Scaled Finance Insights Blog

RSU Vest

Many employees just had some stock vest! Those shares might fund a cash reserve.

For more, check out:

2. Book Holiday Plans ❄

Now is a great time to book holiday flights and lodging before:

vacation rentals book,
flights prices rise, or
calendars fill.

It’s not just the calendars of friends and family. You need to consider your coworkers’ as well!

Scheduling Paid Time Off (PTO) early is like calling dibs on days off. 🎀

Avoid the drama. **🎭 ** Schedule your holidays now.

3. Complete Open Enrollment

Open enrollment is nearly here!

Now’s a good time to plan for 2027:

Will your family have large medical expenses that might be better served by a lower deductible healthcare plan? 🏥
Is your youngest child turning 13, ending dependent care Flexible Spending Account (FSA) reimbursements?
Do you need more, less, or about the amount of life and disability insurance?

You can start planning even before the benefits guide is released!

For more, check out:

4. Update Estate Plan

Halloween is a great time to update beneficiaries! 🎃

Doing so is critical because account titling and beneficiary designations almost always take priority over a last will & testament!

Is Your Estate Plan Up to Date?

Has anything changed since the last time you updated your estate plan?

Welcomed a new family member? 👶🐕
Lost a family member or close friend?
Relocated to a new state?
Bought a property?
Grown your net worth?

Each of these can have major implications if something happens to you.

Will You Owe Estate Taxes?

The estate exclusion for federal taxes is $15 million.

However, some states have a much lower threshold.

The exemption or exclusion is below $5 million for:

5. Plan Year-End Healthcare

Now’s a great time to plan medical expenses for the rest of the year.

If your family’s had heavy costs this year, you may have already met your:

deductible or
out of pocket maximum.

Your cost for additional tests and procedures may be limited.

Unfortunately, other people know it’s a good time for treatment.

My wife scheduled skin cancer surgeries for years. Appointments got scarce at year-end. In addition to the increase in demand, healthcare professionals take time off for the holidays. 🏂

Hey, thanks for reading my post on potential steps tech professionals might take in October.

Just a reminder, I share a lot of resources that can help you.

Join the newsletter and get the white paper:

Personal Finance for Tech Professionals

What Financial Steps Might Tech Professionals Take in September?

Kevin Estes — Wed, 02 Sep 2026 20:06:00 +0000

How is it September already?

Fortunately, we still have a third of the year left!

September Financial Steps

Potential steps tech employees might take in September include:

Select ESPP contribution %
Book Thanksgiving plans
Start benefits review
Replenish cash reserve
Schedule remaining PTO

1. Select ESPP Contribution %

Participating in an Employee Stock Purchase Plan (ESPP) isn’t right for everyone. Nonetheless, it’s worth considering.

The primary benefit may be a 15% discount off the lower of the price at the beginning and end of six months.

Let’s say a stock’s price is $200.

If the stock stays the same over six months, it would be purchased at $170 and have a built-in $30 gain.
If the stock price rises to $220, it would be still purchased at $170 and have a larger built-in $50 gain.
If the stock price falls to $180, it would be purchased at $153 and have a smaller built-in $27 gain.

Disadvantages

Some disadvantages of participating in an Employee Stock Purchase Plan include that it:

reduces cash flow,
locks up money (usually until purchase), and
increases taxes - especially if shares are sold right away.

What If I’m Laid Off?

Unfortunately, layoffs are a constant threat at tech companies. There’s both bad and good news.

Bad news: a participant no longer employed on the purchase date misses the opportunity to buy at a discount.
Good news: the participant will instead get the cash back. It’s almost like a small - yet growing! - emergency fund.

For more, check out:

Are ESPPs Underrated?

2. Book Thanksgiving Plans

It’s important to plan ahead for Thanksgiving travel:

Hotels and short-term rentals fill up, especially at popular locations.
Last-minute flights are normally more expensive.
People get busy.

Avoid the drama. 🎭 Book now.

3. Start Benefits Review

Open enrollment starts soon! Now’s a good time to check your benefits.

Are you expecting any major expenses?

This year: If you’ve already met your health insurance deductible, it may make sense to pull forward healthcare expenses into 2026.
Next year: You may need to increase your coverage to pay for higher upcoming expenses.

Do you have “use it or lose it” funds?

FSA = Flexible Spending Account. Funds need to be used in 2026. (There’s a possible $680 carryover)
HRA = Healthcare Reimbursement Arrangement. Funds may also need to be used in 2026, though it depends on the plan.
HSA = Health Savings Account. Funds are NOT “use it or lose it” and don’t to be spent this year.

If you currently have a large FSA or HRA balance, would it make sense to reduce your contribution with open enrollment?

For more, check out

4. Replenish Cash Reserve

Huzzah for all you did this summer!

Those activities may have shrunk your cash reserve. Now could be a good time to top it off before the holidays.

Restricted Stock Units

RSUs may vest more than once a year, which is good news. Many employees just had some stock vest! Those shares might fund a cash reserve.

For more, check out:

Social Security Maximum

Reaching the Social Security income maximum of $184,500 for 2026 might also help! About 6% of covered workers earn more than the Social Security taxable income each year.

5. Schedule Remaining PTO

“Use it or lose it” doesn’t just apply to spending and reimbursement accounts.

Paid Time Off (PTO) is there for a reason. Use it!

Employees might roll over up to two weeks (80 hours). However, that limit can fluctuate. At T-Mobile, it was:

as low as 40 hours and
as high as 120 hours (COVID-19, merger).

Play it safe and plan to carry over no more than 40-80 hours.

Scheduling PTO early also helps avoid scheduling conflicts with teammates. Call dibs!

Hey, thanks for reading my post on potential financial steps for tech professionals in September.

Just a reminder, I share a lot of resources that may help you.

Join the newsletter and get the white paper:
Personal Finance for Tech Professionals

What Financial Steps Might Tech Professionals Take in August 2026?

Kevin Estes — Tue, 04 Aug 2026 17:29:00 +0000

I hope you’re enjoying your summer!

August Financial Steps

Potential steps tech employees might take in August include:

Shop for Back to School
Take summer vacation
Review investments
Submit reimbursements
Check financial plan

1. Shop for Back to School

For families with students, it can help to get a jump on school shopping.

Consider purchasing items on the school supply list as soon as they come out. It’s possible The List has already been posted so be sure to check. Items can sell out quickly.

Buy new school clothes early. No-one wants to find out on the first day of school that a garment’s the wrong size!

Getting items early can prevent tears with:

online shopping,
curbside pickup, or
store visits.

2. Take Summer Vacation

There may still be time to take that last vacation!

If possible, take a break. A few days away or even a staycation can help everyone recharge.

For more, check out:

3. Review Investments

Some tech employers vest Restricted Stock Units throughout the year.

Now is a good time to plan what to do with those shares.

4. Submit Reimbursements

Camps are expensive! Summer care costs can be high.

If you’re enrolled in the dependent care Flexible Savings Account (FSA), now might be a good time to submit for reimbursement.

Digital receipts can simplify the process.

5. Check Financial Plan

Hasn’t summer been wonderful?

Has it helped you clarify your vision of the future?

Now might be a good time to revisit your long-term plans!

Check out the complimentary financial independence course if you’re looking for a place to start.

Hey, thanks for reading my post on potential financial steps a tech professional can take in August.

Just a reminder, I share a lot of resources that may help you.

Join the newsletter and get the white paper:

Personal Finance for Tech Professionals

Potential Financial Steps for Tech Professionals in July 2026

Kevin Estes — Wed, 01 Jul 2026 19:34:00 +0000

Summer!

The 4th of July is in just a few days. It’s definitely summer!

Potential Steps This Month

Financial steps tech employees might take in July include:

Check credit reports
Rebalance portfolio
Take summer vacation
Submit reimbursements

1. Check Credit Reports

Summer expenses can be heavy and span multiple states. Fraud risk may rise while the odds of catching it fall.

Now’s a good time to check credit reports to

verify your information,
check for fraud, and
ensure flexibility.

2. Rebalance Portfolio

Investments drift over time - especially after:

bonuses,
Restricted Stock Unit (RSU) vests,
Employee Stock Purchase Plan (ESPP) buys, and
big market swings.

Did you hear the S&P 500® just posted its best quarter since 2020?

Employer Stock

Holding employer stock can be challenging. A single stock may have more risk with a similar expected return.

Employer stock can also be tied to:

income,
benefits, and
home value.

For more, check out: Is It Worth Holding Employer Stock?

3. Take Summer Vacation

Rest is a critical and often overlooked part of work.

Summer Vacation

Fall was the busiest season when I worked in management consulting and corporate finance.

It’s planning season!

Many great ideas come:

on vacation or
after returning to work refreshed.

Check out: Schedule Your PTO ASAP!

Summer Camp

Camp offers wonderful opportunities. Children get to:

break out of their routines,
connect with peers,
develop new skills, and
learn from different adults.

Our daughter attended camp on an island near Seattle.

When we were waiting at pickup, another parent told us a story:

The first year our daughter went to this camp, she came off the boat in tears.
My mind raced to worst case scenarios.
When I finally got to her, she cried:
‘I don’t want to leave!’ 🤣

4. Submit Reimbursements

Daycare expenses can be heaviest in the summer. Submitting receipts may fund a vacation.

It’s also nice to know early if there’s a problem. That gives everyone time to fix it by year end!

A dependent care Flexible Spending Account (FSA) generally can’t be used for:

overnight camps and
13+ year old children.

There are some exceptions.

Hey, thanks for reading my post on potential financial steps for tech professionals in July!

Just a reminder, I share a lot of resources that may help you.

Join the newsletter and get the white paper:

Personal Finance for Tech Professionals

Potential Financial Steps for Tech Professionals in June 2026

Kevin Estes — Wed, 03 Jun 2026 20:42:00 +0000

Is It Summer Yet?

The days are getting longer and warmer.

Technically, summer’s a few weeks away. However, some schools are already out for the year!

Potential Steps This Month

Financial steps tech employees might take in June include:

Enjoy end of school year
Replenish cash reserve
Prepare for summer
Submit for dependent care

1. Enjoy End of School Year

Final exams, papers, and projects are either complete or nearly there.

Last day of school feeling?

It’s also “moving up” season. Treat the grads you know!

Next year’s school schedules are being finalized. Now is a good time to schedule late summer physicals for student athletes.

2. Replenish Cash Reserve

Millions of Americans take advantage of the long summer days.

Spending rises for:

Gear - camping, bicycle tune-ups, sprinklers;
Water fun - swimming, fishing, boating; and
Hosting - barbecues, drinks, fireworks.

The time and money spent landscaping rises. Nice weather allows for home improvement projects.

Now’s a good time to check cash reserves. Having three to six months’ of expenses can help fund emergencies and lasting memories!

For more, check out: Is Your Cash Starving?

Wealth is what you don’t see. Rich is Flashy.

3. Prepare for Summer

It’s nearly peak vacation season.

Summer Vacations

Trips often require:

Travel - flights and/or road trips;
Lodging - hotels, Airbnb, VRBO; and
Meals - dining away from home.

If you haven’t scheduled vacation yet, considering doing so ASAP.

An “adventure” is better than no vacation!

Summer Camps

It’s also time to get ready for camp! There are:

forms to complete,
medicines to replace,
transportation details to iron out…

Many camps let parents fund small accounts for their children. Campers allowed to spend learn math, budgeting, and prioritization skills.

It’s nice for parents to reconnect when children are at camp. Hooray for date nights!

4. Submit for Dependent Care

Dependent care expenses can by heavy in the summer.

Submitting receipts quickly may:

improve cash flow,
help with Back to School, and
ensure funds are received by year end.

If there’s a problem, knowing early gives more time to fix it!

A dependent care Flexible Spending Account (FSA) generally can’t be used for overnight camps. The program’s intended to help people work.

Hey, thanks for reading my post on potential financial steps for tech professionals in July!

Just a reminder, I share a lot of resources that may help you.

Potential Financial Steps for Tech Professionals in May

Kevin Estes — Wed, 06 May 2026 03:41:00 +0000

Nearly Summer

It’s been a busy time.

Fortunately, summer’s almost here!

Potential Steps for May

Steps tech employees might take this month include:

Review tax withholding
Update goals and plan
Check debt balances
Fund education savings
Schedule Paid Time Off (PTO)

1 Review Tax Withholding

Having to pay with a tax return could be unnecessarily painful.

Owe Often?

Taxes can pinch cash flow.

Also, assets may need to be sold to cover the payment. That can increase this year’s taxes.

Someone who owes may also incur interest charges or penalties.

Tax software often recommends making payments throughout the year to avoid a big tax bill.

Consistent Refund?

However, there are downsides to refunds.

Some credits are non-refundable. A taxpayer might pay more in tax because they paid early!

Also, getting a refund is like giving the government an interest-free loan. That matters more when interest rates are higher.

Unique Situations

Less tax may be withheld than needed in certain situations.

Bonuses - only 22% of bonuses might be withheld for an employee in the 35% tax bracket.
RSUs and PSUs - only 22% of Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) may be sold as they vest to cover taxes. Remember: vests are treated like income.
Other Business Income - a side business or rental can increase taxes. Making quarterly estimated payments can help.

W-4 Withholding

Form W-4 is for more than adding and removing family members.

For instance, someone might declare fewer dependents than they have to spread tax payments throughout the year. They can also withhold additional state and federal taxes from each paycheck.

Cash Flow

Before making a change, it’s important to consider the impact on take-home pay. Would each paycheck be enough to cover living expenses?

Bonuses are often paid early in the year. Restricted Stock Units may also vest then. Extra income can help pay a tax bill.

How to Update

Companies usually post Form W-4 and its instructions on their intranet.

If not, a Human Resources (HR) teammate will have access and know how to update it.

2 Update Goals and Plan

I think of finances like surfing.

We can plan but some things are beyond our control:

there may be a perfect wave,
often there’s a lot of waiting, and
watch out for sharks!

Refresh Goals

Situations change.

Someone could expect to pay in-state tuition until their child:

gets a full-ride scholarship or
is accepted to an Ivy League school.

The stock market might rise or fall 20% one year… or more!

Someone could get promoted or laid off.

A couple might plan to retire to a warmer climate and then decide to stay put once grandchildren arrive.

Update Plans

Major changes impact a financial plan. That’s life!

I like what Dwight Eisenhower said:

“Plans are useless, but planning is indispensable.”

It’s unfortunate how software often judges a financial plan. Monte Carlo simulations estimate the odds of “success.”

It’s not really about success or failure. It’s about how much to adjust - and in what direction.

3 Check Debt Balances

Now’s a good time to check loan balances.

Student Loans

Paying off student loan debt may be a low priority:

interest rates could be reasonable,
loans may be forgiven with consistent on-time payments, and
they’re typically discharged at death.

Investing and saving could leave more to loved ones. “Die with debt” may be a valid plan!

A couple ways to pay off debt are:

snowball and
avalanche.

Snowball

The snowball method pays off the smallest balance first, then the next smallest, and so on.

Pros

Wins now - creates momentum by paying off debts
Cuts payments - eliminates payments on repaid accounts
Less complex limits the number of balances to manage

Cons

Pays more interest - does not prioritize higher interest debt
Slow credit boost - maintains larger account balances
Less repayment - continues to pay higher interest rates

Avalanche

The avalanche method pays off the balance with the highest interest rate first, then the next highest rate, and so on.

Pros

Pays less interest - repays the highest interest debt first
Quick credit boost - lowers credit utilization rapidly
More repayment - pays debt down faster

Cons

Wins later - pays off the smallest balance slower
Keeps payments - requires monthly payments on more accounts
More complex - carries more credit balances

4 Fund Education Savings

Late spring is also a good time to save for education. The right saving vehicle depends on a family’s location, income, and assets.

Location

States without income tax like Washington and Texas offer no immediate tax benefit for saving to a 529 plan.

Other states like California and Kentucky don’t allow 529 plan contributions to be deducted.

The benefits depend on each state’s:

marginal income tax rate,
state tax deduction cap,
deduction or credit structure,
taxpayer or beneficiary limit,
tax parity policy, and more.

Income

While 529 plans don’t have an income limit for contributions, other tax advantages do.

The 2025 income limits include:

Contribute up to $2,000 to a Coverdell Education Savings Account with Modified Adjusted Gross Income below $110,000 single or $220,000 married, filing jointly.
Receive an American Opportunity Credit of up to $2,500 per student with Modified Adjusted Gross Income below $90,000 single or $180,000 married, filing jointly.
Earn a Lifetime Learning Credit of up to $2,000 per return with Modified Adjusted Gross Income below $90,000 single or $180,000 married, filing jointly.
Exclude income tax on EE or I Bonds with Modified Adjusted Gross Income below $114,500 single and $179,250 married, filing jointly.
Deduct student loan interest paid with Modified Adjusted Gross Income below $100,000 single and $200,000 married, filing jointly.

Additional restrictions and phaseouts apply. Some of the income limits change annually.

Assets

Who owns family assets can impact a student’s financial aid.

Up to 5.64% of assets owned by a parent count toward the Student Aid Index (SAI).
However, the SAI includes up to 20% of assets owned by the student.

Each school uses its own calculations for financial aid. For instance:

Northwestern University includes home equity when calculating financial aid whereas
Stanford University does not.

5 Schedule Paid Time Off (PTO)

Now’s a good time to plan both summer and fall vacations:

hotels book,
flight prices rise, and
calendars fill.

It’s not just the schedules of friends and family members that matter. It's also your coworkers’!

Scheduling Paid Time Off (PTO) early is like calling dibs.

For more, check out: Schedule Your PTO ASAP.

Potential Financial Steps for Tech Professionals in April 2026

Kevin Estes — Wed, 01 Apr 2026 05:01:52 +0000

In Bloom

We survived the March snowstorm here in the Pacific Northwest.

Now, it’s lovely!

Potential Steps This Month

Tech professionals take the following financial steps in April:

Evaluate stock purchase
File tax return or extension
Pay tax or plan refund
Rebalance the portfolio
Replenish cash reserve
Review tax return

1. Evaluate Stock Purchase

Although the market’s been down, employees who participated in an Employee Stock Purchase Plan may still come out ahead.

ESPP Purchase

Consider a stock that closed at about:

$239 on 9/30/2025 and
$210 on 3/31/2026.

A six-month lookback might take the lower of the price at the beginning and end of six months and then apply a 15% discount.

15% off $210 is a purchase price of about $179.

The shares may earn a quick gain of over 17%:

gain of $31 ($210 less $179)
divided by $179 purchase price.

For more, check out: How Does an ESPP Work?

Employer Risk

We have a lot riding on our employers:

income,
retirement contributions,
insurance,
benefits…

Maybe even a:

home,
rental, or
small business.

Risk and Return

We love our employers. That’s why we work there!

However, on average - they’re average.

One company has more risk because of single stock exposure. There’s a chance something bad happens to just that business:

a competitor enters the space,
an executive makes a poor strategic decision,
someone cooks the books, etc.

I feel owning a single stock has higher risk with a similar expected return. That’s a bad combo.

Of course, there are other possible outcomes. Volatility is good if the direction’s up!

A good investment can underperform. A bad one can do well.

For more, check out: Is It Worth Holding Employer Stock?

2. File Tax Return or Extension

It’s worth double-checking for opportunities before filing.

There’s Still Time!

Some accounts will accept funds for 2025 until April 15, 2026.

Those include:

traditional IRAs,
Roth IRAs,
Health Savings Accounts (HSAs), and more.

IRA contributions are often overlooked. They’re especially helpful for someone whose employer doesn’t have a retirement plan.

A Spousal IRA contribution may reduce taxable income, depending on:

whether the spouse was covered by a retirement plan at work and
the couple’s income.

The deduction is phased out above income limits for 2025:

$126,000 if covered by a workplace retirement plan and
$236,000 if not covered by a workplace retirement plan.

Running Out of Time

The regular deadline to file personal taxes is April 15, 2026.

May businesses had a deadline of March 15 to give investors time to add the income to their personal returns.

A personal extension filed by April 15th pushes the filing deadline to October 15th. However, taxpayers still need to pay estimated taxes by April 15th to avoid interest and penalties.

3. Pay Tax or Plan Refund

In a perfect world, a taxpayer would neither owe a payment nor receive a refund. However, that rarely happens.

Bad Extremes

It’s usually not ideal to either:

owe a sizable tax payment or
receive a big refund.

A large payment is hard emotionally and on the pocketbook. Underpayment can bring interest and penalties.

A big refund is also a problem. It’s an interest-free loan to the government!

How to Pay the Tax

Consider the best way to pay:

dip into cash reserves,
go on a payment plan,
sell an investment, etc.

Selling an asset may drive up taxes for 2026!

If a household usually pays when filing, it could make sense to:

make quarterly estimated payments,
adjust W-4 withholdings, or
both.

What to Do with a Refund

Some refund options include:

build up a cash reserve,
pay down high interest debt,
increase deductibles,
pay in advance for a discount, and more.

Will the money be needed soon or can it be invested? Remember that it could take weeks for the refund to arrive.

Cash flow planning is especially important for tech professionals flush with cash after receiving their:

annual bonus,
merit increase,
Restricted Stock Unit (RSU) vests, and
Employee Stock Purchase Plan (ESPP) shares.

How to Invest a Refund

Investment options include:

401(k) up to the company match or contribution limit,
Employee Stock Purchase Plan (ESPP),
traditional or Roth IRA,
Health Savings Account (HSA),
taxable brokerage account,
small business,
real estate, and more.

For more on saving and investing, check out:

Is an HSA Worth It?

Real Estate

Passive real estate losses may not lower taxes until the investment is sold.

Feeding a property cash every month can be particularly painful if:

income drops,
property values fall, or
both.

Check out: Investing in or Betting on Real Estate?

4. Rebalance the Portfolio

A tech professional may have just received:

a bonus,
stock from Restricted Stock Unit (RSU) vests, and
shares through an Employee Stock Purchase Plan (ESPP).

In addition, the stock market has fallen recently. The S&P 500 index is down about 5% year to date.

Lower stock prices can make a portfolio more conservative. It’s important to check the allocation.

Dividends can be reinvested - often automatically.

Interest from high-yield savings and money market accounts can also add cash. Investing the funds may improve returns.

For more considerations, check out:

5 Ways to Lower Taxes Besides Donations

5. Replenish Cash Reserve

Now’s a great time to check on the emergency and opportunity fund.

Recurring Expenses

I generally suggest someone keep about three (3) to six (6) months of living expenses in cash or cash equivalents.

Factors that could push up the target include:

a single income,
variable compensation,
real estate, and
job uncertainty.

Major Purchases

It’s important to plan for upcoming expenses like:

summer vacations and camps,
home improvements,
vehicle purchases,
new business ventures, and
real estate investments.

I don’t feel stocks, bonds, vehicles, real estate, and cryptocurrencies count toward the cash reserve. Although they may be sold quickly, the market can move faster.

High-yield savings and money market funds might pay 4%, which is:

$400 a year on $10,000,
$2,000 a year on $50,000, or
$4,000 a year on $100,000.

However, it’s important to keep some in checking for ongoing expenses. Paying bills on time can avoid late fees, penalties, and credit score hits.

For more, check out: Is Your Cash Starving?

6. Review Tax Return

It can help to review a tax return with a professional. Tax preparers typically have more time after April 15th.

Here are some questions to ask:

What were my marginal and effective tax rates?
What helped lower my taxes?
Do you see any missed opportunities?
How can I minimize my lifetime taxes?

For more, check out:

Sammy Says: 13 Things the U.S. Tax Code Encourages

Potential Financial Steps for Tech Professionals in March 2026

Kevin Estes — Wed, 04 Mar 2026 05:30:13 +0000

Growing Season

This weekend was beautiful here in the Pacific Northwest.

The days are getting longer, leaves are budding, plants are sprouting… spring has sprung!

Potential Steps

Financial steps for March include:

Select ESPP %
Plan major purchases
Finalize 2025 contributions
Prepare taxes
Schedule summer PTO

1. Select ESPP %

Some companies offer an Employee Stock Purchase Plan (ESPP) with a:

15% discount and a
six-month lookback.

That plan takes 15% off the lower price at the beginning and end of each six month period.

Example:

Mike works for a tech company and maxes his ESPP with 15% of his gross income each paycheck.

At the end of six months, his employer uses the funds to buy stock at a discount. If Mike leaves the company before the purchase, he’ll receive the cash instead.

What happens if the stock price rises from $100 to $110?

Mike would buy at $85, 15% off $100.
However, the stock’s worth $110!
That's a 29% gain ($25 / $85).

What happens if the stock price falls from $100 to $90?

Mike would buy at $76.50, 15% off $90.
However, the stock’s worth $90!
That’s an 18% gain ($13.50 / $76.50).

If able to sell right away, Mike might only hold the shares a day or two.

Participating in the Employee Stock Purchase Plan may offer higher returns and lower risk than holding company shares.

Maximum ESPP Contribution

The maximum qualified Employee Stock Purchase Plan contribution each year is:

15% of compensation, up to
$25,000 a year.

Compensation includes salaries, wages, bonuses, and commissions. It doesn’t include Restricted Stock Unit vests.

Not for Everyone

However, participating in an ESPP isn’t for everyone.

It may not make sense for households with:

high interest debt,
living expenses higher than income, or
large upcoming purchases.

For more, check out:

2. Plan Major Purchases

Now is a good time to prepare for big-ticket expenses.

Remodel

Home upgrades are often easier in the summer than in the winter. It’s much easier to move earth once it thaws! Also, planting in spring gives plants more time to grow before winter.

Buy a Car

The least expensive time of the year to buy a car may be the fall. That’s when new models come out - which can result in good deals.

Someone may be able to minimize their costs by preparing now:

review their credit report,
pay down high balances,
update income (if it’s grown) with financial institutions…

Also, shopping around may save thousands on a car purchase. For more, check out: Buying a Car

Move

While it may be more expensive to buy a home in the summer, it’s easier to move. There’re also more homes on the market.

Families often prefer to move during the summer because it’s easier on children. Changing schools is hard enough without doing so during the school year!

3. Finalize 2025 Contributions

There’s still time to make contributions for 2025!

Traditional IRA

Contributions to an Individual Retirement Arrangement (IRA) can be made up to April 15th, 2026.

