Tag: Making Money

Am I contagious?

 Gold? Or Fool’s Gold?

Posted on by Karac Avalron

Wednesday again so that means a blog post. Let’s talk about gold for this post. Now gold is a commodity that many financial experts will tell you is a great hedge against a potential downturn in the economy. Let me be upfront about something here first. I am a finance professional. I have been working in the finance industry for 30 years now. When I post about finance, investing, commodities, money etc. it is my opinion only. I am not giving you financial advice, what you take from this post is up to you.

So back to gold…. Is it a hedge? Well yes it can be. Like any other investment the key is the buy point and the sell point. Let’s do a little quick math. So based on this website https://goldprice.org/gold-price-history.html 10 years ago (Nov 2023) gold was trading at $1273.50 (U.S.) and ounce. 10 years later it is now trading for $1891.20, a 33% increase. That isn’t too bad, now keep in mind this is a straight net calculation. Meaning we are not accounting for inflation, fee’s nothing like that. Simply I bought at X I sell at Y I get Z.

33% isn’t a bad return but we have a few issues here that are not entirely represented in the % return. The main issue is we didn’t receive interest or dividends on the assets. This is one thing many finance professionals don’t tell you. When you buy a commodity or say a collectible (think famous painting) the only return you get is appreciation. Now there is a counter argument here and that is “yes but I have a tangible asset that I can use to obtain goods and services.”

You could always go into Bitcoin…..

Well, this might be true. For example, someone who puts in a driveway to your home you might be able to trade them a bar of gold for that service. In reality? This doesn’t happen often but that is the counter argument to not have dividends and interest you have a tangible item. Now, if the economy collapses etc. and you have a bunch of gold do you think you will be able to drive to Walmart and trade in your gold bars for food?

You’re better off investing in ammunition and firearms if that happens but the point here is Gold is just a place to hold cash that you want to protect from the volatility of equity markets. The only benefit here is a long-term play and the notion you have a tangible asset. I’ve moved all of the money I did have in gold and precious metals out and taken that money and bought tangible items I can enjoy that have value.

Antiques, collectibles, things of that nature are the same in principle as gold. Over time you hope the asset increases but you are not getting dividends or interest on the asset. However, you are getting something you can enjoy like a painting or an antique chair. Gold isn’t a horrible investment but it’s vastly overrated and often pushed as a “hedge” during hard economic times. I would encourage you to think critically about gold or any precious metals for that matter, the upside is extremely limited.

Thank you for coming by and supporting my blog I really appreciate it. Please remember to like the post, subscribe if you are not and leave a comment so I know you were here.

Karac  

How to obtain wealth – this one metric is key

Posted on by Karac Avalron

Welcome back folks it’s Wednesday and that means another blog post. So, you saw the title it’s not click bait (well maybe a little) but obtaining wealth is one of the more important endeavors many of us pursue. Is wealth the key to happiness? No not really. Does wealth give you more options to achieve happiness? Yes! So, as we journey through life and into adulthood there are a couple of key metrics you can measure to figure out if you will obtain wealth at some point.

To be clear, wealth doesn’t mean tens of millions of dollars. I mean it could mean that for you but wealth, in my view, is having enough income to enable you to pursue things that make you happy. Yes, having a 100 Million dollar yacht might make you happy, so might a 15K bass boat. Hopefully you get the picture here. The point is there are a couple of important aspects of adulthood we all have to deal with. This one key metric I reference in the title is one of the most important to determine if you have a chance to obtain wealth. “Well Karac what is it?!?!?”

How much of your income do you spend on housing.

Everyone has to live somewhere unless you are in dire financial straits. Your housing costs usually represent a huge chunk of your income. The principle here is pretty simple, the more you spend on your four walls the less money you have to spend on other things. Over time this has a debilitating effect on your wealth. To put it simply, if you are spending most of your money on rent you don’t have money left to invest, pay off debt, accumulate items you want etc., so on.

