstances.”— Seneca

Seneca is considered one of the original Stoics. Just like all things hipster, stoicism is back in style. And why shouldn’t stoicism be popular?! This leadership quote is the perfect example of how stoicism promotes the same mindsets that we associate with effective figureheads.

A good leader–whether man or woman, Mr. Seneca–does not let adverse conditions harm their psyche. A leader is a person who faces disaster with a steely gaze and an iron will.

We’ve seen this countless times in history. Why are Winston Churchill and Abraham Lincoln considered timeless leaders? Mainly for their calm decision-making during embattled eras.

Why are Martin Luther King Jr. and Mahatma Gandhi still revered civil rights activists? Because they let their moral compass guide them, even as their rulers (managers, not necessarily leaders) tried to hinder those paths. Societal pressure was no match for their mindset.

But Leaders Aren’t Perfect

Churchill, Lincoln, King, and Gandhi were all far from perfect, by the way. Leaders aren’t perfect. Who is? I know the separation of leadership from faultlessness is something I’ve struggled with. Perhaps you have too.

How can I be a leader if I don’t have all the answers, don’t have all the experience, don’t have all the skills? While knowledge and experience are certainly important, there will always be a new situation to make you feel like a foolish greenhorn. It takes bravery to grab the wheel despite your flaws and confidently point your boat into the crest of the wave.

Honorable Mention

There are a few more I couldn’t leave off the list

“Knowing is not enough; we must apply. Willing is not enough; we must do.” —Johann Wolfgang von Goethe, who loved semi-colons.

“Do not go where the path may lead, go instead where there is no path and leave a trail.” —Ralph Waldo Emerson

“In the end, it is important to remember that we cannot become what we need to be by remaining what we are.” —Max de Pree

“The mind must be trained, rather than the memory.” —Eleanor Roosevelt

“My job is not to be easy on people. My job is to make them better.” —Steve Jobs

“Do what you can, with what you have, where you are.” —Theodore Roosevelt

“The greatest leader is not necessarily the one who does the greatest things. He is the one that gets the people to do the greatest things.” —Ronald Reagan

“Effective leaders allow great people to do the work they were born to do.” —Warren Bennis

“Face reality as it is, not as it was or as you wish it to be” —Jack Welch

“The challenge of leadership is to be strong, but not rude; kind, but not weak; bold, but not bully; thoughtful, but not lazy; humble, but not timid; proud, but not arrogant; have humor, but without folly.” —Jim Rohn

“No person will make a great business who wants to do it all himself or get all the credit.” —Andrew Carnegie

Lead On!

While I’m sure there are dozens of worthwhile leadership qualities–and even more worthy leadership quotes–I think a focus on learning, action, people, and ethics will give you the foundation to be an effective leader. It’s just like John Quincy Adams said:

“If your actions inspire others to dream more, learn more, do more and become more, you are a leader.”

I trust that today’s leadership quotes left you with a little more inspiration than when you started. Lead on!

This post originally appeared on Arrest Your Debt.

Finding easier and more efficient ways to manage money is something most American consumers are adamant about. This need for instant access has led to financial technology (fintech) becoming extremely popular. In fact, over 71% of American consumers rely on online banking solutions to manage their accounts.

While many in the financial industry have known about the power and potential of fintech for some time now, modern consumers are just starting to catch wind of what it can do. In the next few years, fintech will continue to reshape the way people interact with and manage their money/investments.

Below are some of the ways fintech is reshaping the financial service industry and what this means for consumers.

Financial Advice Meets Automation

Most hard-working Americans are always in search of the right investment opportunities. Building wealth is something most people aspire to achieve. In the past, consumers would have to go in and meet with a financial advisor to find out more about the investment opportunities at their disposal.

In the instant gratification world of today, a face to face meeting is becoming a thing of the past.

Robo-advisors are a fintech creation that provides consumers with information about which investments they need to pursue. Generally, these AI advisors are rolled out as live chat features on banking and financial services websites. The owners of these products can customize the messages provided by their Robo-advisors.

This means they can include automated suggestions regarding the financial products/services they have to offer. Companies currently using this piece of fintech have seen a substantial increase in profitability and consumer engagement.

Consumers Want an Omni-Channel Experience

Owners and managers of banking and financial institutions are continually looking for ways to edge out the competition. Accomplishing this goal generally requires the adoption of popular and innovative fintech. When trying to engage with tech-savvy consumers, these institutions focus on providing an omnichannel experience.

These experiences are provided with the help of things like live chat, SMS, social media, and websites. Providing consumers with several different contact methods makes it easy for financial institutions to meet their needs. Various communication channels also provide institutions with a way to market new products/services to their userbase. Using an omnichannel fintech set up for marketing purposes is very difficult.

Working with a marketing agency familiar with these omnichannel setups is the best way to avoid mistakes. With their assistance, it will be much easier for a financial or banking institution to successfully engage with existing and potential customers.

Helping Small Business Owners Get Funding

Starting a small business is one of the most challenging experiences a person can have in life. Whether you want to create a credit repair business or a Bitcoin mining operation, having working capital is crucial. Modern fintech solutions provide entrepreneurs with the ability to apply for and get approved for loans from their mobile phones. Making the loan application process easier allows entrepreneurs to focus on other aspects of getting a new venture off the ground.

Not only are these fintech solutions easy to use, but they are also very secure. Most banking and financial institutions work very hard to ensure they mobile technology provides things like data encryption. Providing consumers with this type of online security helps you avoid data hacks and other technological problems.

Reaching Out to Cryptocurrency Enthusiasts

One of the hottest trends in the world of finance is cryptocurrency. In the past few years, the number of people investing in this digital currency has exploded. This rise in cryptocurrency popularity has led to several financial institutions developing fintech tools specifically for people in this niche market.

These tools include mining apps and even Blockchain platforms with tons of transparency. Most financial institutions realize that cryptocurrency is the wave of the future, which is why they are investing heavily in fintech solutions for this industry.

Embrace the Power of Fintech

As you can see, fintech is changing the way people manage their money. Whether you are a consumer or a business owner, finding ways to use fintech in your life is a great idea. The right fintech solutions can make life easier for both consumers and business owners.

This post originally appeared on Arrest Your Debt.

Pensions are not as straight forward as you may think. Most of us signed up for this career with the thought of a pension being all we needed for retirement.

Unfortunately, our pensions may be giving us a false sense of security, which leads us to believe that additional saving and investing are unnecessary. However, this can be a dangerous outlook.

Relying On A Government Pension

Local, state, and federal governments provide public sector employees with varying plans depending on age, amount of time in service, and employment levels within a particular field such as public safety. There are complicated formulas to determine precisely how much you can expect to receive in retirement, but often these figures are less than you would expect or require.

Many states have recently implemented pension “tier” systems where benefits are reduced for employees who are enrolled in the pension system after certain dates.

Pension reform, reduced benefits, and pension funding deficits have made it apparent that having additional income outside of our pension check may be required to enjoy a comfortable retirement..

Calculating Your Pension Benefit: How Much Will You Get?

For this example, we’ll pick the State of New Jersey (since this is where I am a police officer), to illustrate how pensions could measure up to current salaries.

In New Jersey, pensions for local and county police, firefighters, correctional officers, and other public safety workers are all calculated the same way:

For this example, we will only look at Tier 1 benefits, although New Jersey does have three tiers of pension benefits based upon enrollment date.