It’s possible a family may earn too much to either:

receive a tax deduction on a pre-tax (traditional) IRA or
be able to contribute directly to a Roth IRA.

Roth IRA

A Roth IRA works differently. There’s no tax deduction for the contribution on the front end. Contributions are taxed initially.

However, they may never be taxed again if certain conditions are met!

Spousal IRA

A spouse without earned income might still be able to contribute to a traditional or Roth IRA!

The couple would need to earn enough to fund all their retirement contributions. This is known as a spousal IRA.

Whether pre-tax contributions would lower taxable income depends on:

whether the spouse was covered by a retirement plan at work and
how much the couple earned in 2025.

Here’s a quick decision tree with the income limits:

Health Savings Account

If someone was on a qualifying High Deductible Health Plan (HDHP) by December 1st, 2025, they have until April 15th, 2026 to contribute to a Health Savings Account for last year.

The primary benefit of an HSA is that contributions are triple tax advantaged. They:

lower taxable income when made,
grow tax-free, and
can be used tax-free for qualified medical expenses.

According to the IRS, the 2025 contribution limits are:

$4,300 for individual coverage and
$8,550 for family coverage.

For more, check out:

4. Prepare Taxes

Even if taxes are self-prepared, it’s important to dedicate time to them.

Scheduling time is even more important when working with a tax professional! They’re overworked and in high demand.

Get organized and come prepared.

Tax checklist

Everyone’s busy. Things get missed - even by tax preparers!

Crashes happened frequently in the early days of aviation. Using checklists significantly improved safety.

Checklists have expanded to other areas like:

building construction,
truck driving, and
surgery.

We even use checklists when getting ready to sail!

One thing I like to do both for myself and for clients is draft a tax checklist. It lists everything I know that could impact taxes for the year!

A good place to start is the previous year’s tax documents:

Which still apply?
Are there any changes?

Creating the checklist also reminds me of other tax items!

5. Schedule Summer PTO

Now’s a wonderful time to book Paid Time Off (PTO) for the summer!

Vacation rentals begin to book.
Flight prices start to rise.
Calendars get full.

Call Dibs

It’s not just the calendars of your friends and family members. You also have to worry about your coworkers’!

Summer coverage can be a struggle for many teams. People who schedule late may have limited say in which days they can take off. 😯

Claim the days which work best for you and your family now!

Use It or Lose It

Many companies limit how many hours can be rolled over from year to year. Hours above the limit are involuntarily donated to the company.

Full time employees can often roll over two weeks (80 hours) at the end of the year. However, it can vary.

During my tenure with T-Mobile, the rollover:

shrank to as little as 1 week (40 hours) and
grew to as much as 3 weeks (120 hours).

Avoid the drama. 🎭 Schedule Paid Time Off (PTO) now!

Plan for Unexpected Expenses

Kevin Estes — Sat, 28 Feb 2026 18:39:22 +0000

Overview

Struggling to track every expense?

There’s another way!

This article explores:

which expenses get missed and
why including them matters.

We’ll review three overlooked expenses:

home repair & maintenance,
vehicle replacement, and
gifts & donations.

Finally, we’ll consider a top-down approach to catch hidden expenses.

Underestimates

Expenses are often missed when we estimate total spending.

Remembered

We include regular expenses like:

rent or mortgage,
car payment, and
groceries.

Forgotten

However, we often forget the lumpy ones like:

repair & maintenance,
vehicle replacement, and
restaurants.

Why It Matters

Forgotten expenses can cause problems.

Frustration

Working hard only to have funds zapped by a surprise expense hurts.

It’s even worse when it impacts loved ones. A missed expense may force someone to break a promise.

Fees

Surprise expenses can also:

increase credit balances and interest charges,
generate late payment and overdraft fees, or
lower credit scores that raise interest rates.

These can create a vicious cycle.

Missed Benefits

Overlooked expenses can also lead to missed opportunities.

Consider someone who doesn’t know they’re spending $10,000 a year at restaurants. They might not use a 4% cash back credit card.

They might miss out on $400 a year, tax-free!

Retirement Shortfall

The stakes are even higher when leaving the workforce.

What someone needs to save often depends on what they spend.

4% “Rule”

There’s something called the 4% “rule.” I consider it a rough guideline.

It suggests:

a $1 million portfolio
may support spending of $40,000 a year, plus inflation.

Of course, this isn’t a recommendation or advice. Retirement is too important to leave to guidelines.

Under-save

Some people use the inverse of the 4%. They multiply their spending by 25 to determine how much they need to save.

The calculation assumes their spending estimate is accurate!

Someone who misses $20,000 a year might retire with half a million ($500,000) less than they need!

1. Home Repair & Maintenance

Americans spend about half their budget on housing and transportation. Those are also the source of missed expenses.

Mortgage

We know our mortgage payment.

The amount often includes:

property taxes and
homeowners insurance.

Repair & Maintenance

However, the cost of upkeep is often missed.

We know something’s going to break - just not what or when:

roofs need to be replaced,
furnaces fail,
hot water heaters go out…

Experience

I have a long history with real estate.

Growing up, I helped my family build homes. We later bought and managed an apartment complex. Then, we bought properties during the Great Recession.

1% Estimate

I find 1% of a home’s value a decent estimate for annual repair and maintenance costs.

There are many nuances, including:

Homeowners Association (HOA) fees may be part of the cost.
Newer homes tend to need fewer repairs.
Major remodels, extensions, or additions are separate.
Homes on acres of land may cost less than 1% a year to maintain.

Examples

A $1 million home might cost $10,000 a year (1%) in repair & maintenance.

These expenses often grow with home value and inflation:

2. Vehicle Replacement

We remember our car payment.

What about when a vehicle is:

paid off or
bought with cash?

Funding

I ask people how they fund their vehicle purchases.

“We typically sell some stock” means it’s not in the regular budget!

Vehicle Purchases

People often include an estimate if they’re planning to buy a new car soon. However, that’s just one vehicle.

I ask how long they typically keep vehicles. 10 years is common.

A 40-year-old who plans to live to age 90 might buy five more vehicles!

If they only include the next purchase, their plan may miss four big-ticket purchases. Double that for two vehicles.

Annual Cost

Fortunately, estimating vehicle replacement isn’t hard.

1. How long do you typically keep vehicles?

Let’s say 10 years.

2. How much might you spend on your next vehicle?

Let’s assume $50,000. Remember sales tax!

3. What do you typically get for your old vehicles?

That can depend on:

how much someone paid for the vehicle,
how long they kept it, and
how hard they were on it.

Consider trade-in, sale, gift, donation, and salvage value.

Let’s assume a $5,000 trade-in.

Calculation

Then, it’s simple math:

$50,000 purchase
less $5,000 trade-in
divided by 10 years
equals $4,500 a year.

I like to assume that cost:

for the rest of life,
growing with inflation.

It doesn’t really matter whether it’s financed or bought with cash.

I want people to have the option!

3. Gifts & Donations

Giving is another category that’s often overlooked.

Gifts

Gift expenses are often heaviest for:

education,
holidays, and
birthdays.

However, don’t forget:

weddings,
anniversaries,
Valentine’s Day,
Mother’s Day, and
Father’s Day.

Donations

Charitable contributions are planning opportunities.

Cash

While it certainly depends on the situation, cash may not be efficient.

“Friends don’t let friends give cash.” 😆

Still, cash may work best in some situations - especially if donations are matched by an employer.

Other Giving Options

Tax-advantaged donations include:

appreciated assets,
Donor-Advised Funds (DAFs),
Qualified Charitable Distributions (QCDs),
and more.

Forecast

More important than how donations are given is whether they’re included in the forecast.

I like to estimate annual giving, and grow it for inflation.

However, opportunities can arise as we age - especially if someone would owe state or federal taxes.

Top-Down Approach

It’s nearly impossible to remember every expense.

Fortunately, there’s a simple way to estimate total spending.

Expense Equation

It’s often easier to estimate:

income and
saving for a year.

Cash flow is a closed system! If income isn’t saved, it’s usually spent.

Income

I like to focus on total income and major expenses.

Tax returns and W-2’s are especially helpful for income.

Expense Buckets

A total is tough to digest. I review major categories.

Required

Major expenses can include:

state and federal income taxes,
Social Security and Medicare taxes,
mortgage principal and interest,
property taxes,
home repair and maintenance,
car payment or vehicle replacement,
life, disability, home, auto, and umbrella insurance,
healthcare premiums, and
utilities.

Discretionary

Some categories are more difficult to estimate:

groceries,
restaurants,
clothing,
gas,
entertainment,
travel,
gifts, and
donations.

Expense tracking is especially helpful for these variable costs.

The top-down approach sizes the total without knowing every detail.

Conclusion

It’s important to know your overall spending.

However, you don’t need to track every expense! Income minus saving is a spending estimate.

Be sure to include enough for home repair & maintenance, vehicles, and giving to fund your lifestyle!

Potential Financial Steps for Tech Professionals in February 2026

Kevin Estes — Wed, 04 Feb 2026 05:01:13 +0000

Wonderful time of the year

Forget December. Now is the most wonderful time of the year for many tech professionals!

That’s when you may:

get a raise,
receive an annual bonus, and
vest Restricted Stock Units (RSUs).

Potential steps this month

Financial steps could include:

update saving,
schedule tax prep meeting,
gather tax forms,
accept RSU grant, and
rebalance portfolio.

1. Update saving

The T-Mobile annual raise and bonus are typically communicated around Valentine’s Day. I always loved getting the good news and celebrating with my wife!

However, it sounds like it might be a bit later this year.

Raise

The annual merit increase is often a whole percentage.

Keeping up with inflation?

It’s important to consider whether a raise beats inflation.

The 12-month percentage change in the Consumer Price Index (CPI) ending December 2025 was 2.7%.

If your raise is below 3%, it may be because you:

recently received an increase,
accepted a promotion, or
are at the top of your pay band.

It might also be a sign of trouble in your current position.

Nonetheless, raises help employees automatically save more.

Same contribution rate

Let’s say Bob was earning $100,000 and got a 4% raise. He now earns $104,000 in base salary. Congratulations!

Bob contributes 5% of his gross income to his pre-tax 401(k) to get the full company match.

Without any other changes, his pre-tax 401(k) contributions would rise $360 for the year.

Bob contributes $200 more:

from $5,000 (5% of $100,000)
to $5,200 (5% of $104,000).

The company matches $160 more:

from $4,000 (4% of $100,000)
to $4,160 (4% of $104,000).

Gain without pain

However, raises are a great time to save more without feeling it.

Let’s say Bob bumped his pre-tax 401(k) contribution rate from 5% to 7%.

His 401(k) contribution rises $2,440 for the year!

Bob contributes $2,280 more:

from $5,000 (5% of $100,000)
to $7,280 (7% of $104,000)

… in addition to the $160 more from the company.

The best thing is that Bob’s take-home pay might still rise! It could grow from $2,740 to $2,790 per paycheck. That’s nearly $1,300 more a year!

Receiving more while saving more is a win!

This trick comes courtesy of my grandmother. She consistently saved half of her and my grandfather’s raises.

Bonus

Tech bonuses are no joke.

At T-Mobile, salaried employees are on the Short-Term Incentive Plan (STIP). The annual bonus has both an individual and company component.

The split varies by pay level. The theory is that the higher up someone is, the more impact they have on the whole company.

Individual

The individual portion is based on the employee’s performance according to their leaders:

above 100% is good;
below… not so much.

Individual payouts were about 100% for years. However, variation was added to reward extra effort.

Company

The company portion is tied to overall performance. It’s based on a set of targets.

In good years, it can be well over 100%.

Uncertain

My wife and I never took my annual bonus for granted. We knew the company might pay a low one - or none at all.

Bonus paychecks are mixed:

good - they provide significant income;
bad - they can be heavily taxed.

Retirement saving options

A company may offer:

pre-tax 401(k),
Roth 401(k), and
after-tax 401(k).

There’s also a spousal IRA option outside of the employer.

Pre-tax 401(k)

Saving some of the bonus to a pre-tax 401(k) has three primary benefits:

reduces taxable income (and likely income tax),
gives investments more time to grow, and
reduces how much needs to be taken out of the biweekly paychecks to reach the contribution limit.

The 2026 employee 401(k) contribution limits are:

$24,500 for those less than 50 years old,
$32,500 for those aged 50-59 as well as 64+, and
$35,750 for those aged 60-63.

There’s now a higher catch-up limit for workers aged 60-63. It’s $11,250 instead of $8,000 for other savers who are 50 years old and wiser.

Roth 401(k)

Another option is the Roth 401(k), sometimes shortened to Roth(k).

The Roth benefit is that someone pays income taxes now and - if certain criteria are met - never pays income tax on the funds again!

The Roth option might appeal to someone if they:

don’t need the money for living expenses or debt payments,
anticipate their income will grow significantly in the future,
expect to continue to work until full retirement age, and/or
might move to a state with a higher income tax rate.

Here’s a quick comparison of the Roth and pre-tax 401(k) features:

After-tax

Many tech companies added the after-tax option more recently.

This plan is especially helpful for higher income employees looking to save on top of pre-tax contributions like their:

401(k) and
Health Savings Account (HSA).

The regular 2026 contribution limits are:

$24,500 for employee pre-tax/Roth 401(k) contributions and
$72,000 in total defined contributions.

The company match also counts toward the $72,000 limit.

After-tax example:

Jen is a 45 year-old who earns a $200,000 salary and a $50,000 annual bonus. Congratulations!

Jen maxes her pre-tax 401(k) contributions at $24,500. Her employer also matches $10,000 (4% of $250,000).

That leaves $37,500 for her to contribute to the after-tax account:

$72,000 total defined contributions limit
less the $24,500 employee contribution
less the $10,000 company match.

Some plans allow money to move out of an after-tax account while the employee is still employed. That’s called an in-service distribution. Jen may be able to sweep funds directly into a Roth 401(k) or Roth IRA.

That’s important because gains in an after-tax 401(k) are taxed when withdrawn. Later distributions from a Roth 401(k) or Roth IRA typically aren’t.

It may be easier to roll funds into the Roth 401(k). Jen may even be able to get her custodian (such as Fidelity) to transfer her after-tax 401(k) contributions to a Roth 401(k) automatically.

The fancy term for this process is Mega Roth or Mega Backdoor Roth.

Spousal IRA

A fourth retirement plan is separate from the employer.

A spousal Individual Retirement Arrangement (IRA) is an account a spouse can contribute to despite earning little or no income.

If the couple is married and files a joint tax return, they may be able to:

stash some cash into the spouse’s account,
reduce their tax bill, and
invest for long-term growth.

Here’s the best part: a 2025 contribution can be made until 4/15/2026! The February bonus may be perfect for a last-minute spousal IRA contribution.

Whether the contribution would lower taxable income depends on:

whether the spouse was covered by a retirement plan at work and
how much the couple earned in 2025.

Below is a quick decision tree based on whether the spouse is or is not covered by a workplace retirement plan.

For more tax saving ideas, check out 5 Ways to Lower Taxes Besides Donations. Whether to contribute to pre-tax, after-tax, or both depends on someone’s situation and goals.

Yikes - that was a lot about raises and bonuses!

However, it’s so important that it deserved some extra love. ❤️

2. Schedule tax prep meeting

Another step tech professionals and their families might take now is to schedule their tax prep conversation.

Even if you prepare your own taxes, it’s important to devote time to them.

Scheduling time is even more important when working with a tax preparer! They’re generally overworked and in high demand.

Get organized and come prepared!

3. Gather tax forms

One way to get organized is to create both a physical and digital folder for 2025 tax documents.

Physical folder

All tax documents received in the mail would ideally go into the tax folder.

W-2: salaries, wages, and taxes withheld;
Form 1095: health insurance coverage details;
Form 1098: mortgage repayment, interest, and property taxes;
Form 1099: many uses;
Form 3922: details on stock purchased through a qualifying plan like an Employee Stock Purchase Plan (ESPP); and
Schedule K-1: income, losses, and dividends for partnerships, S corporations, trusts, and estates.

Some of the most common Form 1099 types are:

NEC: Nonemployee Compensation (freelance income);
B: gain or loss on stock;
INT: interest;
DIV: dividends;
R: retirement plans;
T: tuition payments;
MISC: miscellaneous, etc.

A custodian (Fidelity, Vanguard, Schwab…) may include several forms in one file.

Digital folder

It’s best to save digital versions of all tax documents.

Two options include:

downloading directly from financial institutions and
scanning a copy of forms received in the mail.

Even if I receive a physical copy, I like to download the forms. It’s a way for me to double-check I don’t miss anything and that I’m using the latest version.

Places to download forms include:

banks and credit unions for interest paid or received,
custodians for investments, and
employer portals for W-2 compensation detail.

Since personal credit card interest usually isn’t deductible, those statements rarely need to be downloaded.

However, it’s a good idea to check every other financial account for important tax documents. Streamlining the number of accounts reduces workload - especially during tax season!

Tax checklist

Everyone’s busy. Things get missed - even by tax preparers!

Checklists save

Crashes happened frequently in the early days of aviation. Adding checklists significantly improved safety.

Checklists have spread to other areas like:

building construction,
truck driving, and
surgery.

We even use checklists when preparing to sail!

Tax checklist example:

One thing I like to do both for myself and for clients is draft a tax checklist. It lists everything I think could impact taxes for the year!

A good place to start is the previous year’s tax documents:

Which still apply?
Did anything change?

Creating the checklist reminds me of other things!

My personal checklist is in Microsoft Excel and I:

start with last year’s list,
remove what’s no longer relevant, and
add new items.

As I work through the list, I cross them off and record the date accomplished.

Once all the actions are complete, I carefully review our tax return inputs with my wife. Explaining the taxes helps clarify our thinking! She asks wonderful questions and checks other tax-impacting items.

Measure twice, cut once.

4. Accept RSU grant

It typically makes sense to accept RSU grants once they’re available.

Restricted Stock Unit grant

Even if someone is certain they’re going to leave their employer, it still makes sense to accept grants!

Some situations might result in a partial or complete vest:

new manager, team, department, or role,
layoff,
merger or acquisition,
employee death…

Accepting the grant early ensures it isn’t forgotten.

Restricted Stock Unit vest

RSU vesting depends on the company.

Two years ago, T-Mobile started issuing grants which vest every six months instead of once a year. For employees with grants from multiple years, they’ll likely still receive more shares around February 25th. However, they’ll probably also receive a sizable vest around August 25th. It may take a business day or two for shares to settle into employee accounts.

For most employees, some units are automatically sold to cover taxes. Employers provide the custodian with a tax percentage estimate. The custodian (such as Fidelity) then sells shares and sends the proceeds to the IRS and state governments for income taxes.

There’s good, bad, and great news for employees:

good - may not have to manually pay the RSU taxes;
bad - receive fewer shares of company stock; and
great - may be able to sell shares without paying additional tax.

Choosing to keep the shares is like an employee taking cash out of their checking account to buy more company stock.

Is that what they want to do? 🤔

5. Rebalance portfolio

After a bonus or Restricted Stock Units (RSUs) vest is a great time to review and potentially rebalance your investments.

It’s often important to have at least three to six (3-6) months’ of living expenses in a cash reserve.

Asset allocation

Next, check that the investment categories are close to the target percentages. Market performance and recent saving may have thrown off the allocation.

For example, tech stocks have had a wonderful run recently. You may have too much riding on this one industry!

Asset location

Is each of your investments held in the right account?

If either the asset allocation or location is off, it likely makes sense to adjust. However, consider the tax impact.

Thanks for reading my post on potential financial steps for tech employees in February. Happy Valentine’s Day! 💝

Just a reminder, I share many resources that can help you.

Update Your Accomplishments

Kevin Estes — Wed, 10 Dec 2025 05:23:56 +0000

Overview

The best thing for your money might have nothing to do with investments. However, it may still involve taking stock! 😆

Now’s a good time to review - and document - what you did in 2025.

You might earn a bigger raise or bonus!

Updating your accomplishments may help you:

shape your story,
set your direction, and
expand your options.

1. Shape Your Story

Raises occur in February at many companies.

Schedule

If raises go live in the middle of February, that likely means:

Early January: managers evaluate teammate performance,
Middle of January: supervisors input the raises,
End of January: leaders finalize raises, and
Early February: Payroll processes the raises.

An employee may be able to influence the decision early in the year. However, they need a point of view soon!

Document

Your accomplishments can:

lead conversations with your manager and
go on your resume or CV.

List

Consider summarizing what you did this year. You don’t have to send it to your supervisor - though I often did.

Simply creating the list can clarify your thoughts!

Questions

What were your projects this year?
Are they complete?
How did they go?

Be objective - share both positives and negatives.

Initiative

Goal setting and performance reviews can be formal.

Self-evaluations may have more impact when reviews are optional. Creating them shows initiative!

Support

Your supervisor’s perspective may differ from yours.

Expect to be challenged! Prepare responses to objections.

Share results. Demonstrate your impact - and how you achieved it.

Resume

Some managers ask direct reports to update their resume each year.

This practice:

ensures they’re updated regularly,
documents key results, and
levels the playing field for everyone on the team.

It’s a good idea to refresh your resume at least once a year.

The best time is in the moment:

Memories fade.
Coworkers move.
Data disappear.

I love to see numbers on a resume! It takes extra care to track the impact.

Progress

A little effort can go a long way.

Extension

Even a challenging project has bright spots.

Amplifying that success or applying it to other areas may be quick wins.

Start

Any progress is better than a goose egg!

The work may be easier than you think.

Also, circumstances change:

A new tool, process, or team may have come online.
A fresh approach might unlock hidden value.

Lessons

Documentation is important when things go well.

However, it can be even more important when they don’t!

Why wasn’t something completed?
Is there anything that can be done about it?

To err is human.

Supervisors are more likely to overlook a setback if an employee:

learned from it and
won’t repeat the same mistake.

Also, a key insight could make the whole exercise worthwhile!

2. Set Your Direction

Reviews can also serve as a guide.

Projects

Consider your work:

What did you like most?
What was your least favorite?
Why?

You may be able to systematically improve your job satisfaction by doing:

more of what you like and
less of what you don’t.

Your boss isn’t a mind-reader! Let them know what you enjoyed, and why.

They may send you similar work or responsibilities.

People

Repeat the process for coworkers:

Who did you like most?
Who was challenging?

However, handle with care. Focus on how much you enjoyed working with your favorite people. Try not to speak ill of anyone.

If asked what you think about someone you don’t like, consider the sandwich approach:

mention a positive,
share a negative, and
add another positive.

Skills

Also consider your skillset.

Did a knowledge gap slow you down?
Is there anything you’d like to learn?
How might you develop new skills?

3. Expand Your Options

A review can also help you know and grow your opportunities.

Alignment

You likely have a point of view on your performance.

Sharing it with your manager can be informative.

Both Positive

If you feel you did well and your manager agrees, that’s great!

Discuss next steps:

Where would you like to take your career?
Does your supervisor have suggestions on how to get there?

Both Negative

If you and your manager agree that your performance was less than stellar, consider why!

Do you lack resources, support, or training?
How can you get back on track?

Positive Surprise

Your manager may be pleased with your performance even if you feel you struggled. If you, you may lack confidence.

It may help to:

Celebrate your wins - even journaling may help.
Reframe your setbacks - they’re growth opportunities.

Negative Surprise

You may find yourself in an unfortunate position. You might feel you did well, and your supervisor disagrees.

Run into the fire! It’s worth a conversation.

Share facts where possible. You might change their mind.

If every win you share is challenged or ignored, your relationship with your supervisor may be strained. Your career could be in jeopardy.

It may be time to consider a role with another team or company.

Change

Change is the only constant.

According to EY, the average lifespan of an S&P 500® company is 15 years.

You may outlive your employer many times over!

Even before the company closes:

Layoffs are a constant threat.
An honest mistake may not be forgiven.

According to the U.S. Bureau of Labor Statistics, the average tenure of an employee with a company is about four (4) years.

Average time in a position is likely much shorter because of promotions, lateral moves, and demotions.

Even people who “retire” may find themselves:

working part-time,
serving on boards, or
consulting.

A current resume may ease career transitions.

Conclusion

Reviewing your accomplishments can impact your income. Few activities may earn as much per hour!

However, it’s not just about the raise. It’s also about making the most of your career. At the very least, it’s nice to know where you stand.

What Financial Steps Might Tech Professionals Take in December?

Kevin Estes — Tue, 02 Dec 2025 23:39:51 +0000

The Holidays!

The nights are long. The shops are full. Mariah Carey, Brenda Lee, Bobby Helms, Burl Ives, and Wham! are playing everywhere.

I hope you had a wonderful Thanksgiving and are ready for December. Ready or not, it’s heeere! 🎁

Potential Steps This Month

Financial steps tech professionals might take in December include:

Make year end contributions
Update resume
Harvest tax losses or gains
Review Social Security
Update 401(k) contribution

1. Make Year End Contributions

401(k)

If the goal is to max out the employee 401(k) contribution, make sure that’s on track.

The 2025 employee contribution limits are:

$23,500, up $500 from 2024, plus a
$7,500 catch-up contribution for those aged 50-59 and 64+ or
$11,250 for those 60-63.

Now may be a good time for heavy contributions:

we’re only a few months away from the tax benefit,
many employees have reached the Social Security taxable maximum income, and
annual bonus payouts as well as Restricted Stock Unit (RSU) vesting are expected in mid-February.

Someone in the 24% federal and 8% state tax brackets might get $0.32 of every dollar contributed back in a few months with their tax return.

IRA

Contributing to an IRA might be especially helpful for a spouse. That could reduce the income tax for a married couple who files jointly.

The IRA deduction income limits are higher for someone without an employer retirement plan. That’s especially common in single income families. The spouse with earned income would need to earn enough to cover both of their contributions.

Although the deadline to contribute to an IRA is usually tax day, it may make sense to do so now. It’s easy to forget!

It might also take a while to open and fund the account. Setting them up now could avoid a fire drill later. 🚒

Whether to contribute pre-tax (traditional) or after-tax (Roth) depends on the situation.

2. Update Resume

Bonuses and raises often occur in mid-February for salaried employees.

