What To Do If You Get an IRS Notice

Here’s what taxpayers should know if they get a notice from the IRS

Certain taxpayers might get a letter from the IRS this year. It’s called an IRS Notice CP 2000. It gives detailed information about issues the IRS identified. The IRS sends this notice when information from a third party doesn’t match the information the taxpayer reported on their tax return. The notice also provides steps taxpayers should take to resolve those issues.

Here is some information about these notices to help taxpayers understand why they got one and what to do when it arrives:

  • The IRS sends a notice to the taxpayer when a tax return’s information doesn’t match data reported to the IRS by banks and other third parties.
  • This notice isn’t a formal audit notification. It is simply a notice to see if the taxpayer agrees or disagrees with the proposed tax changes.
  • Taxpayers should respond to the Notice CP2000. The taxpayer usually has 30 days from the date printed on the notice to respond.
  • The IRS provides a phone number on each notice. IRS telephone assistors can explain the notice and what taxpayers need to do to resolve any issues.
  • The IRS will send another notice to the taxpayer if the taxpayer doesn’t respond to the initial Notice CP2000, or if the agency can’t accept the additional information provided. It is called an IRS Notice CP3219A, Statutory Notice of Deficiency.
  • The Notice CP3219A gives detailed information about why the IRS proposes a tax change and how the agency determined the change. The notice tells taxpayers about their right to challenge the decision in Tax Court if they choose to do so. Even if they decide not to go to Tax Court, the IRS will continue to work with the taxpayer to help resolve the issue.

More information:

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December 2018 Year End Planning

pexels-photo-775779.jpeg
Photo by IMAMA LAVI on Pexels.com

Tax reform and tax preparation


As a new year approaches, many of us will reflect on the year that has passed. Personal and professional accomplishments may take center stage. And we may take stock of any disappointments and recalibrate as 2019 approaches.

But in any case, I know it’s a busy time. Christmas shopping, holiday parties, tree trimming, family visits, and year-end cheer may already be on the calendar.

Yet it’s not too soon to start thinking about taxes. We’ve had discussions about 2017’s tax reform, but until we’ve filed for 2018, it may still feel confusing to many.

Before we jump in, let me stress that it is my job to assist and help you! I can’t overemphasize this, and I would be happy to review the options that are best suited to your situation. When it comes to tax matters, I also recommend you check with your tax advisor.

Let’s get started

Tax reform, officially known as the Tax Cuts and Jobs Act (TCJA) of 2017, was the biggest change in the tax code in over 30 years. The overhaul covered both individual and corporate income taxes. Most will see their tax bill decline when they file, but a few folks may see a sharper bite.

I’ll touch on some of the changes at a high level.

  1. Tax brackets and tax rates have changed. The lowest bracket holds at 10% but the top bracket has been lowered from 39.6% to 37%. There have also been modest adjustments to the rates and income levels for taxable income.

 

Single filers 2018   Single filers 2017
Taxable income Rate Taxable Income Rate
$0 – $9,525 10% $0 – $9,325 10%
$9,526 – $38,700 12% $9,326 – $37,950 15%
$38,701 – $82,500 22% $37,951 – $91,900 25%
$82,501 – $157,500 24% $91,901 – $191,650 28%
$157,501 – $200,000 32% $191,651 – $416,700 33%
$200,001 – $500,000 35% $416,701 – $418,400 35%
$500,001 or more 37% $418,401 or more 39.6%

 

Married filing jointly 2018*   Married filing jointly 2017
Taxable income Rate Taxable Income Rate
$0 – $19,050 10% $0 – $18,650 10%
$19,051 – $77,400 12% $18,651 – $75,900 15%
$77,401 – $165,000 22% $75,901 – $153,100 25%
$165,001 – $315,000 24% $153,101 – $233,350 28%
$315,001 – $400,000 32% $233,351 – $416,700 33%
$400,001 – $600,000 35% $416,701 – $470,700 35%
$600,001 or more 37% $470,701 or more 39.6%

*or Qualifying Widow(er)

Source: IRS US Tax Center 2017/18 Federal Tax Rates, Personal Exemptions, and Standard Deductions

  1. The personal exemption has been eliminated; child tax credit increased. The $4,050 personal exemption taken in 2017 has been eliminated. However, the child tax credit doubles to $2,000 per qualifying child, subject to income limitations.

 

  1. The increase in the standard deduction will simplify filing for some folks. The standard deduction will rise from $6,350 to $12,000 for single filers and $12,700 to $24,000 for joint filers.