Tier 1 Pension Benefits In New Jersey

Members receive 65% of their final compensation at 25 years of service (any age). The average final compensation of a police officer in New Jersey is $105,106. Final compensation is usually calculated by your last working year’s salary, which is also typically your highest salary during your career. Again, this will vary by state.

Therefore, a police officer who retires after 25 years of service with a final compensation of $105,106 would receive an annual pension benefit of $68,318.90.

Not too shabby, but where do we make up the other 35% of our salary, which equates to $36,787.10 per year? Remember, we still pay income tax on our pensions, and many of us will have additional costs in retirement that were taken as payroll deductions during our working years, such as health benefits.

Pension Formulas Throughout The United States

If you are outside of New Jersey, you can find your individual state’s pension formula on the National Conference of State Legislatures website. In New Jersey, there are no Social Security benefits to supplement public sector pensions.

NJ public safety workers are not eligible for social security benefits unless they held secondary employment or previous employment where they were able to accrue credits. So, unless we downsize or simplify our lives in retirement (which is not always an option), how do we generate more income? In most cases upon retirement, public safety workers will be taking a pay cut right from the get-go.

Should I Put Off Retirement?

While many of us are counting the days until we can retire, it may be worth it to put off retirement for a year or so after your eligible retirement age. New Jersey offers an additional 1% per year for each year of service after 25 years.

For example, at 30 years of service, the annual pension benefit would increase to 70%. Again, this applies to Tier 1 members. Sorry to all those new guys and gals out there. New Jersey does mandate that you retire by age 65 (70 if you’re the chief of police), and overtime is not included in your final compensation number.

Don’t worry; there are plenty of other things you can aside from working longer.

Note: For our examples, we’ve provided reference states that don’t offer Social Security benefits in addition to pensions. Keep in mind, some states do offer social security benefits to first responders.

According to the Social Security Administration, the average social security monthly payment is $1,335. While rare, some of you may be eligible to receive both a pension and Social Security income. If this is the case, you’re in a pretty strong position for retirement. But read on – we have some more information for you.

Don’t Ignore These Retirement Financial Concerns

Upon retirement, your expenses may and probably will change. However, maybe you downsize your house, or the kids go off to college, making trips to the grocery store less expensive, so stretching your dollar a little thinner doesn’t necessarily worry you. But we all know life has a way of throwing unexpected financial issues at us.

Concern #1: Length Of Retirement Is Increasing

People are living longer. According to the National Institution of Aging, in 2010, there were approximately 524 million people who were age 65 or older. This trend is expected to continue with this number growing to 1.5 billion by 2050.

The good news is we are living longer, but that means we are going to need even more money for retirement.

Are you prepared for that?

Concern #2: Pension Gaps

As we continue to live longer, the state and city-run pension plans continue to struggle with funding. Will there be enough for everyone in retirement? This is definitely a concern in New Jersey. According to research from the Pew Charitable Trusts, nationwide pension systems recorded a $968 billion shortfall in 2013 (the most recent data). This shortfall included the promised pension benefits and the available funding in the coffers. Some states, like New Jersey and Texas, have even more significant pension gap issues. The New Jersey Police & Fire Pension is currently hovering around $49 billion in unfunded liabilities (not good).

Concern #3: Health Decline

As you can imagine, the longer you live, the more medical care you will need. With the increase in medical costs, we also need to account for these retirement expenses as well. What if you need long-term care? This can get mighty expensive.

Concern #4: Personal & Life Changes

Add in a few grandkids, and you may find yourself spending even more money when you’re older. Living paycheck to paycheck in retirement will not be a fun way to spend your golden years when you should be going on family vacations or traveling to visit family.

You won’t live forever, and you don’t want to miss out on life’s special moments because retirement planning wasn’t a priority when you were younger.

Concern #5: Life Always Happens

Murphy’s law always seems to happen at the most inconvenient time. Reaching that “vested” milestone for your retirement is often more difficult than first responders think. Life could get in the way of achieving that pension milestone, which could throw a major wrench in your retirement plans.

There are a million scenarios we could get into here. The bottom line; expect the unexpected.

Assessing your pension situation may give you the motivation to come up with a Plan B and even a Plan C when it comes to your retirement planning.

Save For Retirement By Paying Yourself First

The earlier you save and invest, the larger your nest egg will be when you retire. (Don’t panic if you’re nearing retirement – better late than never when it comes to savings – but earlier is undoubtedly better).

While having a pension when you retire is incredible, we can’t rely on it to be our only source of retirement income. The unknowns in retirement do not work well in conjunction with a single source of income. Luckily, there are several options we can do to increase our quality of life when we retire.

Choose An Investment Strategy To Fully Fund Retirement

Many of us have other retirement accounts, such as the ones listed below. Most private-sector employees have to rely solely on their savings, so first responders do have a leg up. But that doesn’t mean we shouldn’t be saving on our own.

Most public safety employees have a 457b plan or other deferred compensation plans through their employer, which is in some ways similar to an IRA (similar – not the same).

Here are some of the advantages and downfalls with each traditional account type:

Roth IRA

Growth is tax-deferred, and withdrawals are tax-free upon as long as you are 59 ½ and have held the account for at least five years.

There are no immediate tax-benefits of a Roth IRA.

Traditional IRA

Traditional IRAs can be volatile, are tax-deferred, and fees can be high depending upon the investments within.

An IRA or Roth IRA is not in and of itself an investment. They are simply tax codes. Growth and performance within these account types will vary greatly depending on the assets you hold.

Mutual Funds

Mutual Funds are subject to loss, they can have high fees & sales charges, but can help you diversify. Growth in a non-qualified account may be eligible for capital gains tax rates. Non-qualified brokerage accounts are liquid at any age.

457b Plan

Subject to loss, no guaranteed income in most cases, fees can be high, and growth is tax-deferred. 457’s can offer liquidity before age 59 ½ in certain scenarios.

403b Plan

Subject to loss, no guaranteed income in most cases, fees can be high, growth is tax-deferred. There can be a 10% penalty on withdrawals before age 59 ½.

*457b and 403b plans vary greatly depending upon your employer’s investment options and how the accounts are structured (i.e., variable annuity). Contributions to these retirement accounts can reduce your taxable income for the year in which you contribute.

Certificate of Deposit (CDs)

Typically low-interest rates, not always 100% liquid.

Regular Savings Account

Little to no growth in most cases but almost always 100% liquid. Almost equivalent to putting your money under the mattress. You’ll notice there’s a lot of “subject to loss” and “volatility” above. How can we reduce that if you’re a conservative to a moderate investor?

*None of these accounts provide guaranteed lifetime income like a pension does except for maybe a savings account, but you’re not even getting enough growth to pace inflation.

Making The Most Out Of Your Investments

Once you have accumulated funds in any of these accounts, it is essential to see how they will be taxed; and how and at what age they can produce income for you. If you haven’t started saving yet, these could be considerations you make before choosing an account type.

Once you retire, accumulated funds within these accounts can be transferred or rolled over into several different annuities, which can act very similarly to a pension. They provide total principal protection (they eliminate loss and volatility) and also offer yearly guaranteed income payments, just like a pension does.