Here’s a rough timeline:

Early January: Supervisors need to submit their raise and bonus decisions by mid-January. That means they’re making decisions in early January or even December!
Mid January: Senior leadership needs time to review / adjust / approve proposed raises and bonuses.
Late January: The Human Resources and Payroll teams need time to process the changes before the changes in mid-February.

Let’s consider a couple scenarios.

Review Is Positive or Excellent 😎

A manager might want to do everything they can for the employee!

It’s much easier to help an employee if you know where they want to go. The manager might be able to:

develop a stretch assignment,
prepare the employee for a promotion, or
help them find a great opportunity with another team.

Review Is Less Than Stellar 🤔

Sometimes, a role or team is a poor fit.

An employee might apply for a lateral change. In extreme cases, they may need to consider positions at other employers.

Either way, an updated resume could come in handy!

Time to Think

December is typically a quiet time around the office. It’s an excellent opportunity to reflect on recent accomplishments.

It’s also a good time to review uncompleted projects. Why weren’t they completed? Is there anything that could be done about it?

Any progress is better than a goose egg! 🥚

What Worked for Me

Here’s what I liked to do:

Go through my calendar month by month. What were my projects? What did I accomplish?
Review my sent emails. What were my key deliverables? What impact did they have?
Review my folders. What did I create? How did that help business partners, teammates, or customers?

I’d then consider the work I did and the people I worked with:

What did I really enjoy?
What didn’t I get a chance to do that I wished I could have?
Who did I like working with?

That review helped set my direction for the next year:

“It seems like there may be an opportunity with X. I’ve been thinking about it and I feel we might be able to do Y.”
“I really enjoyed working with Z on that project. I heard they’re leading a new opportunity. Could I explore that a little further?”
“W is making great progress. I feel they could be great at T. I have a fair bit of experience with that. Would there be an opportunity for me to mentor W on T?”

I then developed a one-page self-appraisal, which I normally printed and shared with my manager.

It’s a bit like discussing a letter of recommendation. They shouldn’t have to work to remember:

what I do well,
what my development opportunities are, and
what I’d like to do next.

I tried to make it easy for my manager to support me!

December is a good time to update resumes, CV’s, and career goals. They’re particularly helpful for performance review conversations.

3. Harvest Tax Losses or Gains

I wrote about tax loss and gain harvesting last year.

Here are some highlights:

Tax Loss Harvesting: Selling an investment at a loss can offset up to $3,000 of earned income. Than may help in a high-income year.
Tax Gain Harvesting: Selling an investment for a gain can increase taxable income in a low-income year.

Each of these tactics need to be completed by year end, making December an excellent time for an investment review! They can help minimize lifetime taxes.

4. Review Social Security

Social Security statements are updated once a year. December is a good time to check them!

Retirement Income

The latest statement can help dial in financial independence plans. Social Security benefits can exceed living expenses for some families!

However, Social Security statements assume someone will earn the same real income they did the previous year until at least age 62. That assumption may be fine for someone with over 35 years of earnings.

The Social Security Administration now includes a calculator to estimate benefits based on future income. I ask clients assume no future ($0) income to see how that impacts their expected benefits.

Fraud

Another good reason to review Social Security statements is to check for fraud. Some criminals report income with a stolen Social Security number. Any of us could be a victim!

Knowing as soon as possible may help catch the fraudster and minimize the financial impact. It’s not ideal to learn about from the IRS!

5. Update 401(k) Contribution

One final step a tech professional might take in December is to update their 401(k) contribution percentages.

Matching

Some employers match:

100% of the first 3% an employee contributes and
50% of the next 2% they contribute.

If someone contributes 5%, a company may match 4%.

Qualifying income includes:

regular salaries and wages,
commissions, and
bonuses - including the short-term incentive plan, monthly cash incentive plan, spot bonuses, etc.

Many people adjust their contribution rates toward the end of the year. However, it’s important to refresh contribution rates before the new year.

If someone’s planning to max out their 401(k) contributions, it might make sense to do so throughout the year. If someone reaches the maximum before the last paycheck of the year, the company may not make a true-up contribution until the following year, often in March.

2026 maximum

The 401(k) employee contribution limits for 2026 are a bit higher:

$24,500, up $1,000 from 2025,
$8,000 catch-up for those age 50-59 and 64+, and
$11,250 catch-up for those age 60-63.

To avoid impacting the 2025 contributions, it may make sense to wait until after the last paycheck of the year to make the changes in Fidelity.

Remember to consider both the regular and bonus 401(k) contributions!

Hey, thanks for reading my post on potential financial steps for tech professionals in December.

Just a reminder, I share a lot of resources that can help you.

Happy Thanksgiving!

Kevin Estes — Wed, 26 Nov 2025 03:24:56 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to Thanksgiving 2025 in a moment.

But first - here are some links you may want to save for later.

Do You Have the 3 T's to Manage Finances Well?

Now, let's get on to the blog! 😀

So Grateful 🦃

Gratitude is both free and priceless. ❤️

Thanksgiving is one of my favorite holidays. It gives me a chance to reflect on the many wonderful parts of my life, including:

Family
Health
Time
Clients
Support
Democracy

Family 👨‍👩‍👧

My family is incredible! It’s been a busy year.

We’re savoring the time we have with our teenager.

Health 🏃‍♀️

Fortunately, we have our health! Although we had a bout earlier this year, COVID-19 continues to fade into history.

Time ⏱

I'm so thankful for the flexibility my career provides. It’s nice to attend swim meets during the week!

It’s also been wonderful to enjoy sunbreaks. I often get out for a quick run when it’s nice!

Clients 🤝

I've been blessed to work with many wonderful clients. It’s hard to believe it’s only been three and a half years since I founded Scaled Finance, LLC.

My clients feel like family!

Support 🏋‍♂️

Thank you to the many wonderful people who've supported my family, me, and my business throughout the year!

Democracy ✔️

I love that government officials are chosen by the people.

Next year will be a big one for elections. Make sure to vote!

Hey, thanks for reading my post on Thanksgiving 2025.

Just a reminder, I share a lot of resources that can help you.

What Financial Steps Might Tech Professionals Take in November?

Kevin Estes — Tue, 28 Oct 2025 22:26:37 +0000

Happy Halloween!

Are you ready for trick or treaters?

Ready or not, here they come! 🎃

Potential Steps for Tech Professionals

Financial steps tech employees might take in November include:

Schedule a vacation
Harvest a tax loss or gain
Give to charity
Buy holiday gifts
Rebalance investments

This assumes open enrollment is complete. If not, do that first!

1. Schedule a Vacation🌴

You’ve already booked your vacation for 2025, right? 😆 Good - because it’s time to consider spring.

Remember those cold and dreary days in February? It could be a good time to plan a vacation before prices rise!

The biggest benefit of scheduling Paid Time Off now is to call dibs! Many teams have limited coverage so get yours approved early.

2. Harvest a Tax Loss or Gain

Income generally falls into three buckets for taxes:

Earned
Investment
Passive

Earned

Earned income is what someone receives from working. That could be working for a company, self-employment, or both!

Investment

Investment income is money earned from investments like stocks, bonds, mutual funds, etc. The U.S. government encourages capital funding by taxing investments at a lower rate than wages.

Passive

Passive income is for investments like rental real estate, limited partnerships, and equipment leases.

If someone actively participates in the business, the income may be taxed as earned. Material participation can complicated.

Rarely Mix

The important thing is that these buckets are rarely allowed to mix.

Passive investments were once abused by higher earners who used them as tax shelters. Now, they’re tracked separately.

Passive Activity Losses generally don’t reduce earned income. They’re not your PAL. 😉

The same is typically true for investments. Losses normally don’t lower earned income and, therefore, taxes.

Tax Loss Harvesting

However, there’s an exception!

Up to $3,000 in net investment losses can offset earned income and lower taxes.

If someone sold investments with $7,000 of gains, that person would need to sell other investments with $10,000 in losses for a net $3,000 loss.

Investment losses may lower someone’s tax bill… especially if they’re in a higher tax bracket.

Tax Gain Harvesting

Another opportunity is tax gain harvesting. This occurs when someone has lower income than they normally would.

Because of deductions and lower tax brackets, it may make sense to sell investments before year end. Gains might be taxed less now than later!

Minimize Lifetime Taxes

Two ways to potentially minimize lifetime taxes are:

lower income in high-income years and
raise income in low-income years.

3. Give to Charity

Among other things, the Tax Cuts and Jobs Act of 2017:

Capped the state and local tax (SALT) deduction at $10,000,
Lowered the deductible mortgage balance from $1,000,000 to $750,000 (existing mortgages were grandfathered), and
Nearly doubled the standard deduction.

The One Big Beautiful Bill Act increased the state and local tax (SALT) deduction to $40,000 for married couples who file jointly in 2025.

Standard Deduction

More people now use the standard deduction.

Good news! That simplified taxes for millions of Americans.

Bad news! That caused fewer people to itemize deductions and reduced their tax benefit of charitable giving.

Itemized Deduction

Nonetheless, millions of Americans still itemize. It may pay to be strategic with charitable giving.

Some techniques to save more tax with donations include to:

bunch - give more one year instead of less in multiple years,
contribute to a Donor-Advised Fund (DAF) - give now and then advise on how the funds will be distributed later, and
donate an appreciated asset - give an investment which has risen in value to charity.

It generally doesn’t make sense to sell an investment, pay tax on the gain, and then donate what’s left to charity. Charities don’t pay income taxes! Donating an appreciated investment can save taxes, enable a bigger contribution, or both.

Tech employees may also have access to special Giving Tuesday employer matching the Tuesday after Thanksgiving, 12/2/2025.

4. Buy Holiday Gifts 🎁

It’s nearly the most wonderful time of the year!

Buying gifts early can ensure they’re:

still available and
arrive in time.

There will be big sale days in a few weeks:

Black Friday, 11/28/2025
Small Business Saturday, 11/29/2025
Cyber Monday, 12/1/2025

The discounts don’t just have to be for gifts! There are some business items I hope to buy on sale. 🤞

5. Rebalance Investments

Now may be a good time to check your portfolio.

The stock market’s done well this year! Investments may have drifted from their target allocation.

ESPP

Tech employees may have recently stocked up - literally - through the Employee Stock Purchase Plan. Do they still want to hold it?

For more, check out:

RSU

Restricted Stock Units (RSUs) often vest throughout the year. It’s worth considering how much, if any, company stock to hold.

For more, check out:

What to Do with RSUs

Frequent RSU Vests May Be Win Win Win

Cash Reserve

As part of the review, it’s important to consider whether you have enough of a cash reserve.

Cash can help with:

emergencies and
opportunities.

Even the wealthy can slip into a scarcity mindset if they don’t have ready access to funds.

Retirement Account Investment Changes

It often works best to adjust retirement account investments.

Doing so could avoid realizing taxable gains. Those gains could require someone pay taxes either:

with an estimated payment,
through additional withholding, or
alongside their tax return.

Fortunately, transactions in retirement accounts aren’t usually taxed.

Asset Location

Where assets are held is often overlooked.

Asset location may be as important as asset allocation. Are your assets in the right location?

It could make sense to hold:

more aggressive investments in after-tax accounts and
more conservative investments in pre-tax or taxable accounts.

Hey, thanks for reading my post on potential steps tech professionals might take in November!

Just a reminder, I share a lot of resources that can help you.

What Financial Steps Might Tech Professionals Take in October?

Kevin Estes — Wed, 01 Oct 2025 02:04:12 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential October steps in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

It’s Fall!

The days are getting shorter. Pumpkin spice lattes are flowing. High schools are playing football. Fall is here. 🍁

However, we still have a quarter of the year left. Let’s finish strong!

Potential Steps for Tech Professionals This Month

Financial steps tech employees might take in October include:

Evaluate stock purchased at a discount
Book holiday plans
Complete open enrollment
Update beneficiaries and estate plan
Plan year end health expenses

1. Evaluate Stock Purchased at a Discount

Tech employees may have just purchased company stock at a discount. It’s worth considering what to do with those shares. 🤔

How Employee Stock Purchase Plans Work

Some plans take 15% off the lower of:

the beginning and
end of each six-month offering period.

Even if the stock fell over the six months, it may have been purchased at a 15% discount. 👏

Impact of Selling Right Away

If someone sells right away, they might realize about an 18% return! 🎉

Realized gains would be taxed as ordinary income at the employee’s marginal tax rate. However, an employee may not want - or be able - to sell immediately.

May Buy Fewer Shares

Qualified ESPP contributions are limited to the lower of:

15% of qualifying compensation or
$25,000 each year.

That’s a federal rule so please don’t complain to your supervisor, HR business partner, or CFO about it! 😉 The same goes for the 15% discount.

Someone who contributed the full 15% and earned at least $166,667 for the year (including bonus) likely hit the $25,000 cap.

For more, check out:

New RSU Vest

Many employees just had some stock vest! Those shares might fund a cash reserve.

For more, check out:

2. Book Holiday Plans ❄

Now is a great time to book holiday flights and lodging:

Vacation rentals tend to book.
Flights prices start to rise.
Calendars get full.

It’s not just the calendars of friends and family. You need to consider your coworkers’ as well!

Scheduling Paid Time Off (PTO) early is like calling dibs on days off. 🎀

Avoid the drama. 🎭 Schedule your holidays now.

3. Complete Open Enrollment

Open enrollment is just around the corner!

Now’s a good time to plan for 2026:

Will your family have large medical expenses that might be better served by a lower deductible healthcare plan? 🏥
Is your youngest child turning 13, ending dependent care Flexible Spending Account (FSA) reimbursements?
Do you need more, less, or about the amount of life and disability insurance?

You can start planning even before the benefits guide is released!

For more, check out:

Benefit from Stop, Start, Continue!

4. Update Beneficiaries and Estate Plan

Could there be a better time to check your beneficiaries than around Halloween? 🎃

Doing so is critical because account titling and beneficiary designations almost always take priority over a last will & testament!

Is Your Estate Plan Up to Date?

Has anything changed since the last time you updated your estate plan?

Welcomed a new family member? 👶🐕
Lost a family member or close friend?
Relocated to a new state?
Bought a property?
Grown your net worth?

Each of these can have major implications if something happens to you.

Will You Owe Estate Taxes?

The estate exclusion for federal taxes is $13.99 million. It’s scheduled to rise further to $15 million in 2026.

However, some states have a much lower threshold.

The exemption or exclusion is below $5 million for:

5. Plan End of Year Health Expenses

Now’s a great time to plan medical expenses for the rest of the year.

If your family’s already incurred many healthcare costs this year, you may have already met your:

deductible or
out of pocket maximum.

Your costs for additional tests and procedures may be limited.

Unfortunately, other people know it’s a good time for treatment.

My wife scheduled skin cancer surgeries for years. Appointments got scarce at the end of the year. In addition to the increase in demand, healthcare professionals take time off for the holidays. 🏂

Hey, thanks for reading my post on potential steps tech professionals might take in October.

Just a reminder, I share a lot of resources that can help you.

The Rise of Agentic AI

Kevin Estes — Wed, 24 Sep 2025 00:31:58 +0000

Hello, I’m Kevin - a financial advisor who helps tech professionals and their families live great lives.

Make yourself at home. We’ll get to AI in a moment.

But first - here are some links you may want to save for later.

We Rode in a Self-Driving Vehicle

Now, let's get on to the article!

Overview

I thought agentic AI meant annoying chat bots.

I’ve worked with ChatGPT as a thinking partner. However, I hadn’t thought to treat it like an assistant!

Agentic AI

“Bad customer service” is what I thought when I heard “agentic AI.”

Some bots simply regurgitate information from the company’s website.

These “chats” can be one step removed from phone decision trees:

Press 1 to hear your account balance.
Press 2 to make a payment…

I get how these systems help companies. Self-service saves money.

However, it shifts work from corporations to customers.

If customer effort rises and costs stay the same, perceived value falls. A bot has to outperform humans to improve the experience.

My AI Journey

My use of Artificial Intelligence has shifted from:

knowledge accelerator to
content editor to
thinking partner.

1. Knowledge Accelerator

My first trips into the AI forest were for knowledge-gathering. AI is great at surfacing known things like recipes and how-to manuals.

Onboarding

However, AI really got my attention when a family member told me a story.

She asked it for details about her new job. The AI response nearly perfectly matched what she’d learned from conversations with coworkers.

That’s a game-changer!

AI can shrink the time and effort needed to come up to speed. It can also reduce how much time tenured employees spend training newer ones.

Mentorship becomes less important when someone can get the information on their own.

Patchy

Of course, they only get the information they seek.

This can lead to patchy knowledge. They might:

learn a lot about some things and
have gaping holes in others.

Lonelier

Deep learning is great. It also eliminates opportunities for people to:

connect,
build trust, and
support each other.

Sparse Specifics

Of course, I had to try it on my business!

I asked an AI chatbot what it recommends T-Mobile employees do for their finances.

The response was senseless.

It was overly generic, missed key points, and had inaccuracies. What it got right, it misprioritized.

Aggregators know a lot. However, they often lack clarity.

They’re information rich and knowledge poor.

2. Content Editor

My next step was to have AI double-check my work.

I created content on a topic. Then, I asked ChatGPT what it thought was most important about the subject.

Did I miss anything?
Did it?
Do I like how it explained something?

I also asked it to improve what I’d written.

However, the responses were about twice as long and added little meaning. AI was wordy.

3. Thinking Partner

I’ve started to treat AI as a thinking partner.

For instance, it helps me create headlines:

I tell it my topic and ask for suggestions.
Then, I sift through the results to see what resonates with me.
I give the bot feedback… and ask for more ideas.

It takes a load off.

Part of my work has shifted from:

always creating to
creating, selecting, and fine-tuning.

It’s a nice balance, and produces better work.

A New Way: Assistant

Allison Baggerly of Inspired Budget changed my perspective with her FinCon 2025 presentation: “How AI Saves Me 10+ Hours Each Week.”

We actually met as she was walking in to present! My friend Penny introduced us on our way back from lunch.

The room was full - very full. Here’s a picture I took from the second standing row in the back!

There’s a reason. Allison may be using AI better than anyone else.

Knowledge Base

Allison added everything she’s created to her Google Drive.

She calls it her Knowledge Base and likes to say:

“I downloaded my brain!”

That includes her:

blogs,
social media posts,
book manuscript,
video transcripts,
emails that performed well,
products and offers,
questions from customers…

Everything she creates goes into her Knowledge Base.

First Assistant: Email Triage

Allison hates how much time she spends on email.

Once her Knowledge Base was in place, she created a project in ChatGPT to scan her inbox. She uses the project as her agent, her assistant.

Her Email Triage assistant decides what she should:

read and respond to now,
prioritize for today, and
mark as spam or promotion.

If she needs to reply, she clicks a button in ChatGPT that:

opens Gmail and
drafts a reply.

This system allows her to only send emails at 8am and 2pm. She has time to pick up her kids from school.

Second Assistant: Creative Sidekick

Allison created another assistant to capture her ideas on the go.

She named it Charles.

Using speech to text, she has “conversations” with Charles. These might be when she’s walking around the yard or neighborhood!

Listen, Charles. We’ve got to talk about:

this,
that, and
the other.

Then, her Creative Sidekick:

asks follow-up questions,
organizes her ideas, and
creates content-ready copy.

The best thing? It uses her inputs and content!

Her words. Her ideas. Her voice.

They’re just repurposed for the task at hand.

She leverages AI support for her:

newsletter,
social media posts,
scripts, and
video shorts.

Third Assistant: Support Rep

Allison also created a support specialist. Its purpose is to respond to customer questions.

She:

gave it screen shots of her sales pages,
created a PDF so it knows what to do, and
defined its role carefully.

Now, it drafts responses she can quickly review and send customers.

Thoughts on the Future

I’m convinced this is the wave of the future.

It’s my next step with AI:

Knowledge accelerator
Content editor
Thinking partner
Assistant

If a tool can do anything, the only constraint is our imagination.

I hadn’t dreamed big enough.

Assistants

Allison is proof that a solopreneur can build an army of AI assistants.

Her system streamlines development and automates manual tasks.

Businesses that previously needed several staff members might thrive with one owner and AI. Amazingly profitable small businesses could become the norm.

However, the demand for human assistants may fall. The best will lean into this opportunity.

Coaching

People will need help developing AI assistants.

Early adopters will likely coach others. The value is so great that experts should be able to charge hefty premiums.

Niche

Industry-specific versions will likely come next.

Organizations

Businesses and nonprofits will upload and add to their extensive knowledge bases.

Imagine all franchise owners leveraging the same AI systems. The speed and consistency could be amazing!

Professions

Each industry group may create its own AI tools.

A CERTIFIED FINANCIAL PLANNER™ professional version of AI could be extremely helpful. Daily tasks can benefit from world-class templates, verbiage, and processes.

Embedded

Software will likely continue to incorporate AI where possible.

Email suggestions are just the start. Website content may come next.

AI may be empowered to make purchases. Top-rated services could get very busy in a winner-take-all setting.

Content

Good copy may be table stakes.

Any writing that isn’t clear will be dismissed as lazy.

Security

I’m not granting AI access to my email anytime soon! Too much sensitive information flows through my inbox.

However, other people may take a different approach.

Collaboration

Toward the end of the conference, another attendee mentioned this year felt less collaborative.

I think some folks left the conference more excited to work with AI than with other people!

Human connection is inefficient.

It’s also essential… and under constant attack.

Conclusion

Agentic AI is a powerful tool - and one I ignored far too long. It’s worth a look for anyone who wants to improve their efficiency.

However, it has pitfalls. Please consider the security and human impacts before using it.

What Financial Steps Might Tech Professionals Take in September?

Kevin Estes — Wed, 03 Sep 2025 01:22:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for September in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

How is it September already?

Fortunately, we still have a third of the year left!

Potential Steps for Tech Professionals this Month

Five steps tech employees might take in September include:

Select Employee Stock Purchase Plan (ESPP) contribution %
Book Thanksgiving plans
Start benefits and insurance review
Replenish cash reserve
Schedule remaining Paid Time Off (PTO)

1. Select ESPP Contribution %

Participating in the Employee Stock Purchase Plan (ESPP) isn’t right for everyone. Nonetheless, it’s worth considering.

The primary benefit may be a 15% discount off the lower of the price at the beginning and end of six months.

Let’s say a stock’s price is $200.

If the stock stays the same over six months, it would be purchased at $170 and have a built-in $30 gain.
If the stock price rises to $220, it would be stil purchased at $170 and have a larger built-in $50 gain.
If the stock price falls to $180, it would be purchased at $153 and have a smaller built-in $27 gain.

Disadvantages

Some disadvantages of participating in an Employee Stock Purchase Plan include that it:

reduces cash flow,
locks up money - usually until purchase - and
increases taxes, especially if shares are sold right after purchase.

What If I’m Laid Off?

Unfortunately, layoffs are a constant threat at tech companies. There’s bad news / good news with the ESPP.

Bad news: a participant no longer employed on the purchase date misses the opportunity to buy at a discount.
Good news: the participant will instead get the cash back. It’s almost like a small - yet growing! - emergency fund.

For more, check out:

Are ESPPs Underrated?

2. Book Thanksgiving Plans

It’s important to plan ahead for Thanksgiving travel:

Hotels and short-term rentals fill up, especially at popular locations.
Last-minute flights are normally more expensive.
People get busy.

Avoid the drama. Book now.

3. Start Benefits and Insurance Review

Open enrollment starts soon! Now’s a good time to check your benefits.

Are you expecting any major expenses?

This year: If you’ve already met your health insurance deductible, it may make sense to pull healthcare expenses into 2025.
Next year: You may need to increase your coverage to pay for higher upcoming expenses.

Do you have “use it or lose it” funds?

FSA = Flexible Spending Account. Funds need to be used in 2025. (with a possible $660 carryover for 2025)
HRA = Healthcare Reimbursement Arrangement. Funds may also need to be used in 2025, though it depends on the plan.
HSA = Health Savings Account. Funds are NOT “use it or lose it” and don’t to be spent this year.

If you currently have a large FSA or HRA balance, would it make sense to reduce your contribution with open enrollment?

For more, check out

4. Replenish Cash Reserve

Huzzah for all you did this summer!

Those activities may have dipped into your cash reserve. Now could be a good time to top off accounts before the holidays.

Restricted Stock Units

RSUs may vest more than once a year, which is good news. Many employees just had some stock vest! Those shares might fund an emergency and opportunity account.

For more, check out:

Social Security Maximum

Reaching the Social Security income maximum of $176,100 for 2025 might also help! About 6% of covered workers earn more than the Social Security taxable income each year.

5. Schedule Remaining PTO

“Use it or lose it” doesn’t just apply to spending and reimbursement accounts.

Paid Time Off (PTO) is there for a reason. Use it!

Employees might roll over up to two weeks (80 hours). However, that limit can fluctuate. At T-Mobile, it was:

as low as 40 hours and
as high as 120 hours (COVID-19, merger).

Play it safe and plan to carry over no more than 40-80 hours.

Scheduling PTO early also helps avoid scheduling conflicts with teammates. Call dibs!

Hey, thanks for reading my post on potential financial steps for tech professionals in September.

Just a reminder, I share a lot of resources that can help you.

What Is a Mega Backdoor Roth?

Kevin Estes — Tue, 05 Aug 2025 21:09:06 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home. We’ll get to the Mega Roth in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the article!

Key Takeaways

A Mega Backdoor Roth:

is an opportunity to save more for retirement,
requires specific employer plan options, and
impacts cash flow as well as taxes.

What Is a Mega Backdoor Roth?

The Mega Roth is a way to save more than the usual limit, convert funds to a Roth account, and hopefully benefit from tax-free growth.

This strategy is especially helpful for someone who can’t contribute to a Roth IRA because they earn too much.

The income limits to contribute directly to a Roth IRA in 2025 are:

$165,000 single and
$246,000 married, filing jointly.

How Does a Mega Roth Work?

The Mega Backdoor Roth takes two steps:

Contribute to an After-Tax 401(k).
Convert the funds to a Roth 401(k) or Roth IRA.

This process is also known as the Mega Two-Step Roth, or simply the Mega Roth.

Types of 401(k) Contributions

Common 401(k) account types include:

Pre-Tax,
Roth, and
After-Tax.