Money can’t buy happiness, but it can buy you time to do things that make you happy.

So how much should you be spending on housing? You should try and land somewhere between 25%-33% of your net income (take home pay, not gross). Now the important thing here is to remember your income can change over time. So, you might be getting a mortgage in 2023 and it is 33% of your income. You project that in a few years your income will increase 10-20% (for argument’s sake) and therefore the % goes down. You always want to start as low as you can on the curve and hope your income increases over time.

You may also lose income at some point, that happens. You may also get to the point where you do not pay for housing (you paid off your house). So, to be extremely clear here the metric for housing is the actual payment you make every month for rent or a mortgage. We aren’t talking about electricity, sewer etc. JUST HOUSING. Ideally you keep your housing costs at 25% of your net income through your adult life with the goal of someday having a house paid for with no mortgage.

At 24 that might not be realistic but let me leave you with this example. You are 24 you make 60K a year. Depending on where you live, taxes, benefits you chose etc. you will probably take home approx. 45,000 (these are rough estimates based on probable outcomes for the U.S.) So that equals $3750.00 a month. 33% of that (the high end) =$1,237.50. That’s the max amount of rent you should be paying to ensure you obtain wealth. Remember the numbers I used here are to give an example. For you here is how you do it.

Take home pay multiplied by number of annual pay periods = net income. Net income multiplied by 25% – 33% = housing cost you should be paying.

We don’t want to spend more than a third of our take home pay on housing because we need our income to pay bills, reduce debt and invest. The lower your % of housing cost the greater chance you will have to build wealth over time. Housing is likely the biggest monthly expense we face as we go through our adult lives. Keeping its cost in perspective as a % of take home pay is the key metric.

Thank you for coming by and supporting my blog I really appreciate it. Please remember to like the post, subscribe if you are not and leave a comment so I know you were here.

Karac

Slow and steady wins the race

Posted on by Karac Avalron

So another finance piece today. Remember these are my opinions based on my experience of 30 years in the finance industry. Prior to making any financial decisions, you should seek out as much information and advice as you can to make sure you make the best decision for you.

So we are in an extended period of inflation and international worry, which affects financial markets. Inflation has leveled off, but we have two very unique situations that have occurred in the last few years making this inflationary period extend longer than most anticipated. First the pandemic. Without getting into that whole debate, economically, when you prevent people from working and companies from manufacturing and print money to sustain them inflation happens. Basically, there are less goods in the economy, making those goods more valuable. The second thing is we have had the great resignation.

Yes it’s rooted in the pandemic shut downs but the underlying economic realities of gig work also contributed. Coupled with the Baby Boomers (by population our largest generation) aging out of the work place and you have the conditions by which companies have to pay people more to produce goods and services, so they charge more for said goods and services. That is the inflation bit, the international worry? The Ukraine war.

Whenever a super power goes to war, (I define super power as any nation with nukes) everyone else gets on the edge of their seat. Russia has struggled in Ukraine, they are going to be there awhile and I do not seeing that war resolving soon. Therefore, this means you have a volatile period of ups and downs in markets. It’s hard to predict when things will stabilize my best guess is probably after the 2024 U.S. election, but that’s a guess.

Those who beat the drums of war, rarely fight in them.

So what do you do as an investor? You continue to be disciplined and invest slowly and steadily. You don’t sell in a volatile period unless you need liquidity fast. You ride the ups and downs, your buy opportunities now will likely evolve into gains later and sell opportunities are usually few and far between. It’s not a horrible idea to put some assets in fixed securities either, CD’s and treasuries are always nice to have but I would never go more than 10% of my portfolio. Still some CD’s are at 5%, which isn’t horrible when compared to historic inflation numbers.

Markets always go up and down, we will continue to see 300+ point swings some days for some time now as the U.S. Fed reserve keeps manipulating the interest rates (they were held artificially low for over a decade). The fed rate now is 4.75%. Anything over 5%, I think is a pretty big stretch but who knows at this point. Keep investing consistently and if you have a 5-10 year window you should be fine and actually come out ahead. Make sure you keep an eye on auto loans, it is the next “big bubble” and I think that one is coming to us later this year but we will see.