In some cases, the income can even increase year after year to offset inflation. For example, you can take a lump sum from a 457b plan and transform it into a yearly income that will also be guaranteed. The exact income numbers will depend upon your age and accumulated funds.

An annuity is the closest thing to a defined benefit pension. It is basically like your own private pension plan. In retirement, it is essential to remember that it’s not all about the nest egg; it is about the cash flow – cash flow is king!

The only difference between an annuity and a pension is that instead of being funded by a local, county, or state government (like your pension check), an annuity payment is supported by an insurance company (make sure you pick one that has strong financial ratings).

With an annuity, you could be looking at two checks every month that are guaranteed for life – your pension check & an annuity check.

It’s important to remember that a lump sum in a retirement account does not do us much good if we’re going to lose a large percentage of it to taxes or if we can’t turn it into a lifetime income stream. You have to turn your accounts into cash-flowing assets.

Pay Yourself First!

If you’re still working, you should be contributing a percentage of each paycheck towards some type of supplemental retirement account. This could be a privately owned Roth IRA or an employer-sponsored 457b plan. However, in many cases, there’s no employer match for public safety and other public sector employees.

Shelter Portions Of Your Money

If you are still relatively young and have many working years left, better alternatives or additions to your Roth or Traditional IRA could be an indexed universal life policy (IUL) or an indexed whole life policy (IWL).

Simply, how this works as a financial vehicle is that the policy has a cash account that is “indexed” to a stock market index. This means that in years when a particular market index, such as the S&P 500, The Dow or NASDAQ has a negative return, your account does not lose value. You have what is called a floor of “0.” The worst-case scenario is that your cash will remain level.

However, in years where the market index goes up, your account grows. This eliminates the risk of loss and takes market volatility out of the equation as you are still able to participate in some market gains but do not expose your cash value to any losses, negative years, or bear markets. The cash account could also have a fixed rate of return (i.e., 3% or 4%).

Pay Attention To Tax Benefits

Also, the cash value within this type of account is protected from income tax. It is protected as long as the policy is not over-funded to the point that it becomes a MEC or Modified Endowment Contract (this is a nice retirement perk) as most retirement accounts are just tax-deferred.

As long as you follow the funding rules, an IUL or an IWL is BOTH tax-deferred and tax-free. There is no other financial vehicle that offers this benefit. A small monthly contribution throughout your career could allow this account to multiply since it has what is called an annual reset feature allowing all gains to be locked in and added to your principle.

In 457b, IRA, and 401K accounts, all of your profits are also subject to loss if you have a market-based investment, but not with the IUL or IWL. Therefore, your cash compounds and grows very quickly. Then when you retire, you can draw from your cash tax-free—pretty sweet deal.

What I Do For Retirement

With all of that being said, I often get asked what “I do” for my retirement. Personally, I contribute to a 457b plan through payroll deductions at my police department.

In addition, I have several Roth IRA accounts (I tend to prefer getting my taxes out of the way now) with varying investments. I have a non-qualified indexed annuity, and I own both an IUL and an IWL. I have contributed to all these plans/accounts for most of my career.

I also don’t live in my car and eat Ramen Noodles to do this. I simply pay myself first and treat these retirement contributions like other bills I might have since my plan is to be completely retired by the age of 45. I include this segment to show what’s possible with some simple planning and implementation. It all comes down to priorities within your budget and paying yourself first (I keep saying it because it’s important).

Track And Calculate Your Retirement Contributions

Compound interest calculators can help you understand how compound interest works. With a retirement calculator, you can keep track of your monthly additions and contributions, current principal, and interest/growth rate on your retirement accounts. Believe it or not, but you may enjoy watching how fast your money is growing in value.

Building a nest egg can be transformed into a cash-flowing asset to supplement your pension. With this strategy, understanding how much you should invest each month, and mitigating risk is crucial.

Once your nest egg is built, you can turn that into another guaranteed income stream in addition to your pension with the use of a variety of indexed annuity accounts (I mentioned this before).

Wrapping It Up

Yes, pensions are helpful. But pensions are not guaranteed to ensure you will retire comfortably. There are too many variables in life, and a pension should not be your sole retirement plan. Instead, it should be part of a complete retirement income plan.

Avoid trusting the government to take care of you when you retire. Retirement should be when you can finally slow down and enjoy everything you have worked so hard for over the years. To achieve this goal, a plan must be in place. You only get one life, prepare now so you can live your retirement the way you want. Time is the one thing you’ll never be able to get back (deep, I know).

To Your Retirement…

This post originally appeared on Arrest Your Debt.

As the world grows ever-more complicated around us, the concept of a no-buy year aims to reset our consumer minds. It’s one of many forms of extremism that is growing in popularity. It turns out, we need far less stuff than we might think.

What’s A No Buy Year?

Hint: the name is a bit of a giveaway.

A No Buy Year is a self-enforced set of rules where someone limits or eliminates their purchases for an entire year.

At its most rigorous, a no-buy year prevents all purchases. E-v-e-r-y-t-h-i-n-g. That means the food you eat comes from your garden. You revert to more natural forms of cleanliness. Just think about your monthly budget for a minute. All of those things – you can’t spend money on them anymore. It’s pretty extreme.

But there are many variants of no buy years, and most of them are less severe than the “all in” method. For example, no buy years are wonderful antidotes to “shopping addictions.” If you feel like you spend way too much on Amazon, perhaps a no-buy year targeting against online shopping is right for you.

Other folks focus on single products for their no buy years. Perhaps they don’t want to buy any clothes for a year. Other people aim to become carbon negative for an entire year. All of their purchases reduce carbon emissions rather than contribute to carbon emissions. If you have a specific weakness when it comes to spending money, that weakness would be an ideal target for a no-buy year.

Should I Consider A No Buy Year?

The principle underlying a no-buy year is that self-limitation can be empowering. This is one of the foundational principles of stoicism.

If you expose yourself to “difficult” conditions, you begin to realize that “normal” life isn’t nearly as challenging as you thought it was. This is a fundamental offshoot of psychological conditioning. Our environment conditions us, and we get used to it. If we choose to “get used to” something difficult, then we’ll gain a new appreciation for the previous “normal.”

I also think the no-buy year is a perfect reminder of the Fulfillment Curve. In short, the Fulfillment Curve states that there is a limit to “more spending = more happiness.” Eventually, more spending will actually lead to more stress and anxiety. A no buy year can highlight which areas of your budget led to more stress than they were worth.

If you’re worried that a no-buy year might be too extreme for you, then start small. What about a no buy week, or a no-buy month? What if you reduce your spending by 50% for the next month? There are many ways to impose self-limitations or to live on less. As an added side effect, saving that spending money might significantly boost your net worth.

We can apply no-buy years tactics to other areas of life. The two that first come to mind are Marie Kondo’s decluttering and the “OMAD” movement.

Decluttering And No Buy

Marie Kondo is an author and consultant who took the American zeitgeist by storm in 2019 with her Netflix show Tidying Up with Marie Kondo about organizing people’s houses.

It turns out that decluttering your bedroom closet acts as a metaphor for decluttering your life. Kondo’s method–KonMari–encourages people only to keep items that “spark joy” in their life. Those joyful items act to buoy one’s psyche, while all other things only serve to drag the mind down.