The higher standard deduction and increased child tax credit will likely lower tax bills for many lower and middle-income filers. In addition, it simplifies filing every year.

  1. Some itemized deductions have been reduced or eliminated. State and local income taxes, property taxes, and real estate taxes are capped at $10,000. Anything above can no longer be written off against income.

All miscellaneous itemized deductions are eliminated, including deductions for unreimbursed employee expenses, tax preparation fees, the deduction for theft, and personal casualty losses, although certain casualty losses in federally declared disaster areas may still be claimed.

The new tax law enhanced the deduction for charitable contributions by raising it to 60% of adjusted gross income from 50%.

The law preserved the deduction for unreimbursed medical expenses, temporarily reducing the limitation from 10% to 7.5% of adjusted gross income for tax year 2018 and retroactively for 2017.

The floor returns to 10% in 2019.

  1. Changes to the AMT–the alternative minimum tax. The dreaded AMT is still with us but will snag far fewer taxpayers since the exemption and exemption phase-out have been substantially increased.

About 5 million taxpayers were expected to pay the AMT under the old law, but only 200,000 are expected to pay the AMT this year.

  1. There’s a new 20% deduction for business owners. The new law gives “pass-through” business owners, such as sole proprietorships, LLCs, partnerships, and S-corps, a 20% deduction on income earned by the business.

 It’s a substantial benefit to business owners who aren’t classified as C-corps and wouldn’t benefit from the reduction in the corporate tax rate to 21% from 35%.

REITs and MLPs are also eligible for the deduction.

The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers.

There are limitations to the new deduction and some aspects are complex. It is important to check with your tax advisor to see how you may qualify.

The points above are simply a summation of the major changes in 2018. You may see provisions that will benefit you. You may also see potential pitfalls. If you have any questions or concerns, let’s have a conversation.


8 smart year-end financial planning moves

1. Review your income or portfolio strategy

Are you reaching a milestone in your life such as retirement or a change in your circumstances? Has your tolerance for taking risk changed? If so, this may be just the right time to evaluate your approach.

However, let me caution you about making changes based simply on market performance.

One of my goals has always been to remove the emotional component from the investment plan. You know, the one that encourages investors to load up on stocks when the market is soaring or one that prods us to sell when volatility surfaces.

2. Take stock of changes in your life

Review insurance and beneficiaries. Let’s be sure you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen.

3. Mind the tax loss deadline

You have until Monday, December 31 to harvest any tax losses and/or offset any capital gains. But be careful. There are distinctions between short- and long-term capital gains, and you must be aware of wash-sale rules (IRS Publication 550) that could disallow a capital loss.

It may be advantageous to time sales in order to maximize tax benefits this year or next. We may also want to book gains and offset any losses.

4. Mutual funds and taxable distributions—be careful

This is best described using an example.

If you buy a mutual fund on December 18 and it pays a dividend and capital gain December 21, you will be responsible for paying taxes on the entire yearly distribution, even though you held the fund for just three days. It’s a tax sting that’s best avoided because the net asset value hasn’t changed.

It’s usually a good idea to wait until after the annual distribution to make the purchase.

5. Don’t miss the RMD deadline

Required minimum distributions (RMDs) are minimum amounts a retirement plan account owner must withdraw annually, generally starting with the year that he or she reaches 70½ years of age. Some plans may provide exceptions if you are still working.

The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31.

The RMD rules apply to traditional IRAs, SEP IRAs. Simple IRAs, 401(k), profit-sharing, 403(b), 457(b) or other defined contribution plans. They do not apply to ROTH IRAs.

Don’t miss the deadline or you could be subject to steep penalties.

6. Contribute to a Roth IRA or traditional IRA

A Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal-tax-free withdrawals if certain requirements are met.

You may also be eligible to contribute to a traditional IRA, and contributions may be fully or partially deductible, depending on your circumstances. Total contributions for both accounts cannot exceed the prescribed limit.

 There are income limits, but if you qualify, you may contribute $5,500, or $6,500 if you are 50 or older. In 2019, limits will rise to $6,000 and $7000, respectively.

You can make 2018 IRA contributions until April 15, 2018 (Note: state holidays can impact final date).

7. Consider college savings

A limited option, called the Coverdell Education Savings account, did not get axed by the new tax law.

Currently, total contributions for a beneficiary cannot exceed $2,000 in any year and must be made before the beneficiary turns 18.

Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual’s modified adjusted gross income for the year is less than $110,000. For individuals filing joint returns, the amount is $220,000.