Contributing may be as easy as choosing the percentage of income to save to each account.

1. Pre-Tax

The Pre-Tax option is also known as Traditional or Tax-Deductible.

Contributions:

avoid income tax initially,
grow tax-deferred, and
are taxed as income when withdrawn.

2. Roth

A Roth 401(k) works the opposite way. Contributions:

are taxed as income initially,
grow tax-free, and
avoid income tax when withdrawn if some conditions are met.

Think of it like an orchard:

Pre-Tax - the seed isn’t taxed, and the harvest is.
Roth - the seed is taxed, and the harvest isn’t.

3. After-Tax

An After-Tax account works differently:

Contributions are taxed initially and can be withdrawn tax-free.
Investments grow tax-deferred.
The growth is taxed as income when withdrawn.

After-Tax to Roth Conversion

It may be possible to:

convert funds from After-Tax to Roth and
avoid tax on investment growth.

However, it’s important to convert funds quickly. Growth in an After-Tax account may be taxed when the balance is converted or withdrawn.

Benefits of Less Taxable Income

Reducing income can have many benefits.

Federal Taxes

Income taxes are progressive:

Some income avoids tax with the standard or itemized deduction.
Income above the deduction is taxed at 10%, up to a limit.
Income above that is taxed at 12%, up to another limit.
Income above that is taxed at 22%…
and so on until reaching the maximum 37% tax bracket.

Also, some credits and deductions aren’t allowed for higher earners.

State Taxes

Less taxable income may also lower state income taxes.

There’s even a State And Local Tax (SALT) deduction cap. Less taxable income may allow more of the state taxes to be deducted on the federal return.

Other Impacts

Government benefits often depend on income, including:

Affordable Care Act (ACA) subsidies,
Medicare premiums for Part B and D,
Social Security payments before full retirement age, and
various social welfare programs.

Higher income can also limit financial aid for education.

Mega Backdoor Roth Limit for 2025

A benefit of the Mega Backdoor Roth is saving more than the regular 401(k) limit.

For 2025, the employee limit is $23,500. That includes both Pre-Tax and Roth contributions.

The After-Tax contribution limit is $70,000 less what the:

employee contributes to Pre-Tax and Roth plus what their
employer adds to their retirement accounts.

Example

Assume a 45 year-old employee earns $250,000 a year,

contributes the maximum $23,500 to their Pre-Tax 401(k),
their employer matches 4% ($10,000) to their Pre-Tax 401(k), and
their plan offers the After-Tax 401(k).

The employee could contribute $36,500 to their After-Tax 401(k),

on top of their $23,500 Pre-Tax contribution and
$10,000 employer match.

Catch-Up Contributions

Employees over the age of 50 can contribute more.

For 2025, the maximum catch-up contributions are:

$7,500 for those 50 to 59 or 64+, and
$11,250 for those 60 to 63.

These catch-up contributions are on top of the $70,000 combined limit.

Employees who earn more than $145,000 a year are required to make any catch-up contributions to a Roth account.

Contribution Tradeoffs

The $23,500 employee contribution limit is for both Pre-Tax and Roth. Contributing to one lowers how much can be saved to the other.

Catch-up contributions, employer matching, and funds converted from After-Tax to Roth do not count toward the $23,500 limit.

If the employee contributes the maximum $23,500 to their Pre-Tax and Roth 401(k) accounts, that leaves $46,500 for either:

employer or
employee After-Tax contributions.

Total Contributions

The maximum 401(k) contributions for 2025 are:

$70,000 for those under age 50,
$77,500 for those 50 to 59 or 64+, and
$81,250 for those 60 to 63.

401(k) loan repayments are separate. The IRS doesn’t consider them contributions.

Mega Backdoor Roth Eligibility

To unlock the Mega Roth, the employer plan must allow:

After-Tax contributions and either
a Roth 401(k) with in-plan conversions or
in-service withdrawals of After-Tax contributions.

In-plan Roth 401(k) conversions let an employee convert funds:

from After-Tax 401(k)
to Roth 401(k).

In-service After-Tax withdrawals let an employee roll funds:

from After-Tax 401(k)
to Roth IRA.

Convert to Roth 401(k) or IRA?

Employees rarely have the option to convert from After-Tax 401(k) to either:

Roth 401(k) or
Roth IRA.

If possible, the decision could depend on:

Simplicity - it may be easier to convert funds from one employer plan to another with the Roth 401(k).
Investment options - there can be more low-cost investment options with a Roth IRA than with a Roth 401(k).
Existing IRAs - an employee with another IRA account may have pro rata complications if converting to a Roth IRA.

Setting Up a Mega Backdoor Roth

Financial institutions like Fidelity, Vanguard, and Charles Schwab may automatically convert After-Tax 401(k) contributions to either Roth 401(k) or Roth IRA upon request.

The setup could require a call to the custodian. It will likely take time to clarify your intentions, options, and decisions.

Once set up, the After-Tax to Roth conversions should occur within a few days of each paycheck.

Is a Mega Roth Worth It?

It depends on someone’s situation and goals.

Limited Availability

Few plans meet the requirements for a Mega Backdoor Roth. It’s more common at large tech companies.

Even plans that offer it may impose restrictions. For instance, they might limit After-Tax contributions to 10% of an employee’s compensation.

Benefits

Contributing has many benefits, especially for those who earn too much to contribute directly to a Roth IRA.

Mega Backdoor Roth benefits include:

Automatic savings - payroll deductions let employees save for retirement before the funds reach their bank account.
Tax-free growth and withdrawals - investments can grow and be distributed tax-free if conditions are met.
No income limit - unlike with the Roth IRA, there’s virtually no income cap for Mega Roth contributions.
No RMDs - funds are not subject to Required Minimum Distributions (RMDs) like Pre-Tax retirement accounts are later in life.
No inherited tax bill - a Roth may avoid shifting income taxes to heirs, which can happen when someone inherits a Pre-Tax account.

Costs

The primary downside of the Mega Roth is less cash flow. Savers often run out of cash before they run out of opportunities.

Other options may take priority:

Cash reserve - keeping at least 3-6 months of living expenses provides flexibility.
Taxable brokerage - using other funds until age 59.5 can avoid the 10% early withdrawal penalty on retirement accounts.
Debt repayment - paying debt is a bit like earning a tax-free return at the interest rate.
401(k) match - earning the employer match is like getting a raise.
Employee Stock Purchase Plan - taking advantage of a stock discount and/or lookback feature may make a lot of sense.
Health Savings Account - contributing can have tax advantages.
Spousal IRA - saving to a spouse’s Pre-Tax retirement account may lower a household’s taxes.
Cost savings - prepaying expenses, increasing deductibles, or making energy efficient upgrades may be very beneficial.
Education - funding a 529 plan could have similar benefits plus a state income tax deduction.
Real estate - buying or renovating property may have a higher return on investment.
Career - buying a car, hiring a coach, or pursuing more education could expand career opportunities.
Insurance - preventing income loss may require both life and disability insurance.
Life Goals - buying a home, starting a family, travelling, and other lifestyle choices may be more fun.
Support - giving to family, friends, or charity may better support someone’s goals.

Conclusion

The Mega Backdoor Roth is a powerful tool for high earners. It’s worth a look if your employer offers it.

However, it isn’t right for everyone. Please consult a tax professional and/or financial planner about your situation.

What Financial Steps Might Tech Professionals Take in August?

Kevin Estes — Tue, 29 Jul 2025 20:35:44 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for August in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

I hope you’re enjoying your summer!

August Financial Steps

Potential steps tech employees might take in August include:

Shop for Back to School
Take summer vacation
Review investments
Submit dependent care reimbursements
Check financial independence plan

1. Shop for Back to School

For families with students, it can help to get a jump on Back to School.

Consider purchasing items on the school supply list as soon as they come out. It’s possible The List has already been posted so be sure to check. Items can sell out quickly.

Buy new school clothes early. No-one wants to find out on the first day of school that a garment’s the wrong size!

Getting them early can prevent tears regardless of whether a family uses:

online shopping,
curbside pickup, or
store visits.

2. Take Summer Vacation

There may still be time to take that last vacation!

If possible, take a break. A few days away or even a staycation can help everyone recharge.

For those of us on the West coast, taking vacation now could avoid fire season.

For more, check out:

3. Review Investments

Some tech employers vest Restricted Stock Units throughout the year.

Now is a good time to plan what to do with those shares.

4. Submit Dependent Care Reimbursements

Camps are expensive!

When our daughter was little, a lot of our dependent care expenses came in the summer.

If you’re enrolled in the Dependent Care Flexible Savings Account (FSA), now might be a good time to submit for reimbursements.

Digital receipts can simplify the process.

5. Check Financial Independence Plan

Hasn’t summer been wonderful?

Has it helped you clarify your vision of the future?

Now might be a good time to revisit your long-term plans and forecasts!

For years, my family used a simple forecast for net worth and spending. Check out the complimentary financial independence course if you’re looking for a place to start.

Hey, thanks for reading my post on potential financial steps a tech professional can take in August.

Just a reminder, I share a lot of resources that can help you.

Case Study: Thrived Through a Layoff

Kevin Estes — Tue, 15 Jul 2025 23:27:40 +0000

Situation

“Marie” is a lovely woman who works at a tech company and earns about $200,000 a year. She’s single and had a net worth of almost $800,000 when we started working together.

Steps

“Marie” has been wonderful to work with! She asks insightful questions and quickly implements nearly every recommendation.

She’s made great strides - despite being laid off!

Among other things, she’s improved her:

investments,
cash flow,
taxes,
real estate,
protection,
estate plan, and
life.

The following moves were right for her but may not be right for you! None of this is financial, tax, insurance, legal, or other advice.

1. Investments

“Marie” had been saving diligently.

Individual Stocks

As a tech professional, she was comfortable owning tech stocks - including shares from her previous employer.

We discussed how single stocks tend to have higher risk for similar expected returns. Also, her cash reserve was less than three to six months of living expenses.

She decided to sell some individual stocks and deposit the funds in her high-yield savings account.

Health Savings Account

We explored the potential long-term benefits of growing her HSA balance. She updated those investments to be more aggressive and hopefully take advantage of tax-free growth.

We also considered how using Health Savings Account funds to pay medical expenses now is a bit like taking money out of a Roth account.

Instead, she started paying her healthcare expenses out of pocket. She’s saving the receipts in case she needs to access funds tax-free.

Roth IRA

“Marie” moved her Roth IRA account:

from a custodian with fewer options and higher fees
to one with more options and lower fees.

She wanted to contribute more to her Roth IRA. However, she earned too much to do so directly!

Instead, she started contributing to an after-tax 401(k) account.

Inheritance

Her grandfather mentioned she’d likely receive an inheritance from him.

Of course, she didn’t want to hear it. She loved her Pop Pop and wanted him to live many happy years!

We discussed how there may be no rush to spend or invest those funds if he were to pass.

Estate and Inheritance Tax

She was a bit worried about inheritance taxes. Fortunately, neither an estate nor an inheritance tax was likely in this situation.

His estate was smaller than both the federal and his state’s exemption.

Step-Up in Basis

Unfortunately, her grandfather passed. She inherited some funds.

The investments received a step-up in basis. That is, they were generally treated as if she purchased the shares when she inherited them.

She could sell the investments without paying taxes based on her grandfather’s low purchase price.

IRA

She also inherited a small traditional (pre-tax) IRA account.

Since her grandfather had started Required Minimum Distributions (RMDs), she had to continue taking them. The balance was small enough that she chose to withdraw all funds in the first year to avoid dealing with the ongoing hassle.

Rebalanced

We created an Investment Policy Statement with helpful information.

Based on our conversations and a questionnaire, we identified that she has a high risk tolerance. A Growth portfolio was appropriate.

We created a target allocation. That target determines what percent of her portfolio to hold in assets like stocks, bonds, and cash.

Her primary changes were to:

sell some international stocks,
buy more mid-cap and small-cap stocks, and
buy more bonds.

While updating her portfolio, she also improved her asset location.

2. Cash Flow

Her initial cash position was low.

She set a goal to increase her cash reserve about $45,000.

High-Yield Savings Account

She deposited the proceeds from selling individual stocks to her high-yield savings account.

At 4% interest, $45,000 could earn about $1,800 a year.

Motorcycle

A motorcycle she owned was sitting unused in her garage.

She decided to sell it and increase her cash position by about $5,000.

Credit Card

We realized she often ordered through Amazon. However, she wasn’t earning much from her purchases.

She started using an Amazon Prime credit card that earns 5-6% cash back. That’s a few percent more than she had been earning.

Based on her spending, the change is expected to earn about $500 more cash back a year.

3. Taxes

She completes her own tax returns with the help of software. However, we identified many steps to hopefully lower her lifetime taxes.

Pre-Tax 401(k)

Her pre-tax 401(k) contributions were trending below the maximum.

She increased her contribution rate to ensure she met the employee limit for the year.

After-Tax 401(k)

We explored her employer’s after-tax 401(k).

Contributing lets her save more than the regular limit. Also, the funds may never be taxed again if done right.

She decided to contribute the maximum 10% to her employer’s plan.

Health Savings Account

Since her healthcare expenses were low, she was only contributing $200 a year to her Health Savings Account.

We discussed how HSA contributions may have a triple tax advantage:

lower taxable income the year contributed,
grow tax-free, and
be withdrawn tax-free for qualified medical expenses.

She chose to:

make a one-time HSA contribution up to the annual limit and
increase her ongoing contributions with open enrollment.

4. Real Estate

“Marie” owns a single-family home.

As is often the case, it needs some upgrades. I generally assume repair and maintenance expenses of 1% of the home’s value each year.

If costs are lower, great! Save it for next year.

Past Improvements

She’d made updates since buying the home.

Upgrades

For instance, she upgraded the electrical and HVAC systems:

using the electrical upgrade to install a sauna and
taking the opportunity to install a heat pump.

Receipts

However, she hadn’t been saving the receipts.

Her home had appreciated significantly. We considered how her gain may exceed the $250,000 home exclusion limit for a single taxpayer. The receipts may increase her cost basis.

She started saving her physical receipts and backing them up digitally. Doing so may save her taxes if she ever sells the home.

Roof Replacement

Her roof was old and needed to be replaced.

She considered financing it with a Home Equity Line of Credit. However, she was able to use her larger cash reserve to fund the replacement.

Future Remodels

Next on her home improvement list are new:

pipes,
floors,
doors, and
a driveway.

She applied for and will likely use a Home Equity Line of Credit (HELOC).

Doing so could help her maintain a healthy cash reserve. The interest expense may even be deductible.

5. Protection

Unfortunately, she was in the common position of:

being underinsured
despite paying high premiums.

Property and Casualty

Coverage Limits

We discussed how higher limits were important, especially given her relatively high income.

“Marie” increased her insurance coverage limits. For instance, she raised her bodily coverage:

from $100,000 each person / $300,000 each accident
to $250,000 each person / $500,000 each accident.

Deductible

Her deductibles were also low. Now that she has a higher cash reserve, she can pay smaller expenses out of pocket.

She increased her collision and comprehensive deductible:

from $250
to $500.

Competitive

Since she hadn’t shopped her insurance in years, I suggested she check prices at a few reputable insurers.

For her home and auto insurance, she was able to:

increase her coverage limits,
increase her deductibles, and
lower her premiums.

Umbrella

Although she was approaching millionaire status, she didn’t have umbrella insurance. That insurance rests on top of other coverage (home, auto, etc.) in case there’s a claim that exceeds those limits.

She researched her options and was able to secure a $1 million umbrella insurance policy for less than $200 a year.

6. Estate Plan

She didn’t yet have key parts of her estate in place.

Documents

We discussed that it’s especially important for her to have her estate plan buttoned up since she’s single.

The following may be particularly important:

powers of attorney,
living will,
account titling,
primary and secondary beneficiaries, and
last will and testament.

She signed up for the legal assistance plan through work to prepare her estate documents.

Estate Tax

The state she lives in - Washington - has a low estate tax exclusion of $2.193 million. That threshold hasn’t changed since 2018.

Her net worth forecast suggests she may exceed the limit.

7. Life

Her life was going well!

Fortunately, she didn’t get lulled into complacency. She sensed there was more she could do and hired help.

Leadership Change

Things were great at work!

Then, her entire leadership team left.

Interim Director

She stepped into an interim Director role and performed admirably, earning a:

top performance review,
raise, and
bonus.

Application

The open Director role was posted. She applied to make her interim position permanent.

Unfortunately, she didn’t get it.

A Shock

Her manager considered her a threat and took steps to remove her.

The move came as a shock because she’d performed well as both an individual contributor and in the interim leadership role. She said:

I guess I was naive. I didn’t think it’d happen to me.

Reframe

My question to her was:

How could this be the best thing that ever happened to you?

She made the most of the situation.

Leave of Absence

”Marie” wanted to spend more time with family during the transition.

Her grandfather was very ill, and she was needed on the other side of the country. She took a leave of absence from work.

Grandfather’s Death

The leave pay funded her expenses and cross-country trips.

It helped her spend time with her grandfather on many of his final days. She supported her family through a trying time.

After he passed, she helped her aunt handle the estate. That included locating his accounts.

Pro Tip: Keep at least one physical account statement as a breadcrumb in case something happens.

His passing also helped her reflect on life:

It sucks to work all the time. I’d like to start living today.

Layoff

After she returned from the leave of absence, “Marie” was laid off.

Severance

She received a severance package and eventually unemployment benefits. Those funds covered her living expenses.

Because the market continued to perform well, she even grew her net worth while unemployed!

COBRA

Since the company’s COBRA wasn’t too expensive, she maintained healthcare coverage through her previous employer.

As she had both the time and coverage, she took the opportunity to get a checkup, bloodwork, etc.

COBRA carried her all the way until she started a position with another tech company.

Pivot

She stayed active in a professional group for her specialization.

New Position

One of her fellow members worked at tech company that was hiring. “Marie” received and accepted an offer for a good position.

Since starting, she’s having a lot of fun and doing well. She loves her manager, teammates, work, and company!

Travel

She traveled for family during the transition.

Now, she travels with friends.

Activities

A previous injury had kept her from doing some of the things she loved. Surgery was successful, and she fully recovered.

She’s able to:

go on bicycle rides with her neighbor,
enjoy social outings, and
participate in team events.

Hey, thanks for reading this case study about a client who thrived through a layoff!

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for Tech Professionals in July

Kevin Estes — Wed, 02 Jul 2025 00:49:54 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for July in a moment.

But first - here are some links you may want to save for later.

Transactions in Retirement Accounts Aren't Taxed… Yet

Now, let's get on to the blog! 😀

Summer!

There’s a heat wave across America. The 4th of July is in just a few days. It’s definitely summer!

Potential Steps for Tech Professionals This Month

Financial steps tech employees might take in July include:

Check credit reports
Review / rebalance investment portfolio
Take summer vacation, attend camps
Submit dependent care reimbursements

1. Check Credit Reports

Summer expenses could be heavy and span multiple states. Fraud risk may rise while the chance of catching it falls.

Now’s a good time to check credit reports to

validate your information,
check for fraud, and
maintain flexibility.

2. Review / Rebalance Investment Portfolio

Investments drift over time. That can be especially true after:

bonuses,
Restricted Stock Unit (RSU) vesting,
Employee Stock Purchase Plan (ESPP) buys, and
big market swings.

Did you hear the S&P 500® hit an all-time high?

Employer Stock

Holding employer stock can be challenging. An investment can have more risk with a similar expected return.

Employer stock can be tied to other finances like:

income,
health insurance, and
home value.

For more, check out: Is It Worth Holding Employer Stock?

3. Take Summer Vacation, Attend Camps

Rest is a critical and often overlooked part of work.

Summer Vacation

Fall was the busiest season when I worked in management consulting and corporate finance. That was in part because it was end of year planning season.

It was also because many great ideas came:

when people were on vacation or
after they returned to work refreshed.

Schedule Your PTO ASAP!

Summer Camp

Camp offers wonderful growth opportunities. Children get to:

break out of their routines,
connect with peers,
develop new skills, and
learn from different adults.

Our daughter attended camp for years on an island near Seattle.

When we were waiting at pickup, another parent mentioned:

The first year our daughter went to this camp, she was in tears coming off the boat.
My thoughts immediately went to worst case scenarios.
When I finally got to her, she cried: ‘I don’t want to leave!’

4. Submit Dependent Care Reimbursements

Daycare expenses can be heaviest in the summer. Submitting receipts may help fund a vacation.

Also, it’s good to know early if there’s a problem. That gives everyone more time to resolve it - well before year end!

A dependent care Flexible Spending Account (FSA) generally cannot be used for:

overnight camps
13+ year old children

There are some exceptions.

Hey, thanks for reading my post on potential financial steps tech professionals can take in July.

Just a reminder, I share a lot of resources that can help you.

One More Year

Kevin Estes — Wed, 11 Jun 2025 07:41:03 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home. We’ll get to whether or not it makes sense to work another year in a moment.

But first - here are some links you may want to save for later.

Newton’s First Last of Motion:

Now, let's get on to the blog!

Early Retirement

The math on financial independence seems fantastic… as in unbelievable. However, it’s technically possible!

Nonetheless, inertia is tough to overcome.

Silly Math

Let’s say someone:

started working at age 22 and
wants to retire by age 40.

They might only work 18 years!

The average life expectancy is 78 years. Someone who retires at 40 may live another 38 years.

Their retirement may last more than twice as long as they worked!

4% “Rule”

However, it may be possible.

Bill Bengen studied historical inflation as well as the returns on on stocks and bonds. In his paper published by the FPA Journal in October 1994, he concluded:

“Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe.”

Someone with a $1 million portfolio may be able to withdraw $40,000 the first year. Withdrawals would then adjust with inflation each year.

A team of three researchers from Trinity University researched the topic in 1999 and came to a similar conclusion.

Assumptions

However, there’s no guarantee.

More Years
The authors focused on up to a 30-year retirement. Early retirees may have a much longer time horizon. What if they live past 100?

The studies also generally ignored:

income taxes,
other income like pensions and Social Security,
planned inheritance (receiving or giving)...

Variable Spending
The authors assumed current spending plus inflation each year. However, inflation-adjusted spending tends to fall in later years - despite higher healthcare costs.

It’s also lumpy because of major purchases like a new appliance, roof, or vehicle.

It Depends

Each household’s financial situation is different:

A couple’s pension and Social Security benefits may be enough to cover their living expenses.
Travel could increase spending.
Major medical costs can derail a plan.
An inheritance could fund expenses for decades.
Raising children or grandchildren late in life could extend costs.
The research was most concerned with especially bad years.

It really isn’t difficult to model someone’s financial situation correctly. Consider hiring a professional to review your situation.

Inertia

An object at rest remains at rest… unless acted on by an unbalanced force.

Many people have more than enough to retire yet keep working.

Some says to themselves - and maybe others:

“I’m just going to work one more year.”

However, one year can turn into two, three… or even decades!

Change often requires a catalyst. Something may need to happen.

The pain of staying must exceed the pain of changing.

Pros

There can be real benefits to working another year.

Some of them could include:

income,
Social Security,
network,
structure,
time,
identity, and
severance.

Income

A tech professional may be stepping away from a firehose of money.

Let’s assume they:

earn a $150,000 base salary,
receive a 20% bonus,
vest $40,000 in Restricted Stock Units,
get a 4% match on their 401(k) contributions,
earn 18% on $25,000 of discounted employee stock purchases, and
receive a $20,000 break on their healthcare premiums.

That may be over $250,000 of income for the year!

Social Security

Working another year can also grow Social Security benefits.

Calculation

The Social Security formula essentially uses the highest 35 years of earned income. That income must have been subject to Social Security.

It’s indexed to the national average Social Security wage for each year, which basically accounts for inflation.

Missing Years

Someone without 35 years of Social Security income will have some years counted as $0. If they worked 18 years, they would have 17 zeros.

Anyone who’s ever failed to turn in an assignment knows that a zero really drags down the average!

Replacement

Even someone who has 35 years of Social Security earnings may benefit from working longer.

Higher income years can replace leaner years when:

a student,
getting started in a career,
temporarily unemployed, or
working part-time.

Network

Some people have spent decades building relationships with coworkers. Not seeing them every day would be a big change.

Your retirement party may be the last time some people ever see you. Without enough humor and enthusiasm, it can feel like a funeral!

We’re social beings. It’s critical to consider your future community:

Will they stimulate you?
Will they help you grow and develop?
Will you enjoy spending time with them more than your coworkers?
How will you support each other?

Structure

We all look forward to not having to wake up to an early alarm. However, the lack of structure in retirement is often overlooked.

Create a New Routine

It’s important to choose what to do with your time. A routine can help.

What will you do?
When will you do it?
Who’ll join you?

Task Expansion

Parkinson’s Law: work expands to fill the time allotted for its completion.

Without a deadline, everyday tasks can consume your day:

laundry,
groceries,
yardwork,
cleaning,
errands…

That’s especially true if you cut services to save money in retirement, and take on the work yourself. Be careful.

Time

Working another year buys time, which can help someone:

reduce risk and
find passions.

Risk

Working longer reduces risk several ways.

Expenses
Each year someone works likely pays for another year of their expenses. They may also pay another year of their mortgage.

At the extreme, working until death can eliminate longevity risk!

Down Market
There will almost certainly be down markets if someone continues to work for several years:

It’s nice to be saving aggressively when investments go on sale.
Continuing to work reduces the number of downturns in retirement.

Someone’s D’s
A close friend or relative may need your help.

That’s especially true if they’re dealing with:

disease,
disability,
debt,
drug dependency,
divorce, or
death.

A former coworker retired early… until an extended family member fell ill and needed financial support. It forced her back to work!

For drug addition and debt, take steps to avoid enabling the behavior.

Also, it’s possible to regret working to pay for someone’s misfortunes, poor decisions, or lack or planning.

Everyone has a limit. Know yours.

Passions

Some people have few passions outside of work.

On the Rails
They’ve lived an efficient life:

graduated high school,
graduated college,
got a job,
got married,
saved for a house,
bought a house,
had kids,
raised kids,
saved for retirement…

They’ve done what they were expected to do. Now what?