Overall, the best strategy to wealth is to retain as much of your income as possible and not send it to other people so you can live. Then taking that income and investing it with a long-term goal of growth. It takes time and perseverance particularly when things are rocky like they are now.

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Finance: Interest Rates

Posted on by Karac Avalron

So from time to time on this blog I do finance pieces. I have been in the finance industry now over 30 years (yikes I am old). This is not financial advice only my financial opinion. You should consider multiple sources when making any financial decision and become as educated as you can. So the subject today is interest rates and how in the U.S. the federal reserve manipulates them to create false narratives in the economy.

Let me be clear here there are several factors in the U.S. economy that contribute to its overall health and well-being. The availability of credit though is a major factor and manipulating interest rates has a dramatic impact on financial outcomes. IMHO one of the biggest travesties in the U.S. economic model is the propensity to promote debt as a means to obtain assets. Of course there are times when you need credit for large purchases you don’t have the capital on hand to cover. Houses, vehicles, machinery that’s traditionally what credit was meant for. Now? You buy your lunch on credit.

The issue then becomes “how much is this purchase costing me?” you see it’s not the 8.99 for the sandwich and soda it’s the interest charge you incur on the purchase when (or if) you don’t pay off your credit card every month. Which, most Americans don’t do. The federal reserve’s rampant meddling with the federal reserve rate (the rate in which banks lend to other banks) has created horrible economic outcomes in the past.

The Fed’s need to relax on rate hikes for at least a quarter.

There is a good article here https://www.forbes.com/advisor/investing/fed-funds-rate-history/ from Forbes that discusses the changes. Essentially what happens is the higher the interest rate the more valuable currency becomes. This is actually a viable method to combat inflation. Inflation often occurs when too much money is in the system or to little supply of products. Post pandemic we have both of these issues which is why the Fed is raising interest rates so much so fast.

Prior to the interest rate hikes over the last 2 years the fed rate was too low. You see the issue really is the U.S. federal government manipulates the value of their currency as a buttress against its monumental debt spending. Now all governments do this to a degree but the U.S. is on a whole other level. We had the prime rate in the U.S. at .5% for years and under 1.0% for a long time. Everyone knew that was way to low but the economy was humming along we had good times so no one complained much.

The problem with that approach is you put off the pain and here we are. Had the fed maintained a more pragmatic approach to interest rates, bringing them back to historic norms incrementally over the last 20 years we would have less inflation now. In the year 2000 the prime rate was 5.75% high by today’s standards but a reasonable rate in my estimation. Why? Because what it does is requires those who use credit to make purchases to think carefully as the interest expense on the debt is high. It’s a big commitment financially to borrow anything at 5% IMHO.

So how do we get out of this manipulation? You can do rate caps but that’s another artificial means to an end. You do what’s called settling the rate market. You get to a point say 4% and you do not raise or lower the rates for 2 full quarters to see how the economy adjusts. The problem now is you have the government changing rates every month. They are doing this to manipulate the economy due to severe inflation. I get why they are doing it but had they not kept interest rates artificially low for nearly a decade the huge increases now wouldn’t be necessary.

I know all of this is fairly dry and not something most of you will probably want to read through. Here is the net bottom line. Leave interest rates alone for 6 months, let things play out see how the economy does. You then adjust .25 -.50 % from there and then wait again. Market adjustments take more than a quarter to take hold and because interest rates were so artificially low for so long it’s going to take well into 23, if not 2024 to flush out the current inflationary situation we have.

Hang in there and remember, your personal economy is paramount. Have a 6-month emergency fund, secure your income sources by diligence at work, and keep an eye on your spending.