The KonMari method is best applied one category at a time. For example, Kondo suggests that someone first organizes all of the utensils in their kitchen, only keeping those that spark joy. This fork is joyful, but this spoon is not. Then they tackle all of the clothes in the house, then all of the decorations in the house, etc.

Similarly, a no-buy year can apply to the entirety of one’s purchasing or only to a small subsection. The underlying principle is the same as KonMari. The no buy year attempts to prevent items from entering your life in the first place. The KonMari method attempts to clean up those items after they’ve entered your house.

They both share the goal of having less stuff.

Does No Buy + OMAD = a NOMAD?

Much like the no-buy year and KonMari, OMAD is a growing trend that employs a “less is more” mentality. OMAD stands for one meal a day. Can you guess what it’s about?

If you answered, “Limiting yourself to only eating one meal a day,” then you are clearly a genius. The common thread between these three ideas is obvious.

Shake up your usual routine. Insert more considerable challenges into your life. Convince your mind or body to get used to less. Get used to this “new normal” and see how your mind/body responds. See life from this new perspective. While you assumed your previous behavior was optimal, you might surprise yourself.

Please note: OMAD deals with physical health in a way that KonMari and no buy year do not. This article is informational only and assumes you would consult with a medical professional before beginning an OMAD practice. Be smart with your health.

Some people view OMAD as a challenge to be overcome. Others see it as a dieting method since OMAD essentially closes down your kitchen except for one period per day.

Much like the no buy year, OMAD might be too extreme for some. There are other variations, like the also-popular intermittent fasting. In this diet method, the dieter limits their caloric intake to an 8-hour window per day.

So that 7 am breakfast and 7 pm dinner won’t work anymore – they occur 12 hours apart. Instead, many intermittent fasters choose to combine a big brunch (e.g., 10 am) with a big dinner (~6 pm). Intermittent fasters typically eliminate one meal per day, eliminate late-night snacking, and usually challenge their stomachs to overcome some mid-morning hunger pangs.

Other Examples Of “Extremism”

All of these ideas are part of a growing trend of “extremism.” KonMari pushes the personal organization to an extreme. OMAD pushes caloric intake to an extreme. No buy years push consumerism to that same extreme. And there are other new “extreme” practices popping up every day.

For example, some people are starting to go on “dopamine fasts.” Dopamine is the neural transmitter most often associated with reward-motivated behavior. In short, good feelings and positive emotions are often a product of dopamine secretion in your brain.

A dopamine fast occurs when someone intentionally chooses behaviors that limit their dopamine secretion in an attempt to “re-baseline” their brain’s reaction to dopamine.

In theory, the brain will get used to a lack of dopamine. As the brain becomes conditioned to less dopamine, it will start to be stimulated by even small dopamine hits. It’s very similar to someone abstaining from sugar in their diet. After a few weeks of no sugar, that person will start to notice just how sweet fresh fruit is. And artificial sugar, like in candy, will taste sickly sweet.

The idea of a dopamine fast is to eventually reset your brain into realizing that even the small things in this world can bring about joyous feelings.

Limits Create Growth

The common bond in today’s article is that limits can create growth.

We are creatures of habit, and those habits often define us. If we shake up our habits, we can break our old definitions and grow in new directions.

Whether with food or material goods or with spending money, a system of self-limitation might teach you something you didn’t know about yourself.

This post originally appeared on Arrest Your Debt.

Have you ever done something in the past and years down the road realized how impactful that decision was? Oh, and then regretted it and wished you had done something differently? I am reasonably sure we’ve all done this at some point. However, this is not an experience I want to have when it comes to my retirement savings.

Failing To Protect Your Retirement Today

This exact sentiment describes Ted Benna, the “father of the 401k.” It’s how he feels about creating the 401k and how it is used today versus what he envisioned.

The 401k has become the standard for employer retirement plans in the private sector. For many employers, this has become the only retirement benefit that they offer their employees. We’ve been trained to believe that a 401k is the primary method to save for retirement. It has become our sole employer-sponsored retirement option. However, this was not the intention when the 401k was born.

Benna was looking for a way to save money with the tax code that would allow people to supplement their pension plans. In the past, many workers planned to receive a pension from the company they worked for. However, over time, these pension plans have become far less common and are now practically non-existent. This is because a pension is a defined benefit plan, whereas a 401k is a defined contribution plan.

The difference between the two is who holds most of the risk. Being a defined contribution plan, the 401k shifts that risk from the employer to you, the employee. With a 401k, the employee bears the burden of risk. We will dive into this idea more in a moment.

The Death Of Pension Plans

Many pension plans have been phased out and eliminated by employers because of the immense burden it places on the company. The disadvantage is that the employer is responsible for offering the defined benefit, or a guaranteed income once the employee retires.

Due to this financial burden, employers shifted the risk away from themselves and onto the employees when it is time for the employee to retire. They were especially eager to do this as life expectancies continue to increase.

With a pension plan or defined benefit plan, the employer bears the risk of having to supply the employee with lifetime income. However, in a 401k plan, the employee assumes all of the risks and responsibilities to ensure the 401k produces lifetime income.

This can be a mighty tall order, especially for someone with no investment or finance experience. Benna initially saw an opportunity with the 401k. However, its original purpose is not how it is being used today, not by a longshot.

The Transformation Of The 401K

In the early 1980s, 401k plans were only available at a handful of large companies. Today most employers offer a 401k as a benefit to their employees. There is even the solo 401k.

On the downside, 401k plans carry much more risk for employees than defined benefit pension plans. As stated earlier, there are no guarantees a 401k will increase in value, or that you will have enough money in your 401k at retirement. There are a lot of variables in the 401k equation, and if something goes wrong, it can sabotage your retirement.

A Lack Of Retirement Training Or Guidance

Most 401k plans are invested in the stock market and most commonly invested in mutual funds. Employees are also seldom offered any reliable advice from a fiduciary in regards to investing in their 401k’s. Instead, employees must decide what they should invest in from a long list of funds. Also, most mutual funds hide their fee structures from people without investment experience.

Aside from the expenses within each mutual fund, 401k’s also have administrative and plan fees. These fees are charged by the investment company to administer the plan to you and your co-workers.

Benna says the 401k plans have become so confusing and filled with hidden fees that they are more beneficial to the brokers than they are to the investors.

This is a massive problem as the average American’s 401k balance at age 65 is less than $195,000. This is not even close to being within range to fund the average retirement of 18 years.

Regretting The 401k Plan

He’d created a plan that no longer represented what he envisioned. The 401k “monster” had taken over retirement plans as a whole and no longer beneficial to the investors. “We went to three options, then to six, then to seven, then to 15 – it is far beyond what most participants were able to deal with,” Benna says. He did not agree that overcomplicating retirement was a benefit to the investors.

Benna realized his invention actually made the rich richer and didn’t benefit the line-level employees. This is one of his biggest regrets.

Read more of the Wall Street Journal article here.

Pension plans have become increasingly rarer, while the 401k has taken over most company retirement plans. Retirement is no longer the responsibility of the employer and instead has been pushed onto employees who are not financially educated.

Because of this employees are paying higher fees than they should and not properly protecting their retirement nest eggs.

Sadly, many people are blindly investing money into a 401k plan simply because it is offered through their employer.

Stock Market Volatility

It is also essential to understand that market-based investments carry certain degrees of volatility depending upon your specific investments. This is simply knowing that the market will go up and down at any given time. Unfortunately, many hope they retire during a time when the market is up.