It’s like the line in the movie The Shawshank Redemption about prison:

Red: These walls are funny. First you hate ‘em, then you get used to ‘em. Enough time passes, you get so you depend on them. That’s institutionalized.

Plan
The key is to prioritize the life you want to live:

What passions will you pursue?
How will you connect with your community?
How will you stay in shape?
What’s your purpose?

The Usual
Some yearn to travel. How long will that last?

Others want to support family. How much help will they need?

It may also be volunteering, mentoring, reading, part-time work, gardening, golfing, writing a book, playing cards…

What will you do because you love it, not because it’s something to do?

Exploration
If you lack a clear vision for retirement, working longer can give you time to explore.

Consider reducing your work hours to spark and fan your passions.

Identity

Retirement ends an identity.

Intro Test

How do you describe yourself when you meet people?

Your default might be like mine:

“Hi, I’m Kevin. I’m a [profession] who…”

If so, your transition may be tougher.

Careers

A sense of identify can be especially strong for professions that:

require a lot of training,
command respect,
have few options to return after retirement, and
take a long time to master.

Examples

Some well paid positions come to mind like senior military officials, commercial pilots, and doctors.

Despite my focus on early retirement, I’m connected to many people on the other end of the spectrum!

One friend’s the most senior pilot at a major airline.
Another’s mother is a 94-year-old physician in New York City!

Of Counsel

The legal profession has a nifty setup for retiring lawyers: “of counsel.”

A firm may hire a retired attorney part-time for specific legal advice.

It can be a way for the retiree to:

stay connected,
leverage their expertise, and
earn a good hourly rate.

Consult

Another hack is to consult for former employers or coworkers.

This can be especially helpful for positions that depend on knowledge or connections.

Severance

Retiring early can leave money on the table.

Layoff

Someone who’s laid off may receive:

weeks of salary,
a prorated bonus,
Restricted Stock Unit vests,
subsidized insurance, etc.

How
If someone wanted to get laid off, they might slowly transition their responsibilities to other team members and avoid new projects.

They’d earn the same pay for less work - and raise their hourly wage!

They may also:

shed work they don’t like and
keep only what they truly enjoy.

When the next round of layoffs come, their leadership will need to make some tough decisions. However, their position may not be one of them!

They’ll likely be let go.

Drawbacks
Some downsides of this approach include:

damaged relationships with coworkers who notice,
the layoff could take years to occur, and
it rarely feels good to be let go - even when orchestrated.

Continued Benefits

Some companies encourage older employees to retire.

Pilot
For instance, the Federal Aviation Administration (FAA) caps the age of commercial pilots at age 65.

55 and 15
Microsoft has a program for employees:

who retire at age 55 or older
with at least 15 years of service.

They can continued to vest existing Restricted Stock Units after they leave the company. It’s a bit of an incentive to enjoy their golden years.

Cons

“The secret of change is to focus all your energy not on fighting the old, but on building the new.”
- Dan Millman

Some of the many drawbacks of continuing to work include:

poor conditions,
health,
no guarantees,
family,
health insurance,
Social Security,
cost,
working for zeros, and
confidence.

Poor Conditions

One more year may not be worth it if you hate the job.

It could feel like another year of playing Simon Says - or worse.

Unhappiness at work spills over to the rest of your life. It’s nearly impossible to be happy if you’re miserable half your waking hours!

Health

Jobs can negatively effect health.

It’s not just risky ones like law enforcement, coal mining, and professional football. It’s also sedentary white-collar positions - especially if they’re high stress.

They can:

not only shorten life
but also lower the quality of the remaining years.

No Guarantees

Each of us is a heartbeat from death.

Loved Ones

If you and a friend or family member have always wanted to take a trip, now may be the time! Do it while you’re both alive and able.

Every year spent working may be one less year with an older relative.

Ability

You and your traveling companion(s) may not be able to do some things later in life.

I saw a tragic photo of an older couple on a gondola ride in Venice. They were both passed out in broad daylight!

Their gondolier just shrugged.

Want to walk the Camino De Santiago, bicycle Tuscany, or explore each National Park? You may need to get on it!

Senses

Our senses tend to fade with age.

Rome literally may not look, smell, and taste the same to us in 20 years.

Locations

Destinations also change:

The Double Arch formation at Arches National Park collapsed.
The Great Barrier Reef is facing potential extinction.

My father had fond memories of Asbury Park, New Jersey. By the time we visited, it was a shell of its former self.

Family

It’s unfortunate that when we’re needed most at home is often when we’re needed most at work.

Children

Many families prioritize time with children before Kindergarten. That time is crucial for development!

However, we may underestimate the importance of the early teenage years. That time is packed with emotional development and activities.

Once children can drive themselves to activities, the workload drops.

I hope. 😉

Parents

I was amazed by how many people in the financial independence community needed to help a parent soon after leaving work.

Then, it happened to me.

Extended

Consider who in your extended family lives alone.

Who would take care of them if something happened?
How old are they?
How’s their mental and physical health?

Consider long-term care. It may even make sense to take out a policy on their behalf!

Health Insurance

Companies share how much they pay for an employee’s insurance:

They may report it in a “total compensation” report.
It’s also usually published as Code DD in Box 12 of the W-2.
(Congrats if you know that that means!)

Affordable Care Act

However, health insurance might be less expensive in retirement. The Affordable Care Act (ACA) plans may help.

Premiums for these plans are based on income, not wealth. A multi-millionaire with little income may receive subsidies!

Medicare

Americans typically become eligible for Medicare at age 65. They may be able to enroll earlier in some instances.

Medicare enrollment is handled by the Social Security Administration. However, participants are not required to start Social Security benefits when they go on Medicare. They’re two separate decisions!

As with the ACA healthcare exchanges, higher income can increase monthly premiums for some Medicare coverage.

Social Security

Progressive

The Social Security system is intended to serve as a safety net for those with limited means in retirement.

For 2025, Social Security payments are based on:

90% of the first $1,226 of average indexed monthly earnings plus
32% between $1,226 and $7,391 plus
15% above $7,371.

For a year, those translate to:

90% of the first $14,712 of average Social Security income,
32% between $14,712 and $88,692, and
15% above $88,692.

Less Incentive

The Social Security taxable maximum wage limit is $176,100 for 2025.

Assume:

a worker reaches the income cap each year and
the growth of average indexed monthly earnings matches that of the taxable maximum.

They would need to work about:

3 years to reach the first bend point and
18 years to reach the second.

Working another year may only increase the monthly benefit about $63:

$176,100 taxable maximum
divided by 35 years = $5,031
multiplied by 15% = $775 benefit a year
divided by 12 months = an extra $63 a month, plus inflation.

There’s less incentive for high earners to keep working.

Benefit

The annual Social Security benefit with the first two bend points is about $36,914 for 2025:

90% of $14,712 plus
32% of $88,692.

Also, a spouse or ex-spouse may be entitled to:

50% of the Social Security benefit while the worker’s alive and
100% of the benefit after the worker’s death.

For the example above, a married couple may earn:

$55,371 a year while the worker’s alive and
$36,914 a year after their death.

The benefits grow with inflation.

Cost

It’s worth considering the cost of working:

clothes,
makeup,
commuting,
parking,
meals,
convenience,
subscriptions,
memberships,
dues, etc.

It’s not just the hard cost but also the unpaid time dedicated to work!

Working for Zeros

A friend and her husband used to talk about not just “working for zeros.”

Meaning

They felt there was no need to keep adding digits to their net worth when they already had enough.

It can also means working for a boss you dislike!

Unfortunately, their story has even more significance. Her husband passed away far too young from cancer a few years after they retired.

Play It Out

I dislike the terms “success” and “failure” for financial planning.

Adjustment
We have the ability to adjust!

We might:

take fewer vacations,
replace vehicles less often, or
work a part-time job.

Worst Case
Let’s ride a crazy train of thought all the way to the end.

Assume the worst financial situation occurs late in life. We contract an expensive condition that still allows us to live a long time.

At some point, we might have to go on Medicaid.

My grandmother was wealthy. Many of her fellow hospice residents were on Medicaid.

My grandmother paid full price.
Other patients didn’t.

We’re cared for when we’re babies and when we’re old.

Is it worth working longer to pay for it?

Confidence

Some people fixate on the small chance of “failure” instead of focusing on the high likelihood their plan will work well.

Too Much

Consider the “success” scenarios as having saved too much!

Someone with:

less than a 5% chance of ever needing to adjust their plan
has 95%+ odds of over-saving!

Going from 94% to 100% confidence may take years of sacrifice.

Also, it’s important to get clear on the odds. They’re often just for the investment portfolio and may ignore real estate equity!

Run the Numbers

Consider running the Monte Carlo for a wide interval - like 5% to 95%.

How much will you likely end with in those cases?

Knowing you might “only” have $3 million to $70 million may give you the confidence to retire early.

Hey, thanks for reading my post about working one more year!

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for Tech Professionals in June

Kevin Estes — Tue, 03 Jun 2025 04:24:07 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for June in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Is It Summer Yet?

The days are getting longer and warmer.

Technically, summer is a few weeks away. However, some schools are already out for the year!

Potential Steps for Tech Professionals This Month

Financial steps tech employees might take in June include:

Enjoy end of school year
Replenish emergency fund
Prepare for summer vacation and camps
Submit dependent care reimbursements

1. Enjoy End of School Year

Final exams, papers, and projects are either complete or nearly there.

Remember that last day of school feeling?

It’s also “moving up” season. Treat the graduates you know!

Next year’s schedules are being finalized. Now is a good time to schedule late summer physicals for student athletes.

2. Replenish Emergency Fund

Millions of Americans take advantage of the long summer days.

Spending rises for:

Gear - camping, bicycle tune-ups, sprinklers;
Water fun - swimming, fishing, boating; and
Hosting - barbecues, drinks, fireworks.

The time and money spent landscaping rises. Nice weather allows for home improvement projects.

Now’s a good time to check cash reserves. Having three to six months’ of expenses can help fund emergencies and lasting memories!

For more, check out: Is Your Cash Starving?

Wealth is what you don’t see. Rich is Flashy.

3. Prepare for Summer Vacation and Camps

It’s nearly peak vacation season.

Summer Vacations

Trips often require:

Travel - flights and/or road trips;
Lodging - hotels, Airbnb, VRBO; and
Meals - dining away from home.

If you haven’t scheduled your summer vacation(s) yet, considering doing so ASAP.

An “adventure” is better than no vacation!

Summer Camps

It’s also time to get ready for camp! There are:

forms to complete,
medicines to replace,
transportation details to iron out…

Many camps let parents fund small accounts for their children. Campers allowed to spend a set amount learn math, forecasting, and prioritization skills!

It’s nice for parents to reconnect when children are away at camp. Hooray for date nights!

4. Submit Dependent Care Reimbursements

Dependent care expenses can by heavy in the summer.

Submitting receipts quickly may:

improve cash flow,
help with Back to School, and
ensure funds are received by year end.

If there’s a problem, knowing early gives more time to resolve it!

A dependent care Flexible Spending Account (FSA) generally cannot be used for a overnight camps. The program is intended to help people work regular hours.

Hey, thanks for reading my post on potential financial steps for tech professionals in June.

Just a reminder, I share a lot of resources that can help you.

$1 Million in Bank Account

Kevin Estes — Wed, 21 May 2025 02:00:10 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home. We’ll get to the million dollars in a moment.

But first - here are some links you may want to save for later.

Investing in or Betting on Real Estate

Now, let's get on to the blog!

Better Options

A bank account may not be the best place to park $1 million.

However, it depends on the situation.

This article has seven parts:

possible scam,
drawbacks of checking and savings,
appropriate cash reserve,
extra compensation,
current tax savings,
future tax savings, and
investment considerations.

1. Possible Scam

Hopefully, it’s not a scam.

A fraudster may claim you’re set to receive $1 million for a:

prize,
settlement,
inheritance…

All you need to do is provide your bank account and routing number!

Their goal is to empty your account. 😯

However, let’s assume that isn’t the case.

You have $1 million in your checking or savings account from:

an inheritance or settlement,
the sale of a business or home,
a great income, or
some other valid reason.

2. Drawbacks of Checking and Savings

A checking or savings account may:

lack full FDIC protection,
earn a low interest rate, and
be a fraud target.

FDIC Protection

The Federal Deposit Insurance Corporation (FDIC) provides protection for many banks and savings associations. It steps in to pay account holders in the remote chance that a member institution fails.

For one account, only $250,000 is covered by FDIC insurance.

As a result, it rarely makes sense to keep $1 million in a single checking or savings account for long.

Low Interest Rate

Many accounts pay an annual interest rate that rounds to 0%. Meanwhile, some high-yield savings accounts and money market mutual funds pay over 4% interest a year.

An extra 4% on $1 million is $40,000 a year!

Fraud Target

Keeping that much cash in one account can make it a target.

It’s also a bit tougher to reverse fraud:

If there’s a bad charge on a credit card, the financial institution’s money was taken.
If there’s a bad charge on a debit card, your money’s gone!

3. Appropriate Cash Reserve

It’s important to have a cash reserve. Even the wealthy can lapse into a scarcity mindset without ready access to funds.

Three to Six Months

I generally suggest someone keep at least three (3) to six (6) months’ of living expenses in cash reserves.

These funds could be used for either:

emergencies or
opportunities.

For someone who spends $2 million a year on business and personal expenses, $1 million could be just right!

However, it depends on the situation.

Upcoming Expenses

Major planned expenses add to the required cash reserve.

Big expenses on the horizon could include:

buying a home, car, or business,
paying for education or medical expenses, or
caring for a loved one.

These expenses would be on top of the regular cash reserve.

Special Circumstances

Some situations can push the cash reserve to six months and beyond!

It may make sense to keep more cash if someone:

has variable income,
owns a business or real estate, or
is retired.

4. Extra Compensation

An employee might earn additional income offered by their employer.

Restricted Stock Units

It generally makes sense to accept Restricted Stock Unit (RSU) grants.

Grant

The units granted usually tie to employer shares.

If someone stays employed with the company, those grants could grow to be worth a lot of money.

Vest

When Restricted Stock Units vest, they’re treated as income.

Some shares are sold and withheld for taxes. The remaining shares are deposited into the employee’s account.

Tax

The shares deposited into the employee’s account are treated as if the employee purchased them the day they vested. Selling at that price creates no more taxes!

Holding RSU shares is like taking money from a checking account to buy company stock. Is that the plan?

Not enough shares may be sold to cover the tax on Restricted Stock Unit vests. That’s especially likely for higher earners.

Tip: Employees may need additional funds to pay income tax on Restricted Stock Unit vests.

Stock Options

It also usually makes sense to accept stock option grants.

Grant

Stock options allow someone to purchase shares of their employer at a set price in the future. That’s called exercising the option.

The exercise price is often the company stock price when the options are granted.

Exercise

Options can provide significant leverage if the stock price rises. However, the options could be worthless if the stock price falls.

Funds may be needed to:

exercise the options and
buy shares below the market price.

Tip: Significant cash may be needed to exercise options.

However, the employer may offer a cashless exercise. It might sell shares at the market price and distribute the gain to the employee.

That income would be taxed.

Tax

Stock option taxes depend on both the option type and the recipient’s tax situation.

Options are usually taxed when:

exercised and
sold.

A qualified Incentive Stock Option (ISO) may avoid income tax when exercised. However, the difference between the fair market value and exercise price may increase taxes through the Alternative Minimum Tax (AMT) system.

401(k) Match

Many companies only contribute to a 401(k) if the employee firsts contributes. That’s called a company match.

Example

Assume an:

employee earns $100,000 a year and
their employer matches 4% of the first 5%.

A 5% employee contribution would be $5,000. The employer match would be $4,000.

How much the company matches grows with employee income. A 4% match on $400,000 is $16,000!

Vest

Some companies vest 100% of their contributions immediately.

Others have vesting schedules. For instance, an employee may need to work for the company for three to five years to fully vest. If not, some or all of the company matches could be clawed back.

Tip: Contributing to a 401(k) can be a higher priority if company matches vest immediately.

Tax

Traditional contributions can lower taxable income.

What an employee adds to a pre-tax 401(k) is a bit like deferred compensation since it:

isn’t earned income yet,
avoids tax initially, and
will be taxed later.

However, the distribution may be taken when it’s convenient for the employee. That income might be taxed at a lower rate.

ESPP

Employee Stock Purchase Plans can be attractive.

Plan

The best plans offer a:

steep discount and
lookback.

The highest qualifying discount is 15%. However, it could be higher with a lookback that takes the lower of the price at the start and end of each offer period.

An employee participating in the plan would contribute a certain amount each paycheck. These contributions are after-tax. They reduce what goes into the employee’s checking account dollar for dollar.

At the end of the offer period, the employee buys shares at a discount. If they leave the company before then, the employee will receive the cash they contributed.

Example

Assume a company offers an ESPP with a:

15% discount,
lookback provision, and
six-month offer period.

Also, the stock was $100 and rose to $110 over the six months.

The purchase price is 15% off the lower of $100 and $110. That’s $85. However, the stock’s worth $110.

That’s over a 29% gain:

$25 divided by the
$85 purchase price!

Tax

The employee may be able to sell the stock right away. If so, the gain would be taxed as ordinary income.

Maximum

The most that can be contributed to a qualified Employee Stock Purchase Plan is:

15% of an employee’s income,
up to $25,000 for the year.

5. Current Tax Savings

There may also be opportunities to use funds to minimize lifetime taxes.

Health Savings Account

A Health Savings Account (HSA) is different from spending and reimbursement accounts.

Portable

HSA funds are not “use it or lose it.” They don’t need to be spent each year and can instead continue to grow.

When an employee leaves the employer, they can take the balance with them.

Investment

HSA funds can be invested for long-term growth.

A certain amount - often $2,000 - may need to be held in “cash” to pay for healthcare expenses.

An employer may also contribute to an employee’s Health Savings Account. That’s a bit like extra compensation.

Tax

Health Savings Account contributions can:

lower taxable income the year made,
grow tax-free, and
be used tax-free for qualified medical expenses.

Limits

To be eligible to contribute to a Health Savings Account, someone needs to be on a qualified High Deductible Health Plan (HDHP).

A high deductible could force the employee to pay more out of pocket for healthcare. That may not be right for a family with:

expensive prescriptions,
ongoing health expenses, or
certain medical conditions.

It’s important not to let the tax tail wag the healthcare dog. The right health insurance takes priority!

Unlike with other account types, someone doesn’t need earned income to contribute to a Health Savings Account.

However, they cannot contribute to an HSA once they go on Medicare.

Maximum

The maximum contribution to a Health Savings Account in 2025 is often:

$4,300 single and
$8,550 married, filing jointly.

There’s also a catch-up contribution of $1,000 for those 55 and wiser.

Pre-Tax 401(k)

Contributing to a 401(k) plan can be a way to save automatically. Retirement plans also benefit from creditor protection.

However, the primary benefit of contributing to a pre-tax 401(k) beyond the employer match is to lower taxable income for the year.

Tax

Pre-tax contributions can be especially helpful for someone who earns more now than they will later.

They may be able to pay a lower tax rate by shifting income from higher to lower income years.

Limits

The most an employee can contribute to a 401(k) is their earned income for the year.

Many employer plans have additional restrictions to ensure employees:

withhold taxes and
still receive some regular income.

Those limits might be something like 50% or 75%.

Maximum

For 2025, the regular 401(k) contribution maximum is $23,500.

There are also catch-up contributions of:

$7,500 for those aged 50-59 and 64+ as well as
$11,250 for those aged 60, 61, 62, and 63.

Spousal IRA

Contributing to a spouse’s IRA may also help lower taxable income. That can be especially helpful for a stay-at-home parent.

Limits

The couple needs to be married and file a joint tax return.

They also need to earn enough income to cover all of their retirement plan contributions.

Tax

Whether a pre-tax contribution is deductible in 2025 depends on:

whether the spouse is covered by a workplace retirement plan and
the couple’s combined income.

Maximum

The regular maximum IRA contribution for 2025 is $7,000.

There’s also a $1,000 catch-up for those aged 50 and over.

6. Future Tax Savings

Let’s assume someone has already:

optimized their cash reserves,
maximized their additional compensation, and
minimized their taxes for the year.

It may also be possible to lower future taxes.

After-Tax 401(k)

Someone may be able to save even more with an after-tax account.

Not Roth

After-tax is different from Roth.

Roth and pre-tax 401(k) contributions count toward the employee limit. Together, they must generally stay below the $23,500 cap.

After-tax contributions have a higher limit, which can be especially helpful for higher earners.

Tax

While after-tax contributions generally aren’t taxed when withdrawn, the investment income and gains are. That’s why it’s ideal to move after-tax 401(k) balances to a Roth account.

With a Mega Roth, a participant:

contributes to an after-tax account and
rolls the funds into a Roth account.

It may be easiest to transfer funds from the employer’s after-tax 401(k) to its Roth 401(k).

There are income limits to contributing directly to a Roth IRA. However, those restrictions don’t apply to a Roth or after-tax 401(k).

Limits

Not all companies offer after-tax contributions. Even fewer allow in-service distributions to move funds from an after-tax to a Roth 401(k).

Many tech companies offer both. The combination is the Mega Roth.

Maximum

For 2025, the maximum after-tax contribution is $70,000 less the other:

employee and
employer contributions.

Example

Let’s assume that in 2025 someone:

earns $100,000,
maxes their pre-tax 401(k) contributions at $23,500,
receives a 4% match of $4,000, and
has access to an after-tax 401(k).

Their maximum after-tax contribution is likely $42,500 for the year.

529 Plan

A qualified tuition program can help someone save for education and lower future taxes. It’s also called a 529 plan.

Use

529 plans have expanded over time to include:

K-12 private school tuition,
trade schools and apprenticeships,
associate and bachelor’s programs,
graduate and professional school, etc.

Funds can even be used at many international colleges and universities.

Flexible

529 plans have a lot of flexibility.

Funds can be transferred to a family member. That includes parents!

It’s also possible to withdraw funds from a 529 plan if a student receives a scholarship or appointment to a U.S. military academy.

Those distributions generally avoid the 10% penalty for not using funds for qualified education expenses. However, they could still incur state and federal income taxes.

A new rule that took effect in 2024 could allow unused funds to be rolled over to a Roth IRA.

The 529 plan account would need to have been:

open at least 15 years and
have received the contributions at least five years prior.

Also, the rollovers are capped at the annual Roth IRA contribution limits and subject to a $35,000 lifetime maximum.

Tax

Contributing to a 529 plan could lower state income taxes.

However, many states cap the benefit. Contributions aren’t deductible for federal taxes.

Funds can be invested and grow tax-free. Many 529 plans offer low-cost, diversified investment options.

Better yet, funds can be used tax-free for qualified education expenses. Unfortunately, the state and federal definitions of “qualified” may differ.

Maximum

In many ways, the IRS treats a 529 plan contribution like a gift.

The standard contribution limit is based on the annual gift tax exclusion. That’s $19,000 for 2025.

However, there’s an opportunity to “superfund” a 529 plan. Someone could add up to five years of contributions in one year.

For 2025, they could contribute $95,000:

$19,000 annual exclusion
times five (5) years.

A married couple who files a joint tax return could double that contribution. However, they’d need to

complete a gift tax return (Form 709) and
reduce their combined gift and estate tax exemption for any gifts made to the individual over the next five years.

Investment

It makes sense to invest a 529 plan based on when the money will be needed. Using a target enrollment date fund often makes sense.

Target date funds grow more conservative over time. You wouldn’t want the balance to plummet just before it’s needed!

However, a target date fund may not make sense if needed for:

K-12 private school,
graduate school, or
another family member.

A target enrollment fund also might not make sense once the student starts their education. Even a conversative investment may lose value!

7. Investment Considerations

Assume someone has:

set aside a cash reserve,
taken advantage of their benefits, and
funded tax-advantaged accounts.

Remaining funds might be moved to a taxable brokerage account.

How to invest depends on many factors, including:

timing,
taxes, and
tolerance.

Timing

Money needed later can generally be invested more aggressively than money needed now.

For instance:

Roth IRA funds that won’t be needed for decades might be invested more aggressively than
college savings needed in a couple years.

Traditional brokerage account funds are often used first in retirement. That’s because retirement account distributions have an extra 10% penalty if used before age 59.5 unless an exception applies.

Taxes

Someone in their peak earning years may want to lower their taxable income. In that case, a stock mutual fund or Exchange-Traded Fund (ETF) might be a more natural fit for a taxable brokerage account.

Bonds may work better in a traditional (pre-tax) retirement account. Investment income could be deferred until earned income falls.

Roth accounts may hold slightly more aggressive investments like:

small-cap,
mid-cap, and
international funds.

Tolerance

Someone’s allocation can also depend on their risk tolerance.

If an investor would panic sell when markets fall, they may benefit from less aggressive investments.

However, investors typically need growth to achieve their goals. Even retirees often need to take risk to fund 30+ years of retirement!

I believe risk capacity matters more than risk tolerance.

Hey, thanks for reading my post about a $1 million bank account.

Just a reminder, I share a lot of resources that can help you.

Buying a Property You Are Currently Renting

Kevin Estes — Wed, 07 May 2025 07:02:14 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home. 😉 We’ll get to how to buy a property you’re renting in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog!

Different Situations

In an ideal world, you would want to buy the property and the landlord would want to sell. However, your plans may not perfectly align.

After all, there were reasons the:

landlord chose to rent instead of sell and
you chose to rent instead of buy!

This article has three parts:

Renter want to buy
Landlord wants to sell
Potential next steps

1. Renter Wants to Buy

Assume you haven’t been approached by your landlord yet would like to buy the property.

They may or may not be willing to sell.

More Likely

Situations a landlord may be more likely to sell include:

remote ownership,
home gain exclusion,
rapid appreciation,
strong stock market,
recent expenses,
Adjustable Rate Mortgage, and
higher taxes.

Remote Ownership

It’s tough to manage property from far away.

Hassle
It’s tough enough to hire local service professions when you live nearby. It may not be possible to coordinate repairs and maintenance remotely.

Also, tenants could skip town or stop paying without notifying their landlord. It helps to have someone check on the property regularly.

Lawsuits, evictions, and collections are painful for everyone involved. They may require the landlord’s physical presence.