A 529 plan allows for much higher contribution limits, and earnings are not subject to federal tax when used for the qualified education expenses of the designated beneficiary. Contributions to both accounts are not tax deductible.

8. Wrap up charitable giving

Whether it is cash, stocks or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income.

Did you know that you may qualify for what’s called a “qualified charitable distribution (QCD)” if you are over 70½ years old? A QCD is an otherwise taxable distribution from an IRA or inherited IRA that is paid directly from the IRA to a qualified charity (“End-Of-Year Contribution and Distribution Planning for Tax-Favored Accounts”–Kitces.com).

This becomes even more valuable in light of tax reform as more taxpayers will no longer be able to itemize, and an RMD that is taken, then donated to a charity, may not provide tax benefits.

Given the increase in the standard deduction and limits on state income and property taxes, annual year-end gifts to your favorite charity may not exceed the higher thresholds. Therefore, you may consider giving an annual gift in early January. Coupled with an annual gift next December, you might reap the tax advantages from itemizing in 2019.

You might also consider a donor-advised fund. Once the donation is made, you can generally realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.


Uncertainty forces modest correction

The conclusion of the midterm elections failed to soothe concerns through much of November.

Anxieties include higher interest rates and a moderation in economic growth.

Eight 0.25 percentage-point rate hikes by the Fed have done little to discourage investors since late 2015, at least through September. While rates remain low by historical standards, concerns have cropped up that the Fed’s desire to gradually raise rates throughout 2019 might begin to crimp growth.

Maybe it’s temporary or just statistical noise. But we are seeing signs that U.S. growth is slowing in Q4. Global growth has moderated, which will likely create a headwind for U.S. exports. And trade tensions are creating uncertainty, which may be impacting business investment.

Housing sales have turned lower, and housing starts have slipped. In addition, first-time claims for unemployment insurance, a good leading indicator, have inched off September lows, according to the Department of Labor.

Given the heightened uncertainty, analysts have been trimming profit forecasts for 2019. Still, the sell-off has been modest since the late September peak.

As the month concluded, Fed Chief Jerome Powell appeared to take a slightly more dovish tone regarding rate hikes. Expect another 0.25 percentage point increase in December, but a gradual series of increases next year seem less uncertain.

If you are concerned and want to talk, I’m simply a phone call away. I’d love to hear from you.

Table 1: Key Index Returns

MTD % YTD % 3-year* %
Dow Jones Industrial Average 1.7 3.3 13.0
NASDAQ Composite 0.3 6.2 12.8
S&P 500 Index 1.8 3.2 9.9
Russell 2000 Index 1.4 -0.1 8.6
MSCI World ex-USA** -0.3 -11.7 1.5
MSCI Emerging Markets** 4.1 -14.1 6.9
Bloomberg Barclays US

Aggregate Bond TR

0.6 -1.8 1.3

Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar

MTD returns: Oct 31, 2018-Nov 30, 2018

YTD returns: Dec 29, 2017- Nov 30, 2018

*Annualized

**in US dollars

 

I hope you’ve found this review to be educational and helpful, but keep in mind that it is not all-encompassing. Once again, before making any decisions that may impact your taxes, please consult with your tax advisor.

Let me emphasize that it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me a call.

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor. If you have any concerns or questions, please feel free to reach out to me at latoya@latoyamaddox or call me at 678-821-2968 and we can talk. That’s what I’m here for.

 

 

 

Where is Your Financial Emergency Kit?

first aid case on wall
Photo by rawpixel.com on Pexels.com

Floods, hurricanes, wildfires, earthquakes, extreme winds, and tornadoes. They all have the potential to create treacherous conditions and cause devastation.

We prepare with insurance, but it is often inadequate. It covers many, but not all natural disasters. Flooding requires flood insurance. And a standard homeowners policy won’t cover damages caused if the ground shakes violently.

Disaster can strike with little or no warning. Early preparation is the key.

Today, I want to focus on the importance of building a financial emergency kit. The time to create an emergency kit is today, when the skies are blue and the winds are calm.

What do I need?

Consider purchasing a box or safe that is fireproof and waterproof. You can’t guarantee it won’t be damaged during a disaster, but it will go a long way in safeguarding important papers. A safety deposit box is also an option.

Store electronic copies of important documents on a USB drive. Even better, upload them to a password-protected, cloud-based system. And be sure to create a strong password that is unique. Include letters (some caps, some lower case), numbers, and special characters. If two-factor authentication is an option, enable it.