However, a retirement plan built on hope is destined to fail.

Using A 401k To Your Advantage

Investing in a 401k can also carry some benefits if done correctly. One benefit is the employer match. For example, if your employer is offering up to a 3% match, take advantage of it – that’s free money! But educate yourself and choose investments that suit your needs and goals.

Let’s take a closer look at this. If you have a salary of $75,000 and your employer will match 3% of your 401k contributions, this means you will earn an immediate 100% return on your money. This is because if we contribute 3% or $2,250 and our employer matches it, we now have $4,500 in contributions for the year.

However, contributing over the employer match rarely carries any extra benefit, and those excess contributions can usually be put to work better elsewhere. We must still be prudently investing our hard-earned money within the 401k.

What To Do With Old 401k Plans?

I am also often asked, “what should I do if I have an old 401k from a previous employer?” In most cases, it is wise to transfer funds out of an old 401k you are no longer contributing to.

You can do a direct rollover or transfer into an IRA where you can better control the investments, reduce or eliminate plan fees, and continue to contribute if you’d like. It is important to remember that you must still pay administrative and fund fees in an old 401k even if you are no longer with that employer and no longer contributing. This can erode your account value over time.

The bottom line is, in most cases, you will have far more control over your retirement funds in an IRA.

What Can Employees Do?

One positive development for retirement accounts is the allowance of annuities within 401k plans. Under the SECURE Act, which was passed in early 2020, 401k plans may now offer annuities.

An annuity acts more like a traditional, defined benefit plan. This is because an annuity is a contract with an insurance company and can provide fixed rates of return, fixed income, and lifetime guaranteed income payments in some instances.

A fixed annuity is the closest thing to a defined benefit plan that you will find in a 401k today. These options are just now being phased in. However, it is a step in the right direction that will alleviate some of the burdens from the 401k owner.

Benna’s New Retirement Strategy

Benna recently announced that he’d put a large portion of his own money, “probably the biggest part of my wealth,” into another kind of savings plan, namely, high cash value life insurance.

These alternative savings plans are guaranteed to grow every year and do not fluctuate like the stock market. They also do not have age restrictions for penalty-free withdrawals, nor do they force you to withdraw money at age 72 as part of your required minimum distribution (RMD).

Read what CSMonitor had to say about the 401k and Ted Benna here, and why the ‘father of the 401k’ says he regrets pushing the 401k retirement plan.

Wrapping It Up

The takeaway is that if you invest in a 401k, read the fine print. Understand what fees are being charged, hidden, and not hidden. Only certain fees require disclosure. You read that right; there are hidden fees. Find out what stocks or bonds are being purchased within those mutual funds in your 401k. Educate yourself on how your money is being invested.

…And, like Benna, my clients and I, learn about what alternative investment options can do for you in conjunction with your 401k. You only get one shot at getting the retirement puzzle correct, so be sure to educate yourself and make decisions you won’t regret later when you want to retire. By that time, it will be too late.

401Ks & Target Date Funds

Your 401k money is likely invested in something called a Target Date Fund (TDF) – even if you didn’t authorize it or request it – and that should concern you.

Approximately 98% of all employer-sponsored 401k plans use TDFs, and 90% have it as the “default option” for their plan. This means they automatically invest your money there unless you specifically direct them to do otherwise.

The problem is that almost no one changes their elections. This is because there is rarely any education provided on the different investment options, and confusion often leads to indecision. This leads to, “I’ll just do what everyone else is doing.”

TDFs are supposed to dial back risk as you near retirement, but in practice, that has not happened. In 2008, some TDFs designed for participants expecting to retire in two years lost as much as 40%.

Target-date funds attempt to use a diversification strategy that has not yet been shown to be successful. Target-date funds worked well in recent history, but so has every other investment. However, times change, and retirement investment strategies must follow.

401Ks and Exchange Traded Funds

Most target-date funds are actively managed Exchange Traded Funds (ETFs) that are designed to automatically adjust their risk profiles as retirement nears based on a target retirement date (i.e., 2030, 2040, 2050, etc.).

One of the greatest fallacies of target-date ETFs is that most investors in the funds also own other securities – such as stocks and bonds. This can automatically skew their portfolio diversification. Without knowing it, they overweight all the asset types.

Just because your employer or 401(k) plan administrator automatically does something with your precious retirement funds, this does not mean it’s good for your wealth or in your best interests.

As B.C. Forbes, founder of Forbes magazine noted: “Refuse to be stampeded! Do your own thinking.”

If you’re concerned about retirement, click here to schedule a free call with Gary

This post originally appeared on Arrest Your Debt.

Many people talk about personal finance, but broke people seem to be the ones giving the most advice. What exactly is personal finance anyway?

Making Personal Finance Personal

Personal Finance is the name given to everything related to the financial scope of an individual by applying the same financial concepts used in a company. This means that in your finances, you will hear about budgeting, planning, and cash flow. These are just some of the essential topics under the umbrella of “Personal Finance.”

In this article, we will give you six easy personal finance tips that lead to a big payoff. These tips will provide you an insight into what differentiates millionaires from the rest of us when it comes to personal finances.

Are you struggling to pay off your credit cards? Never have any extra money to invest? Why is all of this so hard?

It’s time to understand precisely how your knowledge of finance is fundamental to all of this. Here are our tips!

Becoming Your Own Personal Finance Expert

Understanding personal finance is as essential as knowing the way home, learning how to use the internet, or your cell phone. Money is an integral part of our lives, without which we cannot access anything: from essential items to leisure.

Those who do not understand personal finances are hostage to a system created to keep people indebted and unable to invest. To put it another way, a scheme to keep people financially disadvantaged.

Don’t think that everyone who drives an expensive car, lives in a big house, or has luxurious habits understands personal finance or has any money. In fact, these are strong indications of indebtedness and total unfitness in personal finances.

Often these people who “appear to be” are highly indebted to “maintain an image” that, if they dedicated themselves to their finances, would realize that they are at odds with their financial reality. The knowledge of personal finances will allow you a virtuous circle that begins with the care of your budget and financial self-knowledge, culminating in investment and personal enrichment.

Commit To Living Differently

To start your financial planning, the first step should be to gather as much information as possible about your economic reality. Identify your current account and investment statements, everyday expenses, monthly income, and any other documents that will help you in the first analysis of your financial situation.

It is vital to understand how much money you have in relation to how much debt you owe to know the real equity situation. The objective is to prepare your financial planning in an appropriate and realistic way.

Six Personal Finance Tips You Need To Follow

These steps will cover the need to pay attention to interest rates, understanding your current investment allocation, and your current risk tolerance. To give yourself the best chance at success, you need to be reasonably familiar with budgeting, debt payoff, and investing for the future.

1. Organize Your Personal Accounts

Being organized is essential for those who want to develop financial control and is also one of the basic requirements for proper personal financial planning. The good news is there are several ways to organize personal accounts.

The hardest part of organizing is starting in the first place. If you commit and begin, your chance at success will significantly improve. Organize your accounts by checking, savings, investments, debt owed, etc. Put them in separate categories, so you get an overall picture of your current financial situation.

I use a spreadsheet in Microsoft Excel to stay organized, but you can use whatever you are most comfortable with – including a piece of paper and a pencil.