Damage
Tenants may damage or even steal the owner’s property.

Some examples my family has experienced from tenants include:

flushing diapers down the toilet,
stealing a dishwasher, and
tearing into walls to loot copper pipes.

Situations that impacted human lives were far worse.

Travel
Someone needs to be located near the rental.

If the landlord lives far away, they may have to pay travel and lodging costs. They also might spend a lot of time in transit.

Property Manager
A remote landlord might hire a property manager.

However, the property manager may charge:

the first month rent for a new tenant and
10% of ongoing rent.

It also complicates the situation. All communications may be filtered through a property manager who has a vested interest to continue to rent the property!

Home Gain Exclusion

The U.S. Government encourages home ownership. One way it does so is with a tax exclusion for the gain on a primary residence.

Someone who owns and lives in the house two (2) out of the last five (5) years may be able to exclude up to:

$250,000 single and
$500,000 married, filing jointly.

If the landlord lived there before renting to you, consider mentioning the exclusion to them. They simply might not know!

Rapid Appreciation

Residential real estate property values have risen significantly since the start of the pandemic.

The owner may not know the fair market value. They might be able to cash out substantial equity from their rental.

It’s more likely the landlord would sell if the home’s value has risen faster than its rent. That’s especially common in markets with rent control.

Feel free to share high-level numbers numbers with the owner:

"Zillow estimates the value of your home has risen $200,000 over the last five years. What do you think?"

Mentioning it could build goodwill and plant a seed for a potential sale.

Strong Stock Market

A landlord may be inclined to sell when the economy is doing well.

If the stock market and other investments have risen faster than real estate, the owner may feel like they’re missing out on bigger gains.

Recent Expenses

Surprise expenses are part of home ownership:

drains clog,
furnaces fail, and
roofs leak.

1% a Year

I generally assume 1% of the home’s value each year for repair and maintenance expenses.

If it costs less, great! Save the money for future updates.

All at Once

However, a home may have several major expenses at once.

The owner may feel overwhelmed and be interested in selling. We’re all prone to recency bias.

Prepaid Expenses

If that case, they may have paid for some major repairs. That could lower the future cost of ownership!

Tip: If the owner complains about their expenses and you’re paying market rent, they may want to sell.

Adjustable Rate Mortgage

The owner may have a looming Adjustable Rate Mortgage (ARM) issue.

Typically, interest on these loans is fixed for years and and then adjusts to the market rates. The initial period is often five (5) to seven (7) years.

Interest rates have risen. A landlord with an ARM may have significantly higher costs on the horizon. They might want to sell before their interest rate adjusts.

Higher Tax

A landlord could pay more tax over time.

Less Depreciation

A property may take more depreciation soon after it’s rented.

Some assets can be depreciated over 5, 7, or 15 years instead of the standard 27.5 years for residential rentals. Stoves, refrigerators, flooring, furniture, roads, fences, and landscaping typically don’t last 30 years!

Accelerating depreciation can reduce taxes soon after renting a property. However, those deductions end after the 5, 7, or 15 years.

Lower Interest

With a fixed interest rate mortgage, more of each payment goes to repaying the balance over time. The same interest rate on a smaller loan balance costs less each month.

Less interest expense tends to raise income and ultimately taxes.

Higher Rent

The landlord may raise rent each year for inflation.

Collecting more rent while reporting less depreciation and interest can increase taxable income. Taxes will likely rise.

Less Likely

A landlord may be less likely to sell in situations like:

future rent increases,
low fixed interest rate,
market volatility,
retirement income,
personal use,
family bequest, and
address benefits.

Future Rent Increases

Rent may be below market value. That’s especially common in rent controlled areas.

If you were to move out, the landlord could raise the rent.

However, it already seems to be worth their while. The chance to earn more could make it less likely they’d sell.

Offering to buy could:

alert the owner the rent is below market and
signal your desire to live in the home long-term.

Tip: Check rent estimates on sites like Zillow and Redfin. If you’re paying below market rent, offering to buy the property could backfire!

Low Fixed Interest Rate

The owner may have locked in a low interest rate.

A below market rate gives them a competitive advantage in the rental market. It allows them to earn more profit than other owners - even you!

They may not be willing to give up that benefit.

Market Volatility

There’s often a flight to more stable investments when markets fall.

An investor may be less likely to sell a rental which earns steady income in down markets.

Even if the return is low, it may be seen as better than a potential loss.

Retirement Income

A landlord may consider rent as their retirement income.

Real estate often makes up the majority of someone’s net worth.

Once they pay off the mortgage, their primary expenses could be:

property taxes,
insurance, and
repair/maintenance.

These expenses tend to rise with inflation. So does rent.

If rent already covers the expenses, inflation will likely grow profits.

If rent doesn’t cover all expenses, the owner is betting on appreciation.

Personal Use

The owner may plan to move back into the home you currently rent.

That’s especially common for a couple who used to live there and moved into a larger home to raise a growing family.

Downsize

Once their children are grown and flown, the owner may not need as much home. They might move back into your residence!

Tax Exclusion

The landlord may move back in to qualify for the home gain exclusion. It might only take two years for them to receive the full tax benefit.

Tip: Moving back into the home is more likely if the landlord lives nearby and the property has appreciated significantly.

Family Bequest

People often want to keep a home in the family.

Sentimental Value

Their emotional attachment may be especially high if:

they grew up in the home or
raised their children there.

They might want to leave it to a family member after they pass.

Step-Up in Basis

Doing so could receive a step-up in basis.

The property could be treated as if the heir bought the home at the fair market value when the owner died.

The family might avoid capital gains tax altogether!

Example

Let’s say the landlord:

paid $200,000 for a home
that’s currently worth $600,000.

The home rises to be worth $1 million by the end of their life. They leave it to a family member after they pass.

The home may be valued at $1 million for the owner’s estate.

The heir would also have their cost basis stepped up to $1 million. It’d be as if the heir paid $1 million for the property.

They could sell it right away and pay little or no tax.

The family might not pay any tax on the $800,000 gain!

Tip: It’s worth checking how much the owner’s home has appreciated since they bought it. Sites like Zillow, Redfin, and the local county assessor may publish the purchase price and current estimated value.

Address Benefits

A landlord may own a property primarily for its address.

Diversification

It could lower their geopolitical and currency risk if they live abroad.

Residency

The address could also be used to establish residency.

For instance, a friend of mine from college moved from Mexico to California for his senior year of high school. That got him four years of in-state tuition at UCLA.

Shady

There are more underhanded ways to use a property’s location.

The address may be helpful for enrolling in a school district or conducting business. These benefits could disappear if challenged.

2. Landlord Offers to Sell

The owner may offer to sell you the property.

Typically, that’s for one of eight reasons:

debt,
divorce,
disability,
death,
deduction,
discontent,
diversification, or
displacement.

Debt

A landlord may need to sell a rental to pay business or personal debt.

They might need to pay for medical expenses, education funding, business challenges, repairs, purchase of another home, etc.

Divorce

Landlords often need to split their assets to settle a divorce. It’s possible the rental was a source of contention.

Their housing needs may also change. When our landlords got divorced, he moved into the home we were renting! We had to move.

Tip: A divorce roughly doubles the odds a landlord will move back in! Watch out for marital conflicts - especially if renting month to month.

Disability

If someone becomes disabled, they may not be able to work. They could also have heavier expenses for medical and other care.

Disability may be worse than death financially and force a sale.

For more, check out: How Disability Insurance Works

Death

If the landlord passes, the home may need to be sold to split assets or pay estate expenses.

In that case, you may deal with an estate executor or even an attorney. They may have an incentive to sell quickly.

Deduction

A landlord may see their tax bills rise if their depreciation expense falls. That’s common with accelerated depreciation.

In addition, they may be about to lose the home gain tax exclusion. The deadline may be three years after they move out of the home.

Tip: If the landlord lived in the property until they rented to you, consider getting ready to buy a year or two into your lease.

Discontent

It can be a hassle to chase rent and deal with the seedy side of humanity. The owner may decide renting isn’t worth the effort.

If they’re offering to sell you the property, it may be because of frustrations with another tenant.

Diversification

The landlord may simply have too much invested in real estate!

They might decide to sell the rental and either:

start a business or
invest in something more passive.

Displacement

The owner may need to relocate for any number of reasons:

a new job,
an ailing family member,
the birth of a grandchild, etc.

3. Potential Next Steps

There are steps you can take regardless of who mentions the sale first.

Your BATNA

The key to any negotiation is to know your Best Alternative To a Negotiated Agreement (BATNA).

Options

Other options give you leverage:

If you’re looking to buy a car, find at least two good models.
If you’re borrowing money, get at least two lenders to compete.
If you’re looking to buy a home, find at least two good properties.

Timeline

Timing can be a critical factor.

A renter who just signed a 12-month lease has more flexibility than someone who’s renting month to month.

A landlord with growing debt may have less flexibility than if they were debt-free.

An estate attorney may want to settle as soon as possible.

Perspective

Assume you’re going to move.

That mentality can help you evaluate the situation more clearly.

Estimate

Next, explore your options.

What would it cost to rent a similar property?
How much might it cost to buy?

Consider key factors like:

location,
number of bedrooms and bathrooms,
square footage,
lot size,
layout,
building age and condition,
school district,
view,
amenities,
HOA fees and restrictions, etc.

Identify what’s important to you. Only pay for what you value!

Based on your checklist, what would it cost to rent or buy?

Needed Repairs

You may know more about the property’s issues than anyone else - including the owner!

Make a list. Estimate the cost of each improvement.

If the repairs are necessary, deduct them from the property value.

Homeowners Association

A Homeowners Association (HOA) can significantly impact the experience of living in a property.

HOA Financials

If there’s a Homeowners Association, check its financials.

HOA fees vary greatly. There may also be special assessments which could cost extra.

Cash reserves are needed. Ask for a copy of the latest budget, balance sheet, and tax return.

Upstart HOA

It’s possible the property doesn’t yet have a Homeowners Association. That’s common if apartments are being converted to condos.

It might make sense to start one.

The residents could share information and collaborate on improvements. They might even coordinate negotiations.

Tenants may be in suboptimal units. Someone in a two bedroom apartment may benefit from downsizing while someone in a studio may need more room.

Placing multiple units on the market at once may lower the sale price of each unit and extend the time on the market.

Tip: Learn what you can from other residents if many units are being sold at once.

Limitations

A property may have other requirements - particularly with a Homeowners Association (HOA):

Installing a fence, greenhouse, or shed may not be permitted.
A garden may not be allowed - especially in the front yard.
The HOA may contract with a landscaping company, which might be an issue for someone who’d rather maintain it themself.
There may be restrictions on (or requirements for) decorating!
An owner may not be able to grill on their balcony.

Other Important Factors

Some important things may not be impact the appraised value.

Accessibility

Stairs may not be an option for someone.

While not having an elevator now could be an inconvenience, it may be a major problem later in life.

Family Friendly

Some locations are more kid-friendly than others.

It seems obvious that children can’t live in a retirement community. However, it could become an issue if something happens to adult children and grandparents assume custody.

Public school district zoning influences property values in many parts of the country. However, public schools might not matter if you plan either private school or homeschool.

A nearby park, school, or playground can be very helpful. A neighborhood liquor store, strip club, or drug dealer - not so much.

Tip: Look for other children in the neighborhood. That can impact childhood friendships, activities, babysitting, and the like.

Pet Friendly

If you’d like a pet, consider whether the location would work.

A “no pets” policy could impact your life plans. Having a yard or nearby park could be important.

Rentable

Since you’re currently renting the property, it’s likely you’d be able to rent it to someone else if you bought it.

However, it’s worth checking!

The owner may have been grandfathered into their ability to rent it. There may be a cap on what percent of a building can be rented.

Also, short-term rentals have become popular.

The rise of Airbnb, Vrbo, and other options have lifted property values in many areas.

Tip: Check whether a home can be rented either short-term or long-term before putting in an offer.

Financing

The next step is to plan the finances.

Ongoing Expense

Estimate how much you can afford to spend monthly.

Tip: Rent is essentially the maximum you’ll pay each month. A mortgage is more like the minimum.

Standard

Usual expenses include:

mortgage principal and interest,
homeowners insurance,
HOA fees,
repair and maintenance expenses,
utilities,
security, etc.

PMI

Private Mortgage Insurance (PMI) is extra.

This insurance protects the lender in case the borrower fails to make on-time payments. It’s usually the result of less than a 20% down payment.

The cost of PMI depends on many factors like the:

down payment,
credit score,
loan amount, and
mortgage type.

The annual cost is often 0.5% to 1.5% of the loan balance each year, typically paid monthly.

It’s important to remember this is insurance. PMI payments don’t lower the loan balance.

Length

One way to lower the monthly expense is to take out a longer loan.

15 and 30-year mortgages are common, though some lenders offer longer repayment schedules.

Tip: Consider the age you’d be when you pay off the mortgage.

Do you plan to work that long?

Initial Expense

The buyer can also have many upfront expenses like:

home inspection,
credit check,
appraisal,
title search,
origination,
underwriting,
mortgage points, etc.

Upfront and selling costs are why it may only makes sense to buy a property if you’re sure you’ll live there for years. One guideline is a minimum of seven (7) years.

Credit Report

It’s worth checking your credit before a lender does!

Impact

Borrowers with better credit scores tend to:

have loan applications approved more often and
pay lower interest rates.

Challenge

Seemingly small changes can have a big impact on credit scores.

After reviewing your credit report:

dispute inaccuracies,
attack fraud, and
resolve issues.

Improve Utilization

You may also be able to lower your credit utilization.

Even if it isn’t possible to impact the total, you may be able to improve your credit score by lowering high balances.

Stay Consistent

At this point, it likely doesn’t make sense to either:

request a credit limit increase or
close any accounts.

Doing so can lower your credit score.

Instead, focus on making on-time payments. Also, update your:

contact information if it’s outdated and
income information if you earn more now.

For more, check out:
How to Use Credit Reports to Improve Credit Scores

Down Payment

Benefits

A bigger down payment can:

lower the monthly mortgage payment,
avoid PMI, and
provide negotiation leverage.

Cost

A big down payment also zaps more cash.

You may need that money for unexpected expenses.

Tip: There’s little benefit to paying more than 20% down unless you pay cash for the entire purchase.

Lender Negotiation

Almost every part of a mortgage is negotiable.

BATNA

Do some research to find low cost reputable lenders.

If you have a realtor, ask them for recommendations. They may know a responsive lender who can help you close on time.

Have a least two good lending options available before proceeding.

Pre-Approval

Start the application process with your most likely lender.

You can support your formal offer with a pre-approval letter.

Be sure to ask for more than you need. You can lower the loan amount later. However, it might be difficult to be approved for more.

Seller

The seller may offer to finance the property.

Their risk could be lower because they know:

you,
your rental history, and
the property.

They have a personal relationship with you and know you pay on time.

They could also take back ownership of the property if you default on the loan.

Options

Taking steps now can help prepare you for the upcoming negotiation.

They may put you in a good position to:

buy this home,
purchase another property, or
rent another home.

Learn More

Once you know your property and financing options, it’s time to talk to the owner.

Potential Questions

Your goal is to better understand their situation.

Some potential questions include:

Have you ever lived here?
What caused you to move?
What are your long-term plans for the property?

Their Perspective

Consider the situation from their perspective.

What is their Best Alternative to a Negotiated Agreement (BATNA)?

They may want to sell at the fair market value. However, it might cost to do so.

Lost Rent

The owner may lose months of rent as they get the property ready to sell. Then, it’d be on the market until they come to terms with a buyer. After that, time is needed to prepare for and close the sale.

It may take three to six months - or more - to sell the property at fair market value. The lost rent can get expensive.

Updates

Homes often require touch-ups for normal wear and tear before listing.

A fresh coat of paint, updated flooring, and general repairs add cost.

Landscaping

It’s important to maintain or improve the curb appeal of the property. Yardwork will revert back to the owner if you move.

Staging

People need to be able to see themselves in a home.

Staging it with furniture comes with additional cost.

Commissions

One of the biggest potential cost savings is real estate commissions.

While you may be able to purchase it directly from the landlord, you might still want to work with a realtor to help:

facilitate the purchase and
find backup properties in the case the deal falls through.

However, the commissions may be substantially lower with only one realtor involved.

At the very least, the landlord could avoid the cost of showing and marketing the property.

All told, selling the property directly to you could save the landlord tends of thousands of dollars.

Inspection

It’d be ideal to get a home inspection before submitting an offer. Double-check your lease to see whether an inspection is prohibited.

Your Insight

You can access the property and are intimately familiar with it!

It likely makes sense to walk the property with an inspector.

Ask questions. Mention quirks.

Doing so can be a great way to:

learn more about the property,
uncover negotiation opportunities, and
create a punch list of items to improve.

Bids

You might take the next step and request bids for the work. However, some service providers will only submit a bid to the owner.

Nonetheless, bids can help you:

decide whether to put in an offer,
finalize your price, and
plan cash flow impacts.

Tip: Only get an inspection if you feel the owner is interested in selling.

Make a Verbal Offer

You’ve spent a fair bit of time preparing.

The next step is to ask the landlord. The answer is no unless you ask!

Let Them Know

Meet with the owner. Let them know you’d like to make an offer.

Face to face meetings are best. A video call, phone conversation, or text message might work in the right situation.

Show them you’ve prepared. You may have:

engaged a realtor,
saved up a down payment, and
been pre-approved for a mortgage.

Thank them for being good landlords (if it’s true) and for the opportunity to live in their home.

Then, ask them whether they’d be open to receiving an offer.

This may or may not come as a surprise to them. Your previous conversation(s) may have them wondering.

Their emotional responses could vary:

excited about potentially receiving a cash windfall,
worried you’ll buy another property if they don’t sell,
flattered you like the property enough to make an offer,
curious whether they should raise the rent,
sad they might part with a home that has sentimental value,
interested to hear your offer…

Keep It Reasonable

They may want to hear your offer.

Share
Mention how they could potentially save tens of thousands on:

real estate commissions,
repairs,
lost rent,
staging, and the like.

Then, share the top-line number.

If they’ve lived in the home for two out of the last five years, mention they may be able to benefit from the tax exclusion.

Then, pause. Ask them their thoughts.

I like: “That’s a lot. What questions do you have?”

**Substantiate
**They may ask how you came up with that number.

Share that you based your offer on comparable recent property sales in the area.

You don’t have to give them all the details. If you give them your exact market estimate and the discounts, they may treat it like a menu.

Anchoring is powerful:

If you share an offer, they’ll focus on that.
If you share an offer and the fair market value, they’ll focus on the higher of the two since it’s in their best interest.

Ideally, your offer would be a bit below the market price because of the owner’s hard savings. Also, never lead with your best offer.

However, you don’t want your offer to be too low. They might decline your offer outright or decide to list the property.

**Anticipate Questions
**They’ll likely want to learn more.

Fair questions include:

Are you pre-approved for a mortgage?
Which lender did you choose?
Are you working with a realtor?
How large will your down payment be?
How much would you offer in earnest money?
Are you asking for any contingencies such as an inspection, appraisal, or financing?
How soon are you looking to close?
Are you requesting any repairs or updates?
Would you be open to either rent-to-own or seller financing?
What are your long-term plans for the property?
Would you like to include any of the appliances or furniture?

However, there are other questions I wouldn’t answer directly.

How much is your pre-approved mortgage limit?
I’d say something like: “I’m pre-approved for more than my offer in case we’re unable to come to terms and I need to buy another property.”

If pressed, I’d offer to get an updated pre-approval letter for the amount we discussed and share that with the landlord.

Are you considering any other properties?
I might say something like: “I did see some interesting properties on the market when I was researching comps. However, I wanted to speak with you about this property first.”

_What is your maximum price for this property?
_I’d say something like: “While I feel this is a fair offer for the property, I’d be open to considering several aspects of the sale like repair, rent, timing, and financing.”

_What is your backup plan if financing falls through?
_I might mention something like: “I’ve had good conversations with multiple lenders. After we come to terms on the purchase, I’ll evaluate and select the best lender. The second best be my backup.”

_May show the home to other prospective buyers?
_To me, that’s a bad sign. I would proceed as though we aren’t going to be able to come to terms. I’d explore other properties.

Listing the property loses benefits of selling to you as a tenant. Showings can disrupt your life. Also, it opens up the chance of a bidding war.

However, it worked for a family member!

The landlord offered to sell her the house she and her family was renting.

She and her husband did their research and made a low - yet reasonable - offer to buy it. They kept looking for other properties.

The owner proceeded to show the property while she lived there. In the end, he didn’t receive any better offers and accepted hers!

**Expect a Counter
**If the landlord is interested, they’ll likely issue a counter-offer.

They may do so with clarification questions, a verbal counter-offer, or a written counter-offer.

Listen or read carefully. This is a bit of a dance.

The owner isn’t just saying they want more. They’re also signaling their preferences and priorities.

Items important to them might not be important to you… and vice versa. Those could be good trading opportunities.

There’s nothing more convincing than a reasonable person.

It’s possible they’ll suggest something perfectly reasonable like:

extending the lease a few months,
conducting their own appraisal, or
offering to do some of the repairs.

Tip: Regardless of what happens, thank them for their time and consideration. They’re still your landlord!

Submit a Written Offer

Once you know your offer will be well-received, submit it in writing. Be sure to have a deadline for the owner to accept or counter.

Wait

Their next step is to either:

accept your offer as-is,
submit a counter-offer, or
decline your offer / let the deadline pass.

Steps After Acceptance

Pretend they accepted your offer. Congratulations!

The remaining steps are largely administrative.

Choose a Lender

As with other transactions, it helps to have options. Get at least two mortgage offers in writing.

Then, negotiate everything. Essentially every part of a mortgage is negotiable: interest rates, fees, points, etc.

One nice thing is the landlord has a tenant - you! They may be more willing to delay closing a bit to give you more time for financing.

Finalize Funding

You’ll likely need to share many documents with your lender, including:

signed forms (application, disclosure, and purchase agreement),
income documents (pay stubs, W-2, tax return, employment verification), and
proof of funds (earnest money deposit, credit statements, bank statements, investment account statements).

You may also need to:

submit your earnest money,
explain recent money transfers or income,
get homeowners insurance,
schedule an appraisal, etc.

Tip: You may benefit from a final walkthrough of the property with your realtor. While doing so may seem silly since you live there, it can be a chance to further discuss the home and next steps with your realtor.

The loan is typically finalized at closing.

Documents
You’ll likely need to bring:

government issued photo identification,
a certified or cashier’s check for the down payment,
proof of homeowners insurance,
purchase agreement,
lender requested documents, and more.

**Your Call
**Always remember you’re the buyer.

Everyone else in this transaction has a vested interest in you paying more: the seller, realtor(s), lender, etc.

However, you have the power to stop at any time before closing. While you could lose your earnest money, you might avoid bigger expenses.

Hey, thanks for reading my post about designating beneficiaries.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for Tech Professionals in May

Kevin Estes — Wed, 30 Apr 2025 01:48:39 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to the May steps in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Nearly Summer

Families with school-age children are BUSY. If that’s you, you’ve got this!

Fortunately, summer’s almost here.

Potential Steps for Tech Professionals This Month

Steps tech employees might take in May include:

Review tax withholding (Form W-4)
Update goals and financial plan
Check student loan / other debt balances
Fund education savings
Schedule fall Paid Time Off (PTO)

1. Review Tax Withholding (Form W-4)

Having to pay with a tax return could be unnecessarily painful.

Owe Often?

Taxes can pinch cash flow.

Also, assets may need to be sold to cover the payment. That can increase this year’s taxes.

Someone who owes may also incur interest charges or penalties.

Tax software often recommends making payments throughout the year to avoid a big tax bill.

Consistent Refund?

However, there are downsides to refunds.

Some credits are non-refundable. A taxpayer might pay more in tax because they paid early!

Also, getting a refund is like giving the government an interest-free loan. That matters more when interest rates are higher.

Unique Situations

Less tax may be withheld than needed in certain situations.

Bonuses - only 22% of bonuses might be withheld for an employee in the 35% tax bracket.
RSUs and PSUs - only 22% of Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) may be sold as they vest to cover taxes. Remember: vests are treated like income.
Other Business Income - a side business or rental can increase taxes. Making quarterly estimated payments can help.

W-4 Withholding

Form W-4 is about more than adding and removing family members.

For instance, someone might declare fewer dependents than they have to spread tax payments throughout the year. They can also withhold additional state and federal taxes from each paycheck.

Cash Flow

Before making a change, it’s important to consider the impact on take-home pay. Would each paycheck be enough to cover living expenses?

Bonuses are often paid early in the year. Restricted Stock Units may also vest then. Extra income can help pay a tax bill.

How to Update

Companies usually post Form W-4 and its instructions on their intranet.

If not, a Human Resources (HR) teammate will have access and know how to update it.

2. Update Goals and Financial Plan

I think of finances like surfing.

We can plan but some things are beyond our control:

there may be a perfect wave,
often there’s a lot of waiting, and
watch out for sharks!

Refresh Goals

Situations change.

Someone could expect to pay in-state tuition until their child:

gets a full-ride scholarship or
is accepted to an Ivy League school.

The stock market might rise or fall 20% one year… or more!

Someone could get promoted or laid off.

A couple might plan to retire to a warmer climate and then decide to stay put once grandchildren arrive.

Update Plans

Major changes impact a financial plan. That’s life!

I like what Dwight Eisenhower said:

Plans are useless,
but planning is indispensable.

It’s unfortunate how software often judges a financial plan. Monte Carlo simulations estimate the odds of “success.”

It’s not really about success or failure. It’s about how much to adjust - and in what direction.

3. Check Student Loans / Other Debt Balances

Now’s a good time to check loan balances.

Student Loans

Paying off student loan debt may be a low priority:

interest rates could be reasonable,
loans may be forgiven with consistent on-time payments, and
they’re typically discharged at death.

Investing and saving could leave more to loved ones. “Die with debt” may be a valid plan!

Consumer Debt

The snowball and avalanche methods are two ways to pay off debt.

Snowball

The snowball method pays off the smallest balance first, then the next smallest, and so on.