Cash and keys. Make a duplicate of house keys and auto keys. You may also need cash in the immediate aftermath of a disaster. ATM cards may not work and not everyone is prepared to take a credit card. Still, it wouldn’t hurt to include a duplicate credit card.

Contacts. Who are the important people in your life–family, friends, medical, and professional. Create a list with telephone numbers, emails, or other contact information.

You may store the information electronically, with the appropriate security precautions, but it’s recommended that you place a paper copy inside your kit.

Identification. If disaster strikes, you may be asked to confirm your identity to obtain disaster relief services, file insurance claims, or get access to your property and financial assets.

Your kit should contain essential documents, including extra originals or copies of a passport, driver’s license, birth certificate, marriage certificate, adoption records, Social Security card, green card, any military records, and pet ID tags.

These will allow you to establish your identity, the identify of immediate family members, and eliminate the need to replace important ID markers.

Important records. We have copies of your financials, but this doesn’t preclude you from safe harboring your records.

A short list of financial documents that can fit into your kit includes mortgages, property deeds, and legal documents such as a power of attorney, estate planning, wills, and insurance policies.

Also include recent bank and credit card statements, brokerage accounts records, and statements related to investments that might be held outside a brokerage firm (such as mutual funds or 529 college savings).

If you access accounts or documents online, include a list of password hints. Also, pack recent retirement account statements and your most recent tax return.

A password-protected flash drive or file might be safer than hard copies—as long as you have a way to access the files. If you receive electronic copies of bank and brokerage statements, it is advisable to place recent copies in your kit.

What are your valuables? Create an inventory of your personal belongings. Assemble a paper, photo or video inventory, and put it into your emergency kit.

Be sure to save receipts for major items, home upgrades, or any appraisals of valuable belongings. For your household items, record what’s in each room. For major items, write down serial numbers.

While you’re at it, record the cost. Take closeup pictures of valuables, including details such as serial number tags. You can also videotape your belongings with a narrative description of the relevant information.

If the project seems overwhelming, you may start by tackling one room at a time. If it’s ever needed, it will help you maximize benefits from your insurance policies and expedite the claims process.

(Sources: Ready.gov–Financial Preparedness, Finra.org–Lock down your Financial Emergency Kit, IRS: Prepare for Natural Disasters)

Your kids

A disaster will take an enormous mental toll on you. Having your financial house and records in order will remove one burden. But what about your children?

Your children’s wellbeing will largely be dependent on you. Kids look to Mom and Dad for their security.

Here is a checklist for your kids obtained from UNICEF USA;

  • Pack their essentials such as medicine and clothes.
  • Pack their toys, favorite books, music, electronics, and have fresh batteries.
  • Talk to your kids about what to expect at a shelter.
  • Develop a system with your children that will allow them to be identified if they are separated from you.
  • Learn basic first aid skills in case you are your child becomes sick and medical supplies are scarce.

Chat with your kids in ways they will understand. Be honest, reassure them, but don’t make promises that aren’t realistic. Just as important, let them know there are resources available that will assist your family.

While I sincerely hope you never experience the pain that comes with the loss of property or worse, we are here to assist. Taking proactive steps in advance can help eliminate one source of uncertainty in the event disaster strikes.

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor. If you have any concerns or questions, please feel free to reach out to me at latoya@latoyamaddox or call me at 678-821-2968 and we can talk. That’s what I’m here for.

 

The Legacy of Lehman

September 15th marked an ominous anniversary. Ten years prior, Lehman Brothers declared bankruptcy, sparking a financial crisis that engulfed the global economy.

Lehman’s failure could easily be described as a “systemic event.” That’s financial jargon for an event that triggers severe financial instability and sends shockwaves through the economy.

Economically, we’ve recovered from the downturn. Unemployment is low, and GDP is above pre-crisis levels. Major U.S. market indexes have topped pre-recession highs, but the crisis left an indelible mark on investors. For some, the scars remain.

While today’s bull market pushes higher, some investors fear a repeat. You see it every time the market experiences a correction, or a decline of at least 10%. One day, I believe the memory of the crisis will recede. It may take another downturn that doesn’t lead to severe losses, but I believe it will eventually fade.

Can it happen again?

We cannot unequivocally say “Never.”

Gone are the days when a borrower need only a pulse to obtain a mortgage. OK, that’s a bit of an exaggeration, but I think you understand what I’m trying to convey. Whether you blame it on the banks or blame it on borrowers, too many folks jumped into or were placed into loans they couldn’t afford or didn’t understand.