2. Use A Monthly Spreadsheet Using Excel

Keeping track of your finances using Excel is relatively simple, and you do not need advanced knowledge to do it. There are many budget spreadsheets available online, and some even offer graphs that facilitate the visualization of expenses and revenues.

Just remember that it is essential when preparing financial planning and, consequently, your spreadsheet, that expenses and income are very well detailed and categorized.

Avoid “items in your spreadsheet that are named “Others” and “Miscellaneous,” because for planning to work, details are essential,” says William W. Blair, finance consultant at Writemyx and Nextcoursework. There’s no point in spending and not knowing where the money went.

Also, remember that a credit card bill is a form of payment and not a group of expenses. Therefore, when using them at supermarkets, the amount of this expense should be allocated to “supermarket” expenses and not to a “credit card” expense.

3. Define Your Financial Goals And Projects

Many people begin to save money several times and at different times in their lives. They do this even for relatively long periods, in some cases even for years, but they fail to see the purpose of saving and end up spending the money overnight.

There must be a specific objective for your money: the specified reason serves as an additional motivator for you to save and invest better what you are able to save.

Define your goals as short, medium, and long term. From there, make projections of how much money you will need to accomplish your goal. Depending on your timeframe, you should choose different investments (more or less risky, with greater or lesser potential for return).

4. Learn That Personal Financial Education Is Profitable Knowledge

Financial education is much more than just talking about money or feeding spreadsheets. Financial education is synonymous with freedom!

By fully experiencing the concepts of financial education, people come to value management and conscious choices, discovering that achieving dreams is faster (and cheaper) when done with planning.

Financial education is about valuing resources, learning to build more and more with less.

5. Adjust Your Habits To Build Good Personal Financial Planning

Changing or adjusting habits is essential for anyone seeking financial independence as a lifestyle. The transformation begins by abandoning consumption only for status.

After all, the transformation of financial education “presents us with a real-world where the successful person does not feel accomplished by demonstrations or ostentation, but by personal achievements,” says Lisa E. Williams, blogger at Britstudent and Australia2write.

6. Live According To Your Financial Condition

Part of the discipline that is so necessary for the success of your financial planning comes from the understanding that you must live according to your financial condition. Spending on luxury items or travel can be tempting, but in a few months, you tend to regret the momentary pleasure.

So, care for your long-term financial health and make smart choices.

Discipline is the key to success! As we said, what will make the difference between success and failure is your commitment to putting into practice everything you learned in this guide. So, make personal financial planning a priority.

Financial planning is a powerful weapon and needs to be a priority in people’s lives. To build your budget, keep in mind you need a lot more willingness and commitment than advanced finance knowledge. Still, for more complex matters, it makes sense to seek help from qualified professionals.

This post originally appeared on Arrest Your Debt.

The year was 1985 in the city that never sleeps. A young, ambitious junior stockbroker was set on making a name for himself. He soon found himself with an opportunity to work for one of the wealthiest fund managers on Wall Street.

This unknown broker went from sleepless nights in a small apartment to a luxury penthouse on the upper east side of Manhattan. His desk at a crowded office quickly became a corner office with a view. Lavish parties, overpriced artwork, and high-end cars became his new normal as money was no longer a concern of his.

This is often the glamorous overnight wealth picture Hollywood paints of the stock market. This was also the picture Hollywood painted in the 1987 dramatic film “Wall Street.” Unfortunately for our hero Bud Fox, as quickly as all his dreams became true, they came crashing down.

Sadly, what we will cover in this article, while not quite as dramatic, has become a reality for many individuals today.

Retiring Comfortably Is Harder Than It Seems

The promise of easy money has become an unrealistic selling point for many financial professionals. However, there is no secret to success or “magic pill” for retirement savings.

We are going to break down the three keys to success for retirement savings. I’ll warn you now that they aren’t very glamourous or as exciting as the film “Wall Street.” However, I’ll be showing you a retirement equation of sorts; and if you have all three factors in this equation in your retirement plan, it will equate to success at the end of your retirement savings journey.

So, now that we’ve gotten the movie reference out of the way, let’s continue and put this all into practical application.

A Realistic Retirement Plan With 3 Focus Points

I often speak with new clients who state they were told by their investment advisors, “just put one hundred dollars a month away and you’ll be a millionaire when you retire.”

While certainly a strong selling point, this statement is not based in reality. In fact, if a person put away one hundred dollars a month for fifty years with an annual rate of return of 7.2%, they would have a total of $559,940.34 at the end of those fifty years. While certainly a large number, this is a far cry from the million dollars they believed they would have.

This calculation also includes an optimistic rate of return and a timeline that is well beyond what most investors have. This scenario does, however, identify the three major areas of concern when planning for the future. These are the three factors of our successful retirement savings equation:

Years of growth/time

Principal & contributions

Rate of return

Controlling Our Retirement Savings Plan

Fortunately for us, we are able to control the amount of principal and the years of growth. While, in most cases, the rate of return cannot be guaranteed, a person can use past performance and appropriate investment choices to estimate a reasonably accurate anticipated rate of return.

Knowing what we can control, we can take a look at a few scenarios and see the impact of adjusting each.

1. Using Time To Our Advantage

First, assume a person invested $100 per month for twenty years with an average rate of return of six percent. At the end of twenty years, this person would have accumulated $46,791.27. Not too shabby for a total investment contribution of $24,000.00.

Now we’ll run this same scenario but with an investment period of thirty years. At the end of the thirty years, this individual would have a total of $100,562.01, having contributed a total of $36,000.00. Simply put, for an extra $12,000.00 in contributions, this individual would have an additional $53,770.74 in accumulated value!

This is the power of one of the variables we can control, which is time. This also shows the power of exponential compounding growth, which is critical in building wealth. If these scenarios show one thing, it is that the best time to start investing is ASAP. Start with what you can afford and build over time. There will be no “perfect time” to start, and time is a finite resource that we can never get back.

In other words, once the time is gone, …it is gone.

2. Making Your Money Work For You

Now let us take a look at another variable we can control being principal or contributions. We will circle back to our previous example for comparison. Let’s look at our twenty-year scenario.

In this scenario, if we were to invest $200 per month versus our previous $100 per month, our final result would be an account value of $93,582.54. If you remember, our last scenario left us with an ending account value of $46,791.27.

Maximizing contributions is critical to building wealth as quickly as possible.

Since we now understand the importance of starting early and maximizing contributions, let’s look at what thirty years of investing $200 per month with a six percent rate of return can do for us.

The account value at the end of this thirty-year scenario would be $201,124.03. Simply put, the key to building wealth is starting as early as possible, combined with maximizing contributions. There is no other “secret.”

When asked why more people do not duplicate Warren Buffett’s investing strategy, he responded, “because nobody wants to get rich slow.” However, slow and steady often wins the retirement savings race.

3. Understanding Your Rate Of Return

Now for the third variable in our equation, the rate of return. While most investments will not guarantee a rate of return (if they do it is typically fairly low), you can use past, historical performance to make an educated projection of how an investment will perform over the long term.

It is important to choose investments that fit your risk tolerance and investment time horizon. More so than principal or time, this can be the one variable that genuinely makes or breaks an investment portfolio.