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Finance Tip: “The Cash Flow Buffer”

Posted on by Karac Avalron

This particular tip is used in business often. It is exactly as it sounds a buffer. Keep in mind that opinions I express in my blog may or may not be good advice for you personally. You should investigate all financial advice thoroughly before pursuing any course of action. So a cash flow buffer is a concept that many people might confuse with an emergency fund in the context of personal finance.

With the job market shifting to a more hustle economy, you might not be earning a steady paycheck any more. You might be doing contract or consulting work and who knows you might kill it for 8 months, then the next 2 months your down 60% on your earnings. This isn’t as farfetched as you might think. This happens a lot now. What I am seeing in the news articles I read are people busting their tails for 6 months, doing uber eats, working a full time gig, then maybe one more side hustle and banking a large chunk of change. Only to then slow WAY down to recover for 3-4 months, rinse and repeat.

The job market in the U.S. has changed a lot in the 35 years since I started at burger king in the mid 80’s. So one of the approaches I take with family members I advise financially is treat the working part of your life as a business. We set up a balance sheet, expenses etc. We build an emergency fund of 6 months of expenses (if there isn’t a whole lot of debt) and then work on the Cash Flow Buffer. There it is again, lets define it. A Cash Flow Buffer is the number of days you could continue to pay your bills out of your regular bill paying account if income were to stop.

Inflation is falling, but its still very high

Again this isn’t an emergency fund! So you have 5K in your checking account, you lose all your jobs you have no money coming in. You spend 3500 a month for expenses this would mean you have a cash flow buffer of 45 days. So many would assume you would then begin to tap your emergency fund, and that would be correct. AT THE END OF THE 45 DAYS. You see the buffer is meant to create space for you so you can replace income.

That 5K will keep you afloat for 45 days that’s your real window until you have a real emergency on your hands. The buffer assumes you are not replacing your income. Businesses use this tool a lot, particularly seasonal businesses who do a large % of their sales at a specific point of the year. For you in the new gig economy this might be useful for you to gauge as you navigate the new normal for working.

So how you do it is, look at your monthly spend. Take out all the non-essentials and come up with a number. (rent, electricity, food, water). If you lost all your income today how long could you pay for things without tapping your emergency fund? You see the concepts here are more for discipline purposes. The last thing we want to do is hit the emergency fund because if we tap into that, we know that things are really bad, it’s for emergencies.

Think about your personal cash flow buffer. I keep about an extra month of bills in my checking account so my buffer is 30 days which is light. I am confident that I would be able to replace my income (or a good chunk of it) before 30 days. Ideally you have a 30-60-day buffer here that you would use BEFORE the emergency fund.

I know it’s confusing, but if you start treating your financial situation as your own personal business and economy you might find that these things make sense.

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3 compensations factors that make companies great.

Posted on by Karac Avalron

The great resignation marches on and in the U.S. unemployment is near record lows. Millions of people left the workforce due to the pandemic. Whether it was creating their own income streams or boomers retiring, there are a shortage of workers in the U.S. Now let’s be very clear here, the available jobs are not high end 6 figure salary roles. Sure there are some of those but nearly everyone has leveled up, so your traditional entry level positions are the ones that have the most openings presently.

Regardless of when you get a new job or if you are evaluating your current company there is one truism you always have to remember. Companies need you to perform tasks so they can make money. You wouldn’t be employed if you weren’t either generating income for the corporation, or supporting others who did. So in this sellers’ market (you the employee are the seller) we can now be even more selective of the places we want to work. There are 3 compensation factors that make companies great. This may not be in line with other lists you see out there but from an employee’s stand point, here they are.