Pros

Wins now - creates momentum by paying off debts
Cuts payments - eliminates payments on repaid accounts
Lowers complexity - limits the number of balances to manage

Cons

Pays more interest - does not prioritize higher interest debt
Improves credit slower - maintains larger account balances
Slows repayment - continues to pay higher interest rates

Avalanche

The avalanche method pays off the balance with the highest interest rate first, then the next highest rate, and so on.

Pros

Minimizes interest - repays the highest interest debt first
Improves credit faster - lowers credit utilization quicker
Maximizes repayment - pays debt down faster

Cons

Wins later - pays off the smallest balance slower
Keeps payments - requires monthly payments on more accounts
Maintains complexity - carries more credit balances

4. Fund Education Savings

Late spring is also a good time to save for education. The right saving vehicle could depend on a family’s location, income, and assets.

Location

States without income tax like Washington and Texas offer no immediate tax benefit for saving to a 529 plan.

Other states like California and Kentucky don’t allow 529 plan contributions to be deducted.

The benefits depend on each state’s:

marginal income tax rate,
state tax deduction cap,
deduction or credit structure,
taxpayer or beneficiary limit,
tax parity policy, and more.

Income

While 529 plans don’t have an income limit for contributions, other tax advantages do.

The 2024 income limits include:

Contribute $2,000 to a Coverdell Education Savings Account with Modified Adjusted Gross Income below $110,000 single or $220,000 married, filing jointly.
Receive an American Opportunity Credit of $2,500 per student with Modified Adjusted Gross Income below $90,000 single or $180,000 married, filing jointly.
Earn a Lifetime Learning Credit of $2,000 per return with Modified Adjusted Gross Income below $90,000 single or $180,000 married, filing jointly.
Exclude income tax on EE or I Bonds with Modified Adjusted Gross Income below $111,800 single and $175,200 married, filing jointly.
Deduct student loan interest paid with Modified Adjusted Gross Income below $95,000 single and $195,000 married, filing jointly.

Additional restrictions and phaseouts apply. Some of the income limits change annually.

Assets

Who owns family assets can impact a student’s financial aid.

Up to 5.64% of assets owned by a parent count toward the Student Aid Index (SAI).
However, the SAI includes up to 20% of assets owned by the student.

Each school uses its own calculations for financial aid. For instance:

Northwestern University includes home equity when calculating financial aid whereas
Stanford University does not.

5. Schedule Fall Paid Time Off (PTO)

You've already scheduled your summer vacation, right?

If not, now’s a good time to plan both summer and fall:

rentals and hotels book,
flight prices rise, and
calendars fill.

It’s not just the schedules of friends and family members that matter. It's also your coworkers’!

Scheduling Paid Time Off (PTO) early is like calling dibs.

For more, check out: Schedule Your PTO ASAP.

Hey, thanks for reading my post on potential financial steps for tech professionals in May.

Just a reminder, I share a lot of resources that can help you.

Who Should Be My Beneficiary?

Kevin Estes — Wed, 23 Apr 2025 08:41:32 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home. We'll get to account beneficiaries in a moment.

But first - here are some links you may want to save for later.

I Changed Jobs. Should I Roll Over My 401(k)?

Now, let's get on to the blog! 😀

Three Parts

A beneficiary receives the benefit of an account or policy after the owner’s death.

It’s important to designate beneficiaries carefully. However, it can be tough to choose!

This article has three parts which may help you select your beneficiaries:

Importance of naming a beneficiary
Primary and secondary beneficiaries
Account type considerations

1. Importance of Naming a Beneficiary

An account beneficiary takes priority over someone named in a Last Will & Testament. The assets will go to the beneficiary listed on the account even if the will specifies someone else should receive them.

When an account passes by beneficiary designation, the process is relatively quick, private, and inexpensive.

Naming a beneficiary can:

avoid probate,
coordinate the estate plan, and
ease the burden on loved ones.

Avoid Probate

Passing assets through probate can be slow, public, and expensive. It can be a complete hassle during an already difficult time.

Provides Quicker Access to Funds

The American Bar Association estimates:

The average estate completes the probate process in six to nine months.

Instead of waiting months or even years if a will is contested, the account may change ownership after the beneficiary submits:

a death certificate and
proof of their identity.

A quick turnaround can be especially helpful for bank accounts, which might pay:

medical bills,
funeral expenses, and
loved ones’ living expenses.

Keeps It Private

Because probate is public, it can bring some unwanted attention.

The publicity may inspire some hustlers to either file false claims on the assets or attempt to profit from the beneficiaries.

Reduces Legal and Administrative Costs

The cost of probate typically grows with size and complexity.

There may be fees for each filing, certificate, executor, appraisal, postage, valuation, storage, estate sale, and more.

Coordinate the Estate Plan

Naming beneficiaries is an important part of a broader plan.

Taking a structured approach may help:

minimize lifetime and estate taxes,
ensure assets go to the right beneficiaries, and
mindfully support all loved ones.

May Provide Tax Advantages

More Benefits
Passing accounts to the right people can yield tax benefits.

A spouse may extend a retirement plan or Health Savings Account.
A capital gain may avoid tax with a step-up in basis,
A 529 plan may go to someone who can use it.

Fewer Costs
Careful planning may also avoid:

adding to a beneficiary’s tax burden during peak earning years,
driving up the cost of Medicare for recipients, or
losing Medicaid, special needs, or other governmental benefits.

Lower Tax
Some actions could reduce or eliminate estate and inheritance taxes.

Helps Protect Assets

Many accounts are protected from creditors. This feature could come in handy for an heir with a history of overspending, gambling or addiction.

Maintains Flexibility

Beneficiary designations can usually be changed.

That’s important because plans may adjust with: marriages, births, divorces, and deaths.

It’s unlikely someone would willingly keep their ex-husband or ex-wife as an account beneficiary!

Ease the Burden on Loved Ones

Clarifies Intentions

Without a beneficiary designation, the assets would pass based on the Last Will & Testament or state intestacy laws.

A will can be challenged. That’s more likely if family members are unaware of your intentions.

State laws simply may not align with your wishes.

For instance, beneficiary designations are especially important for unmarried partners. A loved one might not receive anything based on state law!

Reduces Conflict

Taking an intentional approach to estate planning can also help reduce conflict - especially within a family.

Fair may not mean equal.

Communicating to each person what they may receive can help set expectations and uncover areas of concern.

Taxes, timing, and effort could have a major impact. Inheriting a checking account isn’t the same as taking over a business!

Manages Unique Circumstances

Family Members
Some individuals may warrant additional attention.

A minor child may need an adult to care for them or manage their inheritance. There could also be generation-skipping tax impacts.

An adult beneficiary with limited cognition, poor money management skills, or an addiction may not be able to handle a direct inheritance. It’s possible a HEMS, spendthrift, incentive, or discretionary trust may work best in these situations. Please consult an attorney.

Giving assets to an atypically abled individual could impact their government or other benefits. Depending on the situation, a Special Needs Trust (SNT) or ABLE account may work better.

Blended families have unique challenges. For instance, a Qualified Terminable Interest Property (QTIP) trust may direct assets to children from a previous marriage after the death of a spouse.

**Charities
**Loved ones might not share your charitable inclinations. Even if they do, they may give to a different charity!

It could be appropriate to name a trust as a beneficiary to:

protect individuals,
manage funds responsibly, or
give to charity in a tax-efficient manner.

Unique Assets
Some assets may fit one beneficiary better than others:

A home may be easier for a nearby family member to manage than one who lives hundreds of miles away.
Someone who appreciates a work of art may either enjoy it more or ensure it fetches a fair value if they were to sell it.
A family member who’s active in the business may be a more natural fit than someone who works in an unrelated field.

2: Primary and Contingent Beneficiaries

Although naming a beneficiary is important, it’s not enough.

A second or third beneficiary may be needed. It also makes sense to discuss the plan with the impacted adults.

Backup Plan

Predeceased

Beneficiary designations need to be updated regularly. Unfortunately, one or more of them may pass before you do.

They could also pass at about the same time. That situation is more common with transportation accidents.

Unable to Locate

Sometimes, the primary beneficiary can’t be located.

That’s part of why beneficiary forms often request the name, contact information, Social Security number, and other information of the beneficiary. It can help the company find them!

Impact

Without another beneficiary, the account may be subject to probate.

That can be slow, public, and expensive. Worse, it might not honor the owner’s wishes!

Solution

One option is to name contingent beneficiaries.

The owner could name a second, third or more beneficiaries in case the first is unavailable.

Example
Imagine a husband and wife have a young daughter. The wife has a trusted sister who’s savvy with money.

The couple named each other as their primary beneficiary. If the husband dies, everything would go to his wife and vice versa.

The husband and wife could each take the next step and name their daughter as the secondary beneficiary. That way, if they both die in an accident, everything would go to their daughter.

While that may make sense if the daughter is a teenager, it might not if she’s three!

Instead, it could make sense to name the sister as both the daughter’s guardian and secondary beneficiary of the assets.

The issue with this setup is that once the sister becomes the account owner, she might spend it on something other than her niece!

Instead, it may make sense to name a trust as the secondary beneficiary. The trust could be set up to benefit the couple’s daughter. The wife’s sister may serve as trustee.

Of course, it’s important to discuss the plan with the sister before establishing the trust!

It could be a nasty shock for her to learn of her responsibilities while she’s grieving. The decision might also come as a surprise to other family members who might fight to care for the daughter, assets, or both!

Intent Signal

As the example above notes, an account that passes directly to a beneficiary becomes their property. They can typically use the assets however they like and can change the beneficiary to someone else.

Ensuring the assets would eventually go to a third beneficiary could require another setup like a trust.

However, establishing a contingent beneficiary does signal who you might like to receive any remaining assets. There’s no guarantee the primary beneficiary will honor that preference.

Disclaimers

A beneficiary may not want the inheritance.

That’s more common if they:

already have what they need,
would prefer not pay the taxes, and
feel the next person in line could benefit more.

They might use a written disclaimer to decline the inheritance and allow it to pass to the contingent beneficiary.

Example
Let’s say the couple above named the:

trusted sister as secondary beneficiary and
daughter as tertiary beneficiary.

Assume the parents didn’t die in an accident. They both passed decades later from natural causes.

However, they never updated their beneficiaries!

The wiser and wealthier sister is set to inherit the account. However, she neither needs nor wants it.

She decides it would be simplest to disclaim the inheritance, which she does in writing. The assets then pass to her niece.

Part 3: Account Type Considerations

Rules vary by account. These differences can impact decisions.

Common account types with beneficiaries include:

bank,
Roth retirement,
taxable brokerage,
life insurance,
529 plan,
Health Savings Account, and
traditional retirement.

Bank Account

Checking and savings accounts may be the first to transfer upon death.

How They Pass

Bank accounts typically transfer by:

joint ownership,
Payable On Death (POD), or
probate according to a will.

Joint Accounts
Joint checking and savings accounts are co-owned by multiple people.

These accounts often have rights of survivorship. The surviving owners automatically inherit what an owner had when they died.

A joint account can be especially helpful in case of disability. The other account owners may use the money to help the disabled individual.

**Payable On Death (POD)
**Bank account owners usually name a beneficiary with a Payable On Death (POD) designation.

After the owner's death, the beneficiary will likely need to provide:

a copy of the death certificate and
proof of their identity.

Will
If no beneficiary is named, the account will likely go through probate. That could delay funds and incur additional costs.

Use of Funds

Once a beneficiary gains access, they can start to use the funds.

Taxation of Funds

Estate Tax
The balance would be included in the estate and could impact estate and/or inheritance taxes.

Income Tax
Income earned on the account after death is generally taxable income to beneficiaries.

Required Distributions

There’s rarely any requirement to distribute funds from the account after someone inherits them.

Creditor Protection

Bank accounts have few creditor protections. The funds are also liquid.

It may make sense to name another beneficiary or a trust if there's a chance the funds would be used unwisely.

Special Considerations

Gift Tax
Deposits to a joint checking account can result in a gift to the other owner(s). After all, they could use the funds!

While small sums would likely fall below the $19,000 annual exemption, more deposits could dip into the lifetime gift and estate tax exclusion.

Gifts to a spouse generally qualify for an unlimited marital deduction. However, there’s an annual exclusion limit for non-U.S. citizen spouses.

Ideal Beneficiaries

Bank accounts often pass to individuals. Common beneficiaries include a spouse, dependent, or business partner.

Roth Retirement Account

After-tax accounts like a Roth 401(k), 403(b), 457, or IRA have already been taxed. Leaving them to individuals can be especially helpful.

How They Pass

Beneficiary

Roth accounts generally require the owner to designate at least one beneficiary. That's a common and direct way to pass the accounts.

Will

As with other accounts, beneficiaries take priority over a will.

If no beneficiary is named, the account would go through probate.

Use of Funds

The beneficiary can access the funds once they're the account owner. They may need to sell investments to transfer cash.

However, cashing out right away may not be the best move.

Taxation of Funds

Estate Tax

Roth accounts will be included in the estate and could be subject to estate and/or inheritance taxes.

Income Tax

The biggest benefit of Roth accounts is that distributions usually aren't taxed as income.

The owner paid income taxes before they made the contributions! After that, funds grow and may be withdrawn tax-free.

Required Distributions

While Roth accounts don't have Required Minimum Distributions (RMDs), funds may still need to be distributed.

A spouse who inherits a Roth account is able to treat it as their own. They can keep the funds in the account.

Other individuals may need to distribute all funds within about a decade of the owner's death.

Also, the withdrawal of earnings may be subject to income tax if the Roth account is less than 5-years old.

Creditor Protection

Roth retirement accounts generally have strong creditor protections.

Special Considerations

It may make sense to keep funds in a Roth as long as possible since:

they can continue to grow tax-free and
stay protected from creditors.

Ideal Beneficiaries

It generally makes sense to leave Roth accounts to an individual instead of a charity. Distributions from the account will likely be tax-free.

Spouse

A spouse is a common choice - especially since they can treat the account as their own.

Individuals

Other loved once be good choices:

Adults in their peak earning years could benefit from tax-free funds.
Younger adults might have decades of investment growth.
Minor children may be able to delay withdrawing funds from the account more than 10 years.

However, leaving a Roth account to a minor child is complicated:

A parent or other trusted adult would need to manage the funds.
The funds could impact the student’s ability to receive financial aid from a school.

Taxable Brokerage Account

How They Pass

Three ways a taxable brokerage transfers after death include:

Joint Tenants With Rights of Survivorship (JTWROS),
Transfer On Death (TOD), and
a Last Will & Testament.

Joint Tenants With Rights of Survivorship (JTWROS)

Many taxable accounts are owned jointly by multiple people and include rights of survivorship.

As with a joint checking or savings account, the surviving owners inherit funds after an owner dies.

A joint account can also help if one of the owners suffers a disability. Since balances are often larger for taxable brokerage accounts, they may have more resources to support in a time of need.

Transfer On Death (TOD)

Taxable brokerage account owners can often designate a beneficiary using a Transfer On Death (TOD) designation.

As with a Payable On Death (POD) designation for bank accounts, a beneficiary would likely need to provide:

a copy of the previous owner’s death certificate and
proof of their own identity.

Will

If no beneficiary is named, the account will likely go through probate. That could delay funds which may be needed quickly and incur additional costs.

Use of Funds

The new account owner takes control of the funds. They may need to sell the investments before transferring cash.

Taxation of Funds

Estate Tax

The value of a taxable brokerage account will be included in the estate and possibly subject to estate and/or inheritance taxes.

Income Tax

However, one big benefit is that the investments in a taxable brokerage account typically receive a step-up in basis.

That generally means the investments are treated as if the new owner purchased the investments when the previous owner died.

TOD Example

Let's say a mother bought shares of a company for $100,000.

The company had many good years and the investment grew to be worth $1,000,000 at the time of her death.

When her daughter inherited the investment, it was as if she paid $1,000,000 for it the day her mother passed. If the daughter sells it immediately, neither the mother nor the daughter would pay capital gains tax on the $900,000!

The funds were taxed through the combined gift and estate tax system. Both state and federal taxes may apply.

JTWROS Example

Let's use the same example and assume the mother co-owned the account Joint Tenants With Rights of Survivorship (JTWROS) with her husband from the start.

In that case, half of the account would be stepped up in value upon her death:

Her original investment of $50,000 would be stepped up to $500,000.
The husband would be left with an account worth $1,000,000 with a basis of $550,000: his $50,000 cost and her $500,000 basis.

If he sold the investment for $1,000,000, he'd likely need to pay tax on $450,000 of long-term capital gains.

Required Distributions

Another benefit is that funds in taxable brokerage accounts generally aren’t required to be withdrawn.

The federal government’s comfortable collecting taxes on interest, dividends, and capital gains!

Creditor Protection

Taxable brokerage accounts have few creditor protections.

It may make sense to name another beneficiary or use a trust if there's a chance the funds would not be used prudently.

Special Considerations

Financial Aid

Leaving taxable brokerage accounts to parents or children can impact financial aid for education.

Taxable brokerage accounts are counted both in the Free Application for Federal Student Aid (FAFSA®) and in individual schools' calculations for financial aid.

Step-Down in Basis

If an investment falls in value before death, it's possible it will receive a step-down in basis.

Let's assume the reverse of the situation above.

The original investment was $1,000,000. It fell in value to be worth only $100,000 at death.

That $900,000 of long-term capital losses may not lower taxes!

Because of the tax benefits, it often makes sense to sell investments that have fallen in value. Doing so may also help an investor diversify.

However, someone with a large unrealized investment loss near the end of their life may not be able to benefit from the tax deduction. The net capital loss deduction is generally $3,000 a year.

In that case, they may be ahead to gift the investment to an individual.

Additional Vesting

It's possible a taxable brokerage account could receive additional shares of company stock after an employee’s death:

stock options and Restricted Stock Units (RSUs) may vest and
stock may be bought with an Employee Stock Purchase Plan (ESPP).

That could be one reason not to transfer an account immediately.

Receipt of additional stock would likely result in additional income taxed either to the estate or beneficiaries. However, an heir might not incur additional taxes if they sell those shares once they receive them.

UTMA/UGMA

Some taxable accounts are:

owned by a minor child (often a child) and
cared for by an adult (often a parent).

The adult serves as the custodian.

Uniform Transfers to Minors Act (UTMA) accounts have largely overtaken Uniform Gifts to Minors Act (UGMA) accounts since states have adopted the UTMA laws.

It's important to decide who would care for the account if the custodian were to pass.

Also, these accounts:

could significantly impact financial aid since they're treated as a student asset and
would automatically become available to the child once they reach the age of majority (usually 18).

Other account types may be a better option.

Ideal Beneficiaries

Individual

Because of the step-up in basis and nearly immediate access, it often makes sense to name individuals as beneficiaries.

If someone is charitably inclined, they could give highly appreciated assets to charity instead of cash throughout their life.

Doing so could:

avoid taxes on the gain and
receive a full tax deduction.

A Donor Advised Fund (DAF) or similar structure can facilitate such donations.

Life Insurance Policy

How They Pass

Pure life insurance is a promise made by an insurer to pay a certain death benefit to a beneficiary.

Use of Funds

The benefit is typically paid once the life insurance claim is processed.

Documents

A beneficiary will likely need to submit the following:

a completed claim form,
a copy of the death certificate, and
the insurance policy document.

The insurer may require the beneficiary to submit other supporting documents as well.

Lump Sum or Annuity

Many insurance policies offer beneficiaries the option to either receive a lump sum or a steady stream of payments known as an annuity.

Annuity payments are often paid monthly.

Whether to take the lump sum or the annuity depends on the situation. A lump sum may be invested wisely or squandered depending on how a recipient manages it.

An annuity provides guaranteed income - often for the rest of the beneficiary's life.

However:

there could be tax implications,
the implied interest rate may be lower than other investments’, and
the length of the beneficiary's life is uncertain.

Taxation of Funds

Estate Tax

Life insurance benefits often aren't included in an estate.

However that may not be the case if the deceased had incidents of ownership with the policy like the ability to:

change the beneficiary,
surrender the policy, or
borrow against the cash value.

The estate tax is less of an issue at the federal level since the exclusion is $13.99 million for 2025.

However, some state exclusions are much lower. For instance, the Oregon estate tax starts at only $1 million.

An Oregonian with incidents of ownership in a $1 million life insurance policy and any other assets could be subject to estate tax!

Income Tax

Life insurance benefits are generally tax-free.

However, any interest received on the funds is taxable.

Required Distributions

A beneficiary may need to choose to either receive:

a large lump sum payment now or
smaller regular payments over time.

Creditor Protection

Life insurance policies are generally protected from creditors.

However, the benefits are paid in cash which could be seized in the event of bankruptcy.

Special Considerations

Need May Fall

When we work, we trade:

human capital (hours) for
financial capital (money).

Hopefully we save and invest some if it!

When we're young, we have a lifetime of future earnings at risk. As we age, future earnings fall and our investments generally grow.

We may need less life insurance as we age.

Family Goals

Life insurance can fund major goals like:

paying off consumer debt,
replacing income,
paying off a mortgage, and
funding education.

This is known as a DIME life insurance estimate.

Divorce

Maintaining life insurance may be a requirement as part of a divorce decree or other agreement.

The proceeds can fund alimony or child support payments.

Trust

Life insurance often plays well with trusts. This pairing can fund major goals with the support of a trustee.

Business

Life insurance can be especially helpful for businesses.

They can facilitate buy/sell agreements or provide liquidity after the loss of a key employee.

Ideal Beneficiaries

Because of the tax-free benefits, it often makes sense to name a person as a life insurance beneficiary.

529 Plan

How They Pass

Often, a parent or grandparent owns a 529 plan on behalf of their child or grandchild.

The plan requires a named beneficiary. Fortunately, the beneficiary can be changed to another family member.

Whether the child or another adult would become the owner depends on the terms of the 529 plan. Some plans allow the original owner to specify a successor owner.

Use of Funds

A 529 plan - also known as a Qualified Tuition Program - is designed to provide a tax break for saving for education.

Contributions may:

lower state income taxes on the front end,
grow tax-free, and
be withdrawn tax-free if used for qualified education expenses.

If distributed funds aren’t used for education, the gain will likely be taxed and incur a 10% penalty.

Another Family Member

It's possible to change the beneficiary of a 529 plan.

Another family member is ideal. That may even include the owner or their spouse!

It's technically possible to name a non-family member as beneficiary. However, the investment growth would likely be taxed and incur a 10% penalty upon withdrawal.

Exceptions

There are exceptions to the 10% penalty if the beneficiary:

receives a scholarship,
attends a military academy,
becomes disabled, etc.

Rollover to a Roth IRA

A new provision was added starting in 2024.

Up to $35,000 of 529 plan funds can be rolled over to a Roth IRA.

Some of the many restrictions include:

the account must have been open at least 15 years,
contributions must have been made at least five years before to the distribution, and
the annual rollover amounts are limited to the Roth IRA contribution limits for the year.

Taxation of Funds

Estate Tax

In many ways, the IRS treats 529 plan contributions as a gift.

For instance, how much can be contributed each year is based on the gift tax exclusion - $19,000 for 2025.

An individual can contribute up to five years' worth of gifts at once ($95,000 = $19,000 * 5 years ). This is known as superfunding a 529 plan.

The person contributing would then be unable to give other gifts to the beneficiary for the next five years without dipping into their combined gift and estate tax lifetime exclusion.

Because it's largely treated as a gift by the IRS, a 529 plan balance is generally excluded from the owner's estate.

Some of it may be included in the estate if they:

named themself as a beneficiary or
superfunded the account within five years of their death.

529 plan investments do not receive a step-up in basis upon the death of the owner.

Required Distributions

It's rare for there to be required distributions on a 529 plan.

A family may be able to compound tax-free growth for decades to build up the balance for future generations.

Some states cap the value of a 529 plan. However, that may be solved by redirecting funds to another family member’s account.

Creditor Protection

A 529 plan may be protected from bankruptcy if the beneficiary is a dependent of the owner.

That aligns with the IRS treatment of 529 contributions as gifts.

Special Considerations

Financial Aid

A 529 plan owned by a parent or child is treated as a parent asset.

An advanced planning technique is to transfer ownership to a trusted grandparent.

Doing so could:

remove the 529 plan balance from financial aid calculations
while ensuring the funds are used for the benefit of the student.

State Rules

Not all states follow the federal definition of qualified education expenses. 529 plan distributions not taxed at the federal level may still be taxed by the state.

Ideal Beneficiaries

It's generally best to choose a family member as the beneficiary. One who's similar in age or younger is ideal.

However, transferring a 529 plan to a minor child has its own challenges.

They might:

invest it poorly or
withdraw funds for non-qualified education expenses.

Instead, it may make sense to name the parent of a minor child as the beneficiary.

Health Savings Account

How They Pass

Health Savings Accounts (HSAs) typically allow beneficiaries.

If the owner is married, it’s usually ideal to name their spouse.

Use of Funds

If the spouse is a designated beneficiary, the HSA will be treated as their own account after death.

If someone else is the beneficiary, the following happens upon the death of the HSA owner:

the account stops being an HSA and
the entire balance becomes taxable income to the beneficiary.

Taxation of Funds

Contributions

Health Savings Account contributions may:

lower taxable income the year contributed,
grow tax-free, and
be withdrawn tax-free if used for qualified medical expenses.

For more, check out: Pros and Cons of a Health Savings Account.

Estate Tax

Who receives the Health Savings Account determines whether it is included in the taxable estate.

If a person or charity is named the beneficiary, the HSA is excluded from the estate.
If the estate is the beneficiary (or there is no beneficiary), the HSA is included in the taxable estate.

That could be yet another reason to name a beneficiary!

Income Tax

HSA funds used to pay qualified medical expenses for the owner don't generate taxable income.

If the beneficiary is a spouse, funds used for their qualified medical expenses won't be taxed.

However, the tax treatment for a non-spouse is ugly.

The entire account is considered taxable income in the year of the owner's death. For large Health Savings Account balances, this additional taxable income can result in a significant tax bill.

Required Distributions

There are no required distributions if the spouse is a beneficiary.

If the beneficiary isn’t a spouse, the entire account is automatically recharacterized to no longer be a Health Savings Account.

All funds are essentially distributed.

Creditor Protection

Whether a Health Savings Account receives creditor protection could depend on state law.