If you are not comfortable in choosing appropriate investments, it is wise to seek the advice of a trusted financial professional (preferably one who is a true fiduciary). A fiduciary is someone who is obligated to put your interests above their own and do the truly right thing for you.

Don’t Forget About Taxes

While you are building wealth, another factor to consider is your tax liability. If planning for retirement, it is usually best to keep your investments in a tax-advantaged account. This can include 401k plans, 403b plans, or 457b plans available through your employer. If your employer does not offer any tax-advantaged accounts, you may consider a traditional IRA or Roth IRA account.

A Roth IRA account will provide tax-free withdrawals when you reach the age of 59 ½, provided you have held the account for five years or longer. The other accounts will provide pre-tax benefits but will be taxed as ordinary income upon withdrawal at your future tax rates.

If you need to access your money before retirement, it may be appropriate to keep a portion of your money in a non-qualified account or alternative investment vehicle. I covered this topic in my Alternatives to Roth IRA’s article.

A Formula For Retirement Saving Success

Just to quickly recap, the equation for building retirement wealth is:

Maximizing time (starting early) + maximizing contributions + choosing appropriate investments = SUCCESS.

These are all very simple concepts and if you have these three factors in your retirement savings equation you will greatly improve your chances of success. Simply combine this simple strategy with the utilization of tax-advantaged accounts and you will be living the retirement of your dreams.

If you’re concerned about retirement, click here to schedule a free call with Gary

This post originally appeared on Arrest Your Debt.

Planning a monthly family budget and taking care of your finances is essential. It helps you stay in control of your life and allows you to set goals and plan ahead. In addition, it also enables you to get through some hard times and stay safe despite the things that are happening around you. But, when some sudden changes occur, like the outbreak of the COVID-19 pandemic, your family budget can be affected.

Therefore, you should make the necessary changes to your family budget and adjust to the new crisis. If you’re not sure how to write a family budget during the crisis times, we’ve got you covered. Here’s a step by step guide that will help you create a new monthly family budget.

Let’s take a closer look.

1. Get Informed

The important thing about a crisis period is for you and your family not to panic. To make sure you’re staying level headed and calm, you need to be informed about the crisis.

Find information using reliable resources and credible media, and find an answer to the questions:

What caused this crisis period?

How long will it last?

How will it affect me and my family?

Will it affect my business and my sales?

Make sure that you understand what’s happening around you and what is causing the changes you’re feeling.

Also, learn about the new changes that you might expect.

This type of information will help you and your family stay on top of things and not let the crisis time affect you too significantly.

2. Income Changes

If you already have a family budget plan, it might go through some significant changes during the crisis period. If you don’t have one, you still need to review your monthly income.

“Unfortunately, the COVID-19 pandemic caused millions of people to lose their jobs, forced them to close their businesses, or caused their sales to go down. That led many families to family budget reviews and forced them to rewrite their budget plans,” says Estelle Liotard, a financial analyst and writer at Trust My Paper.

If any of this happened to you, you need to:

Review your family monthly income

Think about ways of straightening the curve

If your monthly income is affected, do a review, and get the exact numbers on the table.

3. Expenses Changes

The crisis period will affect your monthly income, but it will also affect the way you spend your money. This calls for another review, this time focusing on how you spend your money.

During the COVID-19 pandemic most people save money on:

Traveling

Gas

Entertainment such as theater and cinema

Clubbing

Eating out

This is because none of these things are safe or available to us. Also, we’ll spend more money on groceries or home maintenance.

Make sure to get these numbers on the table as well, to see how you need to adjust your budget.

4. Pay Your Debt

Most of us have some sort of debt we need to pay off. It could be mortgage debt, a student loan, or a credit card debt.

Whatever it is, your monthly family budget needs to focus on:

Paying the debt regularly

Pay at least the minimal amount

Naturally, paying the minimal amount means you’ll have to pay off your debt longer, but at least you’re not skipping a monthly payment.

If you skip a payment, your debt could mount, and your credit score will not be great.

So, make paying the minimal amount a priority and make this one of the top concerns of your monthly family budget meetings.

5. Apply For Help

During the crisis period, most countries will give it their best to help those people who are out of jobs or those businesses that are losing their income due to the crisis.

It’s your job to learn what forms of help you are eligible to apply for and how you can improve the family budget situation.

“If there are any benefits, types of aid, or delays, you can get make sure that you request them. This will affect your monthly family budget and help you save some money for the crisis period,” says Helene Cue, a financial planner, and writer at Supreme Dissertations.

Learn about:

Receiving help for your businesses

Deferred payments

Waived payments

Debt relief

In case you need help with filling in an application or writing a professional email, you can turn to services and tools such as Studicus or Best Essay Education. For help with proofreading and editing, check out Grammarly, or Wow Grade.

6. Save Money

A crisis situation demands a crisis family budget. This means you’re going to have to make some cuts and save money to ensure a normal life for you and your family.

The best way to do this is to:

Gather the whole family

Analyze all your expenses

Find the things you spend money on

Decide which items you need to give up for the time being

It could be something seemingly unimportant such as a monthly subscription for a self-care box. But if everyone gives up on a couple of things, you could boost your budget for a week’s worth of groceries.

Make sure the whole family is on board and decide which things need to be put on hold for as long as the crisis period lasts.

7. Track Your Spending

Once you review your income and expenses, and you consider different ways of saving money or getting help, you’ll need to track the results.

Your new family budget may look great on paper, but you have to make sure things are good when applied.

That means that you have to track your spending.

Together with your family, create a weekly report on the things you’ve spent money on:

Groceries

Transportation

Home entertainment

Clothes

Home supplies

Get a list of things that you’ve spent money on and review each week. Make sure that your weekly expenses fit your monthly budget plan.

If you see room for improvement, jump right to it. If you see room for saving some money, set it aside for an emergency fund.

8. Prevent, Don’t Cure

In case you already have an emergency fund saved up for crises, we strongly recommend not reaching into it unless you have absolutely no choice.

You could go ahead, living your life the way you did before the crisis. You’d just be spending money from this fund, even though your income is lower.

But, this won’t work in the long run.

Instead, prevent your family from needing to use the emergency fund. Use the advice we’ve provided above, make small changes, and don’t allow the crisis to bring you down.

Save the emergency fund for when you have no choice but to use it.

Final Thoughts

Writing a monthly family budget during crisis times is no different than writing a regular family budget. You have to review where you stand, understand the facts, and determine the measures you have to take to continue living decently.

The good thing is that the crisis can’t last forever. But, for the time being, write an improved version of your family monthly budget using the tips we’ve provided above.

This post originally appeared on Arrest Your Debt.

Roth IRAs can be an excellent tool for retirement savings in certain situations. A Roth IRA has the unique feature of tax-deferred growth and income tax-free distributions. But, are there any drawbacks to Roth IRAs, and is there an alternative to the Roth IRA that could serve as a good substitute or addition to your current retirement portfolio?

Since a Roth IRA is a qualified retirement plan, it must follow certain IRS rules for the account owner to receive the benefits. So, what are the rules you ask?

Roth IRA Income Limits

For starters, you must have earned income to contribute to a Roth IRA. This does not include pensions, social security, disability, and annuity payments. Basically, you must have income from a job (W2), a business, or other active work (could be 1099 income from self-employment such as off duty).