Surviving 2020 & covid
Great, another list…..
  1. A robust retirement plan: This includes employer match, Roth and Traditional 401K/403B options. This should be managed through a large firm like a fidelity and the vesting time line is no longer than 3 years. Retirement planning is critical and most successful retirees in the modern era have created wealth through automatic withdrawals via their employer’s plan.
  • Comprehensive benefits: Health Insurance is obvious but you should have 3+ plans to choose from. Dental, LTD, STD, a 1-year life insurance of your salary. There should be A good PTO (Paid time off plan) that scales based on tenure. Every 5 years you should receive 1 additional week of PTO capping at 6 to 8. PTO should be one lump sum, vacation and sick and you get to manage it. Along with major federal holidays. This is where you really get value as this is part of your compensation package. It’s not just the annual salary, it’s the sum of the value of these “perks” as well.
  • Profit sharing: This is one of the rarest benefits you’re going to see out there. If you get into a company with this benefit you really lucked out. Most corporations keep their profits to make distributions to their shareholders. There is nothing wrong with that, they are paying you a salary and offering you benefits. It’s a fair exchange and one that has been the norm for decades. Profit sharing can come in all sorts of forms. Ideally what you get is if the company has a surplus to budget at the end of the year that amount is distributed to employees. Some managers are offered “profit sharing” of some form. I got quarterly performance bonuses based on budget performance in one role.

The 3 items listed above are in addition to your base salary. This is a sellers’ market and employees are now in a situation where they are empowered to create very good deals for themselves. THIS WILL NOT LAST FOREVER. Look, work isn’t meant to be easy. It’s likely you fall into one of two categories. You are either someone who truly loves what they do, or you work to obtain income so you can do the things you truly love.

Most of us fall into the latter category. Work is a means to get income to live life. The more perks you can get the better life becomes. Now is the time to look around, see what’s out there, measure your current work situation. Believe me if the situation was reversed and there was a surplus of workers your company would be looking to see if they could pay you less.

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Commodities – Should you invest?

Posted on by Karac Avalron

For the first time in a long time we have inflation to the point where it is materially affecting multiple financial sectors. Bonus tip: Anytime oil prices rise, it affects pricing on nearly all consumer products. We also have the artificial inflation of the stock market due to interest rates being kept at historic low levels for over a decade. On top of that you had the pandemic that decreased production and you had governments stimulate with increase payments to individuals. These two factors alone cause inflation, less products and more money = product price increases.

Now before I get to far into this let me give you the normal disclaimer. I am a finance professional with 30 years of experience. These are my opinions based on years of observation, any decisions you make pertaining to your personal financial choices should be done so with a great deal of research beyond my blog posts.

Disclaimer out of the way, what does all of the reality of the first paragraph mean? It means commodities will increase. Oil, Precious metals, specific produce items wheat as an example. Does this mean they are a good investment? Yes, and no, first the no. Buying them now would break the basic principal of investing and wealth building (buy low sell high), you would be buying at a high, don’t do that.

Yes, because a diversified portfolio is a good thing. If you had gold in your portfolio at the start of the pandemic (3.1.20 roughly) it was trading at 1497.00 US per ounce. 2 years later? 1944.00 US per ounce that’s nearly a 30% return. Oil, wheat, Silver you can go figure it out, they are mostly up. The point here is you are seeing these items increase because the market is changing. The war in Ukraine effects commodities, specifically Wheat as Ukraine is a huge Wheat producer but what happens when markets change (with the many factors listed in this narrative) commodities tend to rise.

There is no sure thing in investing, its always a rollercoaster.

Ideally what you want to do is use the current financial climate as notice on how to diversify your portfolios going forward. Gold as an example, will come down. Should you go heavy into gold when it does? No, you should consider SOME gold though. 2-5% of your portfolio is what I recommend to family & friends buying at a low (I use 3-5 year price averages myself). Wheat will be another one that spikes soon, keep an eye on that.

Overall, commodities are a useful buttress for lower stock values. If you weren’t in commodities prior watch the prices in 2022 it’s going to be a good year to gauge your comfort level with commodities. Just like stocks it’s a gamble, but sometimes when you gamble you win and had you bought Gold (as an example) years ago and stayed with it, you would have a spectacular sell opportunity now to make some great gains.