Today, banks are much better capitalized than in 2007. The major banks have a much bigger cushion to absorb loan losses. And underwriting standards for home loans are more realistic.

During the Fed’s quarterly press conference, Fed Chief Jerome Powell was asked about financial conditions.

Powell, said, “The single biggest thing I think that we learned was the importance of maintaining the stability of the financial system.” It’s something “that was missing” back then.

“We’ve put in place many, many initiatives to strengthen the financial system through higher capital, and better regulation, more transparency, central clearing, margins on unclear derivatives, all kinds of things like that, which are meant to strengthen the financial system,” Powell said.

These measures won’t prevent another recession, and systemic risks haven’t completely abated, but the financial system is in a much better position to withstand a shock than it was in 2008.

Table 1: Key Index Returns

MTD % YTD % 3-year* %
Dow Jones Industrial Average 1.9 7.0 18.2
NASDAQ Composite -0.8 16.6 21.0
S&P 500 Index 0.4 9.0 15.7
Russell 2000 Index -2.5 10.5 15.9
MSCI World ex-USA** 0.5 -3.8 6.4
MSCI Emerging Markets** -0.8 -9.4 9.8
Bloomberg Barclays US Aggregate Bond TR -0.6 -1.6 1.3

Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar

MTD returns: Aug 31, 2018—Sep 28, 2018

YTD returns: Dec 29, 2017— Sep 28, 2018

*Annualized

**in US dollars

Takeaways

It’s not about timing the market. It’s about time in the market, diversification, and the balance between riskier assets (such as stocks) that have long-term potential for appreciation, versus safer, less volatile assets that are less likely to appreciate.

Headlines can create short-term volatility. We saw that earlier this year, and we’ve seen it at various times in recent years. But patient investors who stuck with a disciplined approach were rewarded. Longer term, stocks historically have had an upward bias.

While heading to the safety of cash during volatility may bring short-term comfort, opting for the sidelines can have long-term costs.

Let me repeat a Fidelity study I recently quoted. “Investors who stayed in the markets (during 2008) saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%” between Q4 2008 and the end of 2015.

“That’s twice the average 74% return for those who moved out of stocks and into cash during the fourth quarter of 2008 or first quarter of 2009.” Even worse, over 25% who sold out of stocks during that downturn never got back into the market.

Yes, the safety of cash during volatility may bring short-term comfort but opting for the sidelines can have long-term costs.

The opposite is also true. Don’t become overconfident when stocks are surging. Some folks feel an aura of invincibility and are tempted to take on too much risk.

That gets them into trouble, too.

I hope you’ve found this review to be educational and helpful. As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor. If you have any concerns or questions, please feel free to reach out to me at latoya@latoyamaddox or call me at 678-821-2968 and we can talk. That’s what I’m here for.

 

The Advantages of Investing in ETFs

The Advantages of Investing in ETFs

Exchange Traded Funds (ETFs) are popular investment options available to the discerning investor. They are similar to mutual funds and index funds but with some distinct advantages. If you are looking for retirement investment options, ETFs are a great choice. Here are just a few of the advantages that ETFs have to offer:

  • Low Commission Fees – With a tight economy and increased cost of living, every penny that can be saved should be saved. Let’s face it, the less you pay out in investment fees and commissions, the more money that goes towards your retirement fund. And that’s the ultimate goal, right? Compared to index funds, ETFs have relatively low trading costs.
  • Allows for Speculation Through Intraday Trading – ETFs may be traded just like stocks. As a result, their value (price) fluctuates throughout any given day. As an investor, you are able to take advantage of the daily movements of an ETF and reap profits on a daily basis. Bear in mind however, that the possibility of losses still exists. Nevertheless, ETFs provide the ability to trade the entire market as if it were a stock.
  • Diversification – We all know that one of the keys to successful investing is diversification. With ETFs, you have the opportunity to diversify your investments by index type, equity market sector, geography (whether international or regional), industry, niche, asset class and more. Asset allocation is what will make the difference between a successful investment and one that fails to deliver the desired returns. With ETFs, investors have the opportunity to build a profitable asset-allocation model.

Whether you are saving towards retirement, or simply looking for great investment options, carefully consider the benefits of trading in ETFs.

Contact me today!