Once you have your “earned income,” there are contribution and income limitations. What this means is that some higher-income earners may not be able to contribute to a Roth IRA due to the amount of money they earn per year.

For 2020, individuals cannot have a modified adjusted gross income (modified AGI) of more than $139,000. If an individual’s modified AGI is over $124,000, their Roth IRA contribution limits are reduced. For those filling jointly, the modified AGI limits are $206,000 and reduced contributions at $196,000.

Roth IRA Contribution Limits

If your income limits meet the eligibility requirements, there are contribution limits for the year. Those that are eligible to contribute are capped at contributions of $6,000 per year ($7,000 if you are over age 50) in 2020.

You can make your contributions up until April 15 of the following year. For 2020, this deadline has been extended to July 15. This means that you can make 2019 Roth IRA contributions up until July 15, 2020.

When You Have Access To Your Roth IRA Money

Now for some good news about your Roth IRA. The three main eroding factors of any retirement account are taxes, volatility, and account/management fees. Therefore, the Roth IRA eliminates the eroding factor of taxes, provided that the Roth IRA owner is at least 59 ½ years of age AND has held the account for a minimum of 5 years.

This is a huge perk.

Additionally, there are NO required minimum distributions (RMD’s) like with a traditional IRA. This means that you are not forced to withdraw any money from your account at age 72 if you do not want to.

In theory, you can let the money sit in your Roth IRA for as long as you’d like.

Roth IRAs And Taxes

Your Roth IRA is funded with after-tax dollars. With a traditional IRA, you receive a tax deduction in the year you contribute and kick the tax bill down the road until later in life.

Personally, I like to get my taxes out of the way now. This is because right now we are experiencing some of the lowest tax brackets we will see in our lifetime. Also, there is no guarantee you will be in a lower tax bracket when you retire, and this is especially true for public employees.

This is partly because you may not be receiving many of the deductions you get while working (i.e., pension & deferred compensation plan contributions, healthcare, etc.). As we can see, the Roth IRA can provide some tax-free money later in life, which is huge!

However, beware that withdrawals that do not follow these rules are subject to a 10% penalty tax and, in some cases, income tax on your gains.

Roth IRA Drawbacks

Now we have established the rules of the Roth IRA, who is eligible, and what the major benefit is. But what are some of the potential drawbacks of a Roth IRA?

Remember, a Roth IRA is not an investment in and of itself. A Roth IRA is essentially a tax code, so the IRS knows how to treat your money when you withdraw it later. It is the investment(s) within your Roth IRA account that determine how your money will grow and appreciate over time.

A potential drawback is that many Roth IRA accounts are usually tied to stock market investments, which can be volatile and risky. These investments can include high fees that may erode a large portion of earnings.

A Real World Retirement Example

Imagine you open a Roth IRA at age 25 with $1,000, and you contribute $6,000 per year until age 59. Now we will pretend you earned 5% per year for those 34 years. This would give you an account value of $515,655.13 at age 59.

If we factor in a 1% annual fee each year for 34 years, this brings your account value down to $414,688.11.

This means that a tiny 1% fee each year ended up costing you $109,967.02! That is $109,967.02 that YOU could have had in your pocket, totally tax-free for your retirement.

Also, one last note on the drawbacks is that we must remember that Roth IRAs are included in the gross value of an estate, which may increase state and federal taxes paid upon your passing by your heirs or beneficiaries.

A Good Alternative Or Addition To A Roth IRA?

Now don’t get me wrong, when it comes to qualified retirement plans, the Roth IRA is probably one of my favorites. However, there is a very effective alternative or addition to a Roth IRA to help achieve the same objectives as the Roth IRA.

This alternative possesses all of the same benefits of a Roth IRA, but it has far fewer rules and restrictions. Plus, it is something that has been around, in some form, for over one hundred years. It is whole life insurance. Now bear with me for a moment, and let’s see exactly how this works and compare the pros and cons of whole life insurance to a Roth IRA.

For those that are unfamiliar with what a whole life insurance policy is – it is merely a life insurance policy that has a death benefit and an internal cash-value account. Why life insurance, you say? Because it provides tax benefits and guarantees that are not available in any other investment or financial vehicle.

As long as a whole life policy is funded correctly and follows IRS guidelines, it will fall under section 7702 of the U.S. tax code. What this means is that whole life insurance provides tax-deferred growth AND tax-free use of your money just like a Roth IRA.

Sheltering Investments From The Stock Market

However, it is not tied to the volatility of the stock market, and there are no age restrictions for liquidity. This means that you can access your money at any age, for any reason, and with no penalties. If you remember, there is a 10% penalty plus applicable taxes for Roth IRA withdrawals that do not follow the IRS rules.

Additionally, unlimited contributions can be made to a whole life policy (within MEC guidelines) and there is a guaranteed growth rate tied to the policy’s cash value (usually around 4%). The death benefit in a whole life policy can also pass tax-free to your heirs. This isn’t always true of a Roth IRA, and the value of a Roth IRA upon the account owner’s death will depend upon the market value of the internal investments.

Unlike a Roth IRA which has a 10% penalty for accessing cash before the age of 59½, the cash value in a whole life policy can be accessed prior to age 59½, without a penalty.

Time-tested, whole life insurance has played a role in retirement plans for over 130 years. And, it can simultaneously be used as a legacy planning tool wherein the death benefit can be passed to heirs’ tax free and usually with a fairly high rate of return in comparison to the contributions.

We must not forget about the role of legacy and estate planning as part of our retirement plans. A lack of proper planning will cause us to limit spending in retirement, which in turn limits the quality of life and enjoyment, and isn’t that what retirement is all about?

Takeaways And Key Points

Overlooking whole life insurance in your retirement portfolio could cost you more than you realize. I am not saying that a whole life policy should completely replace your Roth IRA. However, it can certainly be a solid addition to your current retirement portfolio with its own set of unique financial benefits; and can be a great tool for those that may not be eligible for a Roth IRA.

Since much of our retirement income will be fully taxable for many of us, it is important to add as many tax-free “buckets” of money as possible to limit that tax burden in retirement when we need income the most.

On a side note, if you had to guess, what would you think the largest asset holding for most large banks is? Would it be real estate? Or perhaps mutual funds or corporate bonds?

Rich People Hide Their Money In Life Insurance

Believe it or not, whole life insurance is one of the largest asset classes of big U.S. banks such as Bank of America and Wells Fargo, to name a couple. This is because it is a safe way to store tax-free, liquid cash. You can view a breakdown of asset holdings on the FDIC website here. You may be surprised to see how many billions of dollars banks have invested in whole life insurance policies.

Forbes and other economic researchers and professors concluded that those who integrate cash value whole life insurance into their retirement plans and utilize this tool with other retirement investments realize more growth and income in retirement than those who do not. A retirement income study concluded that “For retirement income, we must step away from the notion that either investments or insurance alone will best serve retirees. More emphasis is needed on the basic forms of insurance products, and how they may behave as part of an integrated retirement income plan.”

So, stop for a minute and think about this question, if there was a way to have a solid foundation within your retirement plan, with guaranteed growth, virtually no restrictions, and tax-free benefits, would you want to add that financial vehicle to your portfolio?

To Your Retirement…

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If you’re concerned about retirement, click here to schedule a free call with Gary

This post originally appeared on Arrest Your Debt.