Always be diligent when investing and don’t close your mind off to any specific sector of the markets. A diverse portfolio that takes a long term view on investments is prudent. Commodities are a big driver in markets (look at oil prices), ignoring them as investments isn’t the smart play. Nor is using a large % of your investing resources and putting that into commodities. It’s a sell position now. Take your gains if you have them and remember the simple phrase “buy low sell high” should always be paramount.

Source for Gold comparison:

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How to navigate the stock market roller coaster

Posted on by Karac Avalron

The markets have been volatile for the last week or so. Inflation, Ukraine, Omicron lots of factors go into this. Let me say clearly that I am a finance professional with over 30 years of experience. I am not a financial advisor and anything you see here is my opinion only. Have I seen something like this before? Yes, I have. Markets have crashed many times in the last 30 years. While I wasn’t investing at the time I am old enough to remember inflation in the 70’s. Many of you are seeing inflation for the first time and are shocked at its impact.

First let me say that I think the markets have been artificially inflated for decades now due to U.S. monetary policy. Keeping the fed rate so low for so long has forced many investors into the market that wouldn’t have necessarily gone in before. Getting .25 of a % of interest at a bank is a killer, even the most cautious investors can’t stomach that kind of return. So right off the bat I think there is a 10-15% inflation of the market (approx. 3-4K points in the dow) due to fed policy, likely more.

Now it’s also true that over the last few decades many companies have created immense wealth and broadened their services. The market isn’t a complete illusion, these companies have value based on market share and branding. So how do you navigate the stock market roller coaster?

You don’t.

Am I contagious?
You don’t ? Is that the best this guy can do?

I know, not the complex detailed answer you wanted but the key to wealth building is consistent investing. If you jump every time there is a dip in the market you will not make a lot of money. Statistically the market normally returns approx. 8% a year. This link shows you the statistical return break down for 147 years…. Yes, we have that much data.

If you want the simple facts here it is: 101 years shows a positive return, 46 years showed a negative return. So statistically the chances of you suffering through concurrent negative years is low, the market usually bounced back. Additionally, if you continued to invest in those down years purchasing your assets at a lower price you balance out the actual cost of your portfolio to you when purchasing in high years.

The trick has been and always will be, when you need to convert the assets to usable currencies (when you sell). If you need to sell now, you are most likely going to take a loss. Now only you know when your sell date is. Mine is approx. 10 years. In the next 10 years I will begin to take my gains with sell offs and move my investments into more principal friendly investments. The older you get the less window you have for the sell, always be mindful of when you will need the money.

So you don’t do anything unless you are at a point you need the money. Otherwise stick with your investment plan. The likelihood of a multiyear down cycle is very low (it is possible). My instinct tells me 2022 is going to be a highly volatile year and it will not be for the faint of heart for investors. Many people can’t take the risk, it’s too stressful. I completely understand. For me, this is a buy opportunity and I am happy to keep accumulating assets at a lower price now to balance out the assets I have that were purchased in peak markets.

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Finance tip – The Credit Score Secret

Posted on by Karac Avalron

So the first finance piece on the blog for 2022 but the same disclaimer…. I am finance professional with 30 years of experience. That said the views expressed on this blog regarding personal finance are my opinion and any financial decisions you make you should do so after having done your own personal research.

If you live in the western world you have a credit score. Now our friends in the east (our Asian and Australian friends) might have something similar, if they do I am not familiar with what it is but its yet another “number” you are given to identify your financial prowess. Now that we are in the midst of the digital age it is very easy to accumulate data on consumers.

Bitcoin is a game changer

Be under no illusion, every financial transaction you make is being stored in some data base and scrubbed as part of meta data for analytics. How many people bought tooth brushes in Dec as opposed to Feb… That data is then resold to manufactures and other large corporations for great profit. Let’s follow the example a bit further… Let’s assume that in Dec tooth brush sales are 300% higher than Feb. That’s critical information for someone who makes toothbrushes, that could be the lynch pin info that creates high profits for their company. You get the idea.