Direct – 678-548-4511

lparker@namcoa.com

Planning For Your Big Day

Retirement

Saving and Investing for Retirement

As you age, saving and investing for retirement should take on increasing significance and should rank higher on your list of priorities. This is especially true if you lost out on the opportunity to maximize your retirement savings by starting to save from your early twenties or thirties. Nevertheless, with self-discipline and a fool proof plan of action, you can still manage to set aside a nice nest egg for your retirement if you act immediately.

Swift action is particularly important for the self-employed and other professionals. This is because these individuals may not automatically fall under the umbrella of a structured retirement savings and investment plan such as a 401(k). The implications are that deliberate efforts must be made to save and invest for retirement purposes and the onus is on the individual to create and execute a viable retirement plan. However, you should not allow yourself to be forced into investing in a plan that offers high levels of returns without ascertaining for yourself what the risks are.

There are several individual retirement account (IRA) options that are available for the self-employed. The key is to choose one that will work based on your particular retirement goals, risk tolerance and timeline. It may be a good idea to discuss your retirement goals with an experienced Certified Financial Planner or advisor. The closer you get to retirement, the less of your investment dollars you should allocate to riskier investment vehicles such as stocks. Once you hit 45 years, your retirement portfolio should ideally be concentrated on fixed income instruments such as treasury bills and government bonds. The trade-off is that the income is essentially guaranteed but the returns are likely to be lower. It is better to have a smaller return on your capital than to lose your retirement capital.

How to Quit It All

Sailing

How Much Money Do You Need to Quit and Sail Away? No, Seriously.

You wake up. Go to work. Get home. Repeat. For many, it feels like being stuck in a hamster wheel. What if you decided to call it quits and retire early? For those who have ever lay in bed wondering what it’d be like to walk away from the rat race… this article is for you.

Whether you want to retire and sail away, or just want to retire and pursue hobbies—that part is up to you. But let’s explore what it takes to make an early retirement a reality. And since the idea of sailing away has a certain ring to it, we’ll use that as our goal.

Will you work part-time?

The first big question is, will you earn an income in retirement? Some people continue to work in a limited capacity by freelance writing, doing graphic design, or consulting, etc. Others just live off their investments. Let’s assume you’re going to quit everything and just live off investments. It’s more fun to imagine that scenario anyway, right?

Save, save, save

Before you cut the cord, you’ll need to earn as much as possible for as long as possible. At the same time, you’ll need to cut your spending. Cutting expenses is a quick win. Earning more can be difficult and take longer to achieve. For example, a $1,000 cut in expenses is like a $1,330 raise assuming the 25% tax bracket. So, gym memberships, fancy cars, eating out, expensive phones, lawn service—goodbye.

The 4% rule

Saving enough money so you never have to work again is a tall order, especially if you’re in your 50s with a long life ahead of you. A common benchmark is the 4% rule. Though debatable1, it’s a rule of thumb used to determine how much to withdraw from a retirement account each year. The 4% rate is considered a “safe” rate, with the withdrawals consisting primarily of interest and dividends.

What will you spend each month?

You’ll need to figure out your monthly living costs. The good news about a boat is, you have limited expenses. Sure, you’ll have to buy the boat. But you can get a used 40-foot sailboat for about $60K. Cheaper than a house.

Boating expenses

Even though you’re living in 150 square feet, you’ll still have to pony up cash each month for marina fees/docking, boat insurance, food, health insurance, and more. Based on sailing blogs, the monthly cost for a couple living on their boat in the Caribbean is about $2000-$35002 a month.

Ok, gimme a number

There are a lot of variables when it comes to determining how much cash you’ll need to save in order to retire. They include your age, health issues, Social Security savings, etc. It’s hard to provide an accurate number without knowing more details. But for simple math, a couple would need to sock away at least $800K3 into investments in order to live off $3,000 a month. Again, this is very rough math, you’ll need to work these numbers out carefully on your own—or better yet, with a financial advisor.
Takeaway

Whether you dream of leaving it all behind and hitting the high seas, or making model train sets, you’ll want to go through a rigorous retirement-income planning process first. But it can happen. If you’re feeling like a hamster, there are ways of getting off of that wheel forever. It just requires crunching some numbers and dreaming big.

1. https://www.forbes.com/sites/wadepfau/2016/06/02/with-retirement-longer-than-ever-what-is-the-new-4-rule/#6503f8d75d2a

2. http://captaingino.com/how-much-it-costs-to-live-on-your-sailboat-in-the-caribbean/

3. This amount is for illustration purposes only, please consult with your financial specialist to help you understand the how much you would need to retire

 

 

Disclaimer:

This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. is information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. Or reach out to us and we can discuss a more tailored assessment.