So you as a consumer are given a credit score. It has been pumped up and built up to be a reflection on your overall prowess as an economic entity. Potential employers will do a “credit check” on you. Some dating sites as part of the vetting system perform these checks as a service for their clients. You even have social conversations (well pre covid anyway) where people would actively talk about their credit score as if it were some bench mark for success.

Here is “The Credit Score Secret”

The credit scores purpose is to grade you on your ability to finance material items you can’t afford

Simply put, your credit score is a benchmark on your ability to make payments on items you can’t otherwise pay for outright. Its far more lucrative for a company to sell you something and have you pay overtime with interest. First, they make more over time due to interest and Second, they can up sell you additional services that complement the original purchase.

The bottom line is, you only need a credit score if you are buying something you can’t afford. In my opinion, the only case you should ever need this is when purchasing a house. You should not be buying other items unless you can pay for them outright, and yes that means cars too. I can bend a little on cars but you don’t need a 50K car, a 10K car will suffice. It’s another illusion the finance industry has created for you.

“Give them a score so they can measure themselves against others”. Its clever, sinister marketing. That score is a curse because it really means you have a high probability of purchasing things you can’t afford and paying for them over time. It’s an indication of how poor at finance you really are, financing a TV, A vacation, a phone… It means you’re willing to pay MORE than the item would normally sell for.

Don’t be fooled by the finance industry. They want you to be good little consumers. “payments” means “interest” and interest is pure profit for them. The item is still worth 20k regardless, but you, because you want it now are willing to pay 30K for it over 10 years because you want it now. Companies love that mentality and that is the “credit score secret”

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Advanced Finance Tip: Annual Gift Tax Exclusion

Posted on by Karac Avalron

DISCLAIMER: Any financial advice I give on this blog is my opinion based on 30 years of working as a finance professional. Before making any financial decision do as much research as you can to make an informed decision.

So in the U.S. we have an extremely complicated tax code, its frankly ridiculous but that’s another blog post entirely. One of the issues the more fortunate of us face is how do we leave our money to our offspring without getting killed on taxes. This doesn’t apply exclusively to the rich either. Middle class Americans who have any amount of money face taxation on their net assets. The older you get the less you actually need your assets to survive. Specifically, there comes a point in your life where you have enough money that generates income that you will not have to compromise your principal.

Again, this isn’t for everyone… Many people live paycheck to paycheck but there are some of us who have a paid for house, a good chunk of change in our 401K’s and are debt free. We aren’t multi-millionaires but we do have money in excess of necessities. You may ask yourself “well Karac, why can’t I just spend it on all those things I wanted to do in retirement?” I would say to you “what things?”

There is this myth that once you retire there is glut of items or travel that you are going to purchase. You likely aren’t going to buy a new car, a 2nd house, travel 1st class. I mean you may, but average middle class people don’t do this regularly in retirement. Once in a while? Yes. So we are sitting on cash, when we die you aren’t going to care what your 401K balance is, your heir’s or the government WILL care because they benefit from it.

Decades later, they will pay taxes on their inheritance.

This is when all sorts of tax issues can happen and depending on the family dynamic horrible drama. There is an option and that is gifting money to your heirs now prior to your death. In 2021 the U.S. allows for a Gift Tax Exclusion of 15K per recipient. So if you had 150K you could gift 15K to 10 people and not have any tax implications. There is a life time limit to how much you can gift, its 11.7 mil which most of us are never going to hit.

So the tip: When you are starting your retirement planning, it may be prudent to calculate annual gifts to your heirs. It’s likely that the money now will help them more than money later as they can then take the gift and use it to supplement their current income. 15K is a lot of money. If you retire at 62 and live the average age (in the U.S.) of 82-84 (let’s say 83) that’s 21 years. 15K a year for 21 years = $315,000.00 that your heirs are not going to inherit and pay associated taxes on.

Again this is an advanced finance/retirement tip. You should be doing a lot of research and planning when you approach retirement. For a good article on Gift’s and Gift Taxes check out the article here.

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