Special Considerations

Medicare Restriction

Once someone enrolls in Medicare, they can no longer contribute to a Health Savings Account.

That may limit the benefit of the HSA to a surviving spouse.

Long-Term Care

A Health Savings Account can be used to pay for:

qualified medical expenses,
long-term care insurance,
health care continuation coverage (COBRA),
health care coverage while receiving unemployment benefits,
Medicare premiums
and other health insurance if age 65 or older.

End of life care can represent a large percentage of total lifetime medical expenses.

It might make sense to keep a significant Health Savings Account balance despite the estate planning challenges.

Late Life Reimbursements

Someone who saved receipts for their medical expenses and hasn't submitted them for HSA reimbursement may be able to do so late in life.

It's important for a Health Savings Account to only be distributed after the account's been used to pay for the deceased's medical expenses.

Ideal Beneficiaries

Spouse

The spouse of an HSA owner is often the ideal beneficiary.

They can:

treat the Health Savings Account as their own,
avoid having to distribute the funds, and
pay income tax on the distributions.

Charity

It may make sense to name a charity as a primary or secondary beneficiary if:

the owner is unmarried,
the account owner's loved ones have what they need, and
the owner is charitably inclined.

Giving this account to charity could avoid the headache of having to pay income taxes on the entire balance.

Traditional Retirement Account

Pre-tax (traditional) retirement accounts include 401(k), 403(b), 457, Individual Retirement Arrangement (IRA), and other account types.

In general, contributions:

lower taxable income when contributed,
grow tax-deferred, and
are taxed when withdrawn.

Think of it like an orchard. The seed isn’t taxed but the harvest is.

How They Pass

Traditional retirement accounts often require at least one beneficiary.

As with other accounts, the beneficiary designation takes priority over someone named in the owner's Last Will & Testament.

Use of Funds

There generally aren't restrictions on how the money can be used.

However, the timing of distributions depend on who the beneficiary is:

A spouse could treat the retirement account as their own.
A non-spouse may need to withdraw all funds within 10 years.
A beneficiary who isn’t an individual (estate, charity, trust, etc.) may need to distribute it within five years.

Taxation of Funds

Estate Tax

Traditional retirement account balances are included in the owner's estate, which could increase the estate and/or inheritance taxes.

Income Tax

Distributions to individuals are generally taxed as ordinary income.

The government gave the original owner a tax break when they contributed the funds, allowed the investments to grow tax-deferred, and now wants its money!

The beneficiary pays taxes the owner didn't.

No Penalty

There's typically a 10% penalty for distributing funds before someone turns age 59.5. The death of the account owner is an exception.

Required Distributions

Required Age

Because the government gets impatient, it requires individuals to start distributing funds once they reach a certain age.

That age is currently 73.

However, it's scheduled to rise to age 75 by 2033.

Continue RMDs

If the deceased had started taking Required Minimum Distributions, the beneficiary will generally need to continue taking them.

It’s jokingly called the Pringles Rule: once you pop, you can't stop.

Start RMDs

An "eligible designated beneficiary" includes:

the spouse or minor child of the deceased account holder,
a disabled or chronically ill individual, or
someone not more than 10 years younger than the deceased.

These people can start taking distributions over the longer of:

their own life expectancy and
the deceased's life expectancy based on standard tables.

They can also follow the 10-year rule.

10-Year Rule

A beneficiary may need to empty the entire account by the 10th year following the year of the owner's death.

The extra year is presumably to allow some time for administration.

The deceased must not have already reached their required beginning date for minimum distributions.

Creditor Protection

Traditional retirement accounts have strong creditor protections. It may make sense to leave funds there so creditors can’t reach them.

Special Considerations

Distribution Impacts

Since distributions from a traditional retirement count as taxable income, they can impact a variety of expenses.

Beneficiaries may be taxed at a high rate. The income may have been taxed at a lower rate before the owner’s death!

Extra income can also impact Medicare costs for Parts B and D. These additional monthly costs are known as the Income-Related Monthly Adjustment Amount (IRMAA).

Retirement plan distributions also raise the adjusted gross income used in the Free Application for Federal Student Aid (FAFSA®). Leaving a retirement account to a parent with school-age children can increase their cost of college.

Cost Basis

A retirement account can have a non-taxable cost basis.

That typically occurs when:

a contribution couldn’t be deducted or
non-taxable funds were included in a rollover.

It's important to track these after-tax funds using Form 8606.

Distributions may be partially taxable and non-taxable. This is known as the pro rata rule and can get complicated.

For a defined contribution retirement plan like a 401(k), it may be possible to make two simultaneous rollovers:

one to a traditional (pre-tax) IRA and
one to a Roth (after-tax) IRA.

It may be possible to isolate the after-tax portion of a traditional IRA by removing the taxable portion.

Two potential options are to:

roll the taxable portion to an employer-sponsored plan or
use it for Qualified Charitable Distributions (QCDs).

Proactive steps can help prevent headache and double-taxation.

Ideal Beneficiaries

Spouse

A spouse is an ideal beneficiary. They have the most options.

Eligible Designated Beneficiary

Others with the preferential status include a:

minor child of the deceased,
disabled or chronically ill individual, or
individual who is not more than 10 years younger than the deceased.

Charity

Because of the taxes and Required Minimum Distributions (RMDs), leaving these accounts to charity may be a viable option.

Of course, doing so wouldn’t make sense if loved ones need the funds.

Account Type Summary

Here’s a summary of some of the major factors when choosing account beneficiaries for different account types:

Also, here’s a review of beneficiaries who may be a good fit for each account type.

Hey, thanks for reading my post about designating beneficiaries.

Just a reminder, I share a lot of resources that can help you.

What to Do When Stocks Drops

Kevin Estes — Wed, 09 Apr 2025 05:47:44 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home. We'll get to stock market drops in a moment.

But first - here are some links you may want to save for later.

Risk Capacity Matters More Than Risk Tolerance

Now, let's get on to the blog! 😀

Three Parts

It can be scary when markets fall.

Our net worth dips. We have fewer resources available. There’s no way to know how far stocks will fall.

However, things may not be as bad as they seem. There are steps you can take.

This article has three sections:

Not as Bad as the Headlines
Back to Basics
Current Opportunities

1. Not as Bad as the Headlines

No Major Changes

It’s important to put a stock market drop in perspective.

Often, nothing really important has changed.

Health

Health is wealth. Worrying about money could impact that!

It may help to:

go for a walk,
take a hike,
work out…

Physical activity can improve your mental state.

Community

Now could be a good time to lean into your network:

spend time with friends and family members,
connect with acquaintances, or
help out neighbors.

A down market isn’t the end of the world!

Consider April 4th, 2025. The market had fallen about 10% in two days following President Trump’s tariffs.

As usual, I took my daughter to swim practice in Seattle and then walked our dog to Volunteer Park. It was a beautiful day!

Friend groups were picnicking on blankets. We stopped several times for good conversations… and belly rubs!

The stock market never came up. It simply wasn’t as important as living in the moment.

Goals and Situation

Consider whether anything fundamental has changed:

Have your goals shifted?
What about your income?
Do you need the money any sooner?

Time Horizon

People almost always need investment growth to achieve their goals.

The longer someone has before they need the money, the more time they have for investments to recover.

That’s why short-term goals need to be funded with stable assets like high-yield savings, money market mutual funds, and cash.

Money needed later can be invested for long-term growth.

Risk Tolerance

It’s easy to say we’re willing to take risk when stocks are rising. However, risk tolerance is really how we feel and what we do when markets fall.

There’s a saying: smooth seas don’t make skilled sailors.

Part of the Process

There was one (1) official recession from the middle of 2009 through March 2025. That was the brief drawdown caused by the COVID-19 pandemic in early 2020.

An entire generation of American investors has never experienced a prolonged recession!

Each market correction starts a little different. However, they all seem to end about the same.

Stock markets fall from time to time. it’s a natural part of the process! Investments with less risk typically earn a lower return.

Volatility is the price we pay for the returns we want.

Allocation

Net worth often falls less than the stock market. Fortunately, not all of our eggs are in that basket!

Allocation is a fancy term for how much someone has invested in asset types like:

U.S. stocks,
international stocks,
bonds,
real estate, and
cash.

An investor’s target allocation depends on their:

goals and situation,
time horizon, and
risk tolerance.

It does not depend on what’s going on in the market!

Reserve Fund

A cash reserve fund is important in case of unexpected:

emergencies and
opportunities.

Emergencies

Things happen. A:

vehicle gets a flat tire,
roof starts to leak,
layoff occurs…

Reserves can be the difference between “Oh, no!” and “Oh, well.”

Opportunities

Some changes are welcome:

a company may offer a discount for pre-paying expenses,
friends may plan a once in a lifetime vacation, or
an adoption may be approved.

It’s important to prepare for both positive and negative surprises!

Limited Downside

Reserve funds need to be held in relatively safe assets like:

checking,
savings,
high-yield savings,
money market mutual funds,
certificates of deposit (CDs), etc.

Those investments generally hold their value well. Some of them are even paying interest of about 4% a year.

Better yet, their value isn’t directly impacted by the stock market.

Bonds

Governments and businesses issue debt called bonds.

They usually pay an ongoing interest rate and then return the original amount borrowed some time in the future.

The price of a bond depends in part on the:

interest rate,
risk of the borrower, and
time until the money will be repaid.

Risk

The riskier the borrower, the lower the chance an investor will be paid.

A higher risk borrower must pay a higher interest rate to attract investors. For instance, interest rates on corporate bonds are generally higher than those of U.S. government bonds.

Time to Maturity

How long a bond has until the original amount borrowed is due is called its maturity.

A bond scheduled to be repaid in 10 years usually has more risk than one maturing in a few months. There’s also the risk of inflation and interest rate changes.

As a result, bonds maturing later tend to pay higher interest than those scheduled to be repaid soon.

Market Rates

Bond prices typically:

fall when market interest rates rise and
rise when market interest rates fall.

Higher Interest Rate

Consider an investor who buys a bond paying 6% interest.

Market interest rates then rise - driving the market interest rate for the bond up to 7%. That’s unfortunate for the investor! They’re earning less than the market rate for the bond.

To attract a buyer, they would need to sell the bond at a discount.

The longer until the bond matures, the more the its price generally falls. An investor would rather it mature now!

Lower Interest Rate

The opposite is true when interest rates fall.

An investor would be happy to earn 6% when the market rate for a bond is 5%. They’d want that to continue as long as possible!

The bond would command a premium. Its price would rise.

Recession

In a recession, the economy is struggling.

The Federal Reserve has lowered interest rates during past recessions.

Lower interest rates make it less expensive for businesses and individuals to borrow. They start new projects, which stimulates the economy.

Interest Rate Impact

All else equal, bond prices rise when interest rates fall.

Higher Default Risk

However, the economy’s not doing well.

The odds a borrow may miss payments (default) could rise.

Flight to Safety

When stocks fall, some investors get spooked and move money to more stable investments. They may flee from riskier stocks to safer bonds.

That shift could increase the price of bonds.

Mixed Impact

Whether bond prices rise or fall depends on the size of the effects:

increase from lower rates,
decrease from higher default risk, and
increase from a flight to safety.

More Conservative

The relative stability of bonds has another feature: a portfolio may become more conservative after a stock market drop.

Example

Assume an investor had $100,000 invested in a 60/40 split. That’s 60% stocks and 40% bonds.

They had roughly:

$60,000 invested in stocks and
$40,000 invested in bonds.

Assume stocks fall 10% and bonds hold their value.

Their total investments would fall about 6% to $94,000:

$54,000 stocks (10% off $60,000) and
$40,000 bonds.

That shifts their investment allocation to about:

57% stocks ($54,000 / $94,000) and
43% bonds ($40,000 / $94,000).

Their portfolio automatically became more conservative!

Rebalance

Their investments could be rebalanced back to their target of 60% stocks and 40% bonds.

They would need to:

sell about $2,400 of bonds and
buy about $2,400 of stocks.

That would shift their portfolio to:

$56,400 stocks (60% of $94,000) and
$37,600 bonds (40% of $94,000).

By rebalancing, investors can systematically:

buy stocks when they fall and
sell stocks when they rise.

Target Date Funds

Some investments automatically rebalance.

Target date funds are often available in retirement, education, and taxable brokerage accounts.

How It Works

Target date funds have a multi-year investment plan based on when the money will be needed.

Two common examples are:

when a student expects to enroll in college and
when an employee expects to retire.

Target date funds become more conservative as the “use by” date approaches.

Shifting Allocation

Here’s an example from Vanguard:

The graph is a bit more complicated than what we’ve discussed.

U.S. stocks refer to shares of companies headquartered in the United States.
International stocks refer to shares of companies headquartered outside the United Sates.
U.S. nominal investment-grade refer to bonds of high-quality borrowers like the U.S. government and thriving businesses.
Treasury Inflation-Protected Securities refer to debt issued by the U.S. Treasury which pays more interest when inflation is higher and less interest when inflation is lower.
Cash refers to cash and cash-equivalents like high-yield savings and money market mutual funds.

Over time, target date funds automatically shift:

form U.S. and international stocks
to bonds and cash.

This can be especially helpful for “set it and forget it” accounts.

Disaster Avoidance

Consider a 529 plan set up by a parent for their newborn child. The account’s expected to pay for college in about 18 years. The parent might choose the target date enrollment investment option.

Initially, most of the target date fund will be invested in stocks to hopefully benefit from growth. Over time, the fund invests a higher percentage in cash and bonds.

40% Stock Market Drop

Imagine stocks fall 40% just before the student heads off to college.

If the account was only invested in stock, it might lose 40%!

A student who previously had four years of college funded might run out early their Junior year.

Less Severe

However, a target date fund that’s slowly become more conservative over 18 years might fall less. That’s a feature!

Target date funds are designed to allocate assets thoughtfully for decades.

Drawbacks

Three downsides to target date funds include:

high fees,
generic allocations, and
inflexibility.

High Fees

The fees charged by target date funds vary considerably.

It’s important to review the annual expense ratio of each investment. These fees are automatically deducted from the investment.

An expense ratio:

less than 0.1% is pretty good and
above 0.5% is expensive.

Hidden annual fees might even exceed 1%. One target date fund might be ten times (10x) as expensive as another!

Generic Allocation

The “hands off” approach can be good. However, a target date fund uses an investment plan for the average investor.

Consider a 529 plan for two high school Seniors:

Student 1 attends a private high school, has no interest in graduate school, and has plenty saved in their account.
Student 2 attends a public high school, plans to attend graduate school, and doesn’t have much saved in their account.

It may make sense to invest Student 1’s account more conservatively since they:

can use the funds for high school tuition now,
have enough to cover four years of undergrad, and
may not pursue further education.

Student 2’s investments may need to be more aggressive since they:

aren’t using the funds now,
don’t have enough saved for college, and
will likely need funds for graduate school.

The default target allocation may not be ideal for either student!

Inflexibility

Target date funds also don’t adapt to changes in goals or situations.

A student may:

unexpectedly attend a private high school or
receive a college scholarship.

An employee may:

experience a health setback which requires them to retire early or
find a passion late in their career that happens to pay well.

Major changes may require a different allocation.

Real Estate

Real estate may also provide a buffer when stocks drop.

Home

The value of someone’s home depends on local supply and demand.

A prolonged recession could cause nearby layoffs. Living near a major company’s headquarters could be risky.

However, people still need somewhere to live. If they’re unable to own a home, they’ll likely rent.

Market rents help set a floor for home prices.

Investment

However, rent has an an even more direct impact on real estate investments.

Investors value a property based on its expected return. Lower interest rates can reduce the cost to finance and purchase a property.

The value of both personal use and investment real estate may fall less than the stock market.

Section Summary

Net worth often doesn’t fall as much as the stock market.

Other assets may be less impacted like:

cash reserves,
bonds,
target date funds, and
real estate.

2. Back to Basics

It feels completely unsatisfactory to do nothing when the market dips. That energy can be used to focus on the basics!

Insurance

Insurance companies often pounce during market corrections. They tout the benefits of limiting risk.

It may help to remember that insurance agents:

aren’t usually comprehensive financial planners and
are paid on commission.

They might receive the entire first year payment of a whole life policy.

However, it still makes sense to double-check insurance coverage.

Life and Disability

When young, we can work many more years.

Over time, we trade:

our human capital (hours)
for financial capital (money).

Hopefully, we save and invest some along the way!

Future Earnings

However, we have a lifetime of earnings to lose.

That’s when life and disability insurance are often most important. We must protect ourselves and our loves ones.

Future Expenses

As we age, our future lifetime expenses shrink:

the number of years we have left to live falls and
our family (hopefully) becomes less dependent on our income.

Net Worth

Also, our net worth typically grows. A larger percentage of our future expenses may be covered by our existing assets.

Therefore, the amount of life and disability insurance we need may fall.

Health

Now may be a good time to schedule a:

routine physical,
dentist appointment, or
eye exam.

Preventive care can save a lot of money - and pain!

Current Insurance

It’s also worth reviewing health-related insurance.

Do you typically use it?
It not, it may make sense to switch to a lower premium plan.

Do you have more money now than you use to?
If so, it may be possible to lower premiums by moving to a higher co-pay or deductible plan.

Health Savings Account

If a qualified high-deductible health plan is right for you, it may make sense to contribute to a Health Savings Account (HSA).

Unlike spending and reimbursement accounts, a Health Savings Account isn’t use it or lose it.

HSA contributions may be triple tax advantaged. They may:

lower taxable income the year contributed,
grow tax-free, and
pay for qualified medical expenses tax-free.

However, it’s important not to let the tax tail wag the healthcare dog! Having the right health insurance is crucial.

Future

Now could also be a good time to estimate future healthcare expenses.

Affordable Care Act

The Affordable Care Act (ACA) lowered health insurance costs for millions of Americans. These plans are offered on state exchanges.

Better yet, the premiums are based on income - not net worth. Multi-millionaires can receive subsidies if their income is low enough.

Medicare

Health coverage is available through Medicare once someone turns 65.

A family friend is wealthy enough to have been invited to join a group bidding to buy the Chicago Cubs. They considered Medicare the best health insurance they’d ever had.

Many people overestimate future health insurance costs. It’s worth checking what your premiums might be today if you stopped working.

For more, check out: How Americans Spend.

Auto

The opposite may be true for auto insurance. Coverage may be an order of magnitude too low!

Underinsured

Many people carry insurance coverage of $10,000 to $50,000.

The U.S. Department of Transportation estimated the cost of a fatal crash at nearly $13 million.

That would wipe almost anyone out financially!

Overpaying

Also, many Americans:

haven’t shopped their auto insurance in years,
have low deductibles even though they could afford to pay for smaller incidents, and
aren’t taking advantage of prepay discounts.

It may be possible to increase coverage and pay a lower premium!

Home

Housing prices have risen significantly in recent years. Unfortunately, insurance coverage hasn’t kept pace for many homeowners.

If you own a home, it’s worth checking that it’s fully insured.

Umbrella

There’s insurance that sits on top of other insurance types.

Umbrella insurance covers amounts above other coverage limits like home and auto.

Since it’s used infrequently, it’s relatively affordable. A $1 million policy may only cost $200 to $400 a year.

A general guideline is to have $1 million of umbrella coverage for every $1 million of net worth. Of course, it depends on the situation.

Job Security

A down market is a good time to focus on job security.

Performance

Strong results help. You’ll either be rewarded by your:

current employer or
another one.

I suggest people update their resume or CV at least once a year. Quantify your impact wherever possible.

Mentorship

Other people have great perspectives.

It’s important both to have and be a mentor!

Knowing where to focus can make all the difference. Also, helping others grow is a key part of our development.

Skill Development

A recession is a great time to level up skills.

Many employers offer tuition reimbursement for classes.

You can also study topics that interest you through:

books,
podcasts, and
videos.

Higher Income

These and other efforts can grow income.

Raise or Promotion

New skills improve marketability.

However, employers have an interest to lower their labor costs to:

improve profitability or
maximize their impact.

It’s important to know your value on the open market. Sites like Glassdoor and Levels FYI share data from other company employees.

While imperfect, that’s a decent starting point.

Compensation primarily depends on:

position,
location, and
negotiation.

Consider what you’d like for your career. Your best move may be a lateral move or some other development opportunity.

For more, check out How Salary is Calculated.

Better Interest Rate

It may be possible to earn more on low-risk investments.

Cash slowly loses its value to inflation. Many checking accounts earn a return that rounds to 0%.

However, some high-yield savings and money market mutual funds are earning over 4% a year.

That could be an extra:

$400 a year on $10,000,
$2,000 a year on $50,000, and
$4,000 a year on $100,000.

Side Hustle

Another option for extra income is a side gig.

A part-time job can be a great way to earn more while doing something you love. It might also be a great workout. Above all, the gig could be a way to explore options for later in life.

The position will likely need to be disclosed to your full-time employer. It’s important not to let it impact your performance.

There’s a chance of burnout. Adding a part-time job on top of a full-time (or more!) position can be overwhelming.

Lower Expenses

Another potential step when the market dips is to review expenses.

Zero-Based Budget

One method is to justify every cost.

When my wife and I do, we almost always find something:

a zombie subscription we thought we’d cancelled,
something we no longer use, or
even fraud!

It’s also worth taking a hard look at:

fees and interest on debt and
interest and penalties on taxes.

Products Instead of Services

Tech companies have shifted from selling products to ongoing services.

Doing the opposite may help reduce expenses!

For instance, it could make sense to:

own a car instead of leasing one,
buy a router instead of renting one from the cable company, or
use a pressure cooker instead of ordering out for dinner.

Better Life at Home

Lavish vacations can be a major family expense. While the experience is great, there’s nothing of value left after the trip.

It may be possible to build a life they don’t feel the need to escape.

Home

Upgrading a home can make it more enjoyable. A remodel may add to the home’s value - making it an investment instead of an expense.

Community

Spending time with neighbors, friends, and family members can be immensely rewarding. It might also cost next to nothing.

Health

Focusing on health can pay dividends, including:

more energy,
fewer medical expenses, and
a better physique.

Section Summary

It may be possible to focus any nervous energy on the basics:

check coverage limits and shop insurance,
deliver results and level up professional skills,
earn more with a raise, higher interest rate, or a side hustle,
review expenses, replace services with products, or enjoy home.

3. Current Opportunities

There are silver linings when the stock market drops.

Higher Potential Returns

If the only change for an investment is a price drop, the expected return may rise.

Assume an investment worth $60,000 pays dividends of 2% a year. The investment would pay about $1,200.

Imagine the price of the investment falls 10% and nothing else changes. It would still earn about $1,200 a year in dividends.

However, the yield would rise from 2% to over 2.2% ($1,200 / $54,000).

Dollar Cost Averaging

There could also be good news for investors who buy consistently through market volatility:

when prices fall, they buy more and
when prices rise, they buy less.

This process can lower the average cost.

Example

Take someone who invests $1,000 each month.

Assume the price of a stock they buy is volatile:

$50 the first month,
$40 the second month, and
$50 the third month.

Investing $1,000 a month, they would buy:

20 shares the first month,
25 shares the second month, and
20 shares the third month.

65 shares would be purchased at an average cost of $46.15. Their unrealized gain would be $3.85 per share, or about 8%.

However, the stock price was the same $50 at the start and end. Owning the stock for three months may have had no return!

Also, the average purchase price of $46.15 is a bit lower than the average of the three monthly prices ($46.67).

That’s dollar cost averaging.

Savers

I get excited for clients who continue to invest when the stock market drops. They’re buying shares at a discount!

Past performance is no guarantee of future results.

Nonetheless, stock indices have generally risen over time. A long-term investor has a good chance to earn a solid return.

A market drop can also help check investor apathy and overconfidence.

Retirees

Recent retirees may be impacted most by a market downturn.

A poor return immediately after retiring could have lasting impacts if they’re forced to sell when values are low. It’s a sequence of returns risk.

Faster Diversification

Wealthy individuals often own a lot of one investment. That may be how they built their wealth!

However, getting wealthy and staying wealthy are two different things.

A price drop can help someone diversify out of a single stock quicker by reducing the tax impact of selling.

Appropriately Conservative

The risk of a stock market drop is why I work to make portfolios more conservative before someone retires.

It often makes sense for a pre-retiree to:

increase the reserve fund and
buy more bonds.

These are protective measures.

Home Equity Line of Credit

Someone planning to retire soon who has significant home equity may be ahead to take out a Home Equity Line Of Credit (HELOC).

It can be:

easier to get approval while still working and
could come in handy.

Living Expenses

One use case may be a market downturn soon after retirement. Using a HELOC for living expenses could give investments time to recover.

Lower Interest Rates

Also, interest rates often fall during a recession. Home Equity Lines of Credit typically have variable interest rates.

It’s rare for money to become less expensive when it’s needed most. However, that may be the case with a HELOC in a recession!

Drawbacks

Using a HELOC may restrict cash flow for years. It could also increase the risk of foreclosure.

Whether to use one depends on the situation.

Section Summary

Silver linings of a market drop may include:

higher expected returns,
dollar cost averaging, and
buying at a discount.

Recent retirees may be the most impacted. However, the pullback could facilitate diversification. The drop may also be mitigated by appropriate conservatism or a Home Equity Line Of Credit.

Hey, thanks for reading my post about what to do when the stock market drops.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for Tech Professionals in April

Kevin Estes — Tue, 01 Apr 2025 21:11:02 +0000

Hello, I’m Kevin - a financial planner who helps tech employees and their families live great lives.

Make yourself at home - we’ll get to some April steps in a moment.

But first - here are some links you may want to save for later.

Transactions in Retirement Accounts Aren't Taxed… Yet

Now, let's get on to the blog! 😀

In bloom

Wow, is it ever nice here in the Pacific Northwest! The rain stopped, the sun’s out, and it’s getting warmer.

Potential steps this month

Tech professionals might do the following in April:

Evaluate stock purchased at a discount
File tax return(s) or extension(s)
Make tax payment(s) or plan refund(s)
Review / rebalance investment portfolio
Replenish emergency fund
Review tax return(s)

1. Evaluate stock purchased at a discount

Employees who’ve participated in an Employee Stock Purchase Plan may be in for a welcome surprise.

ESPP Purchase

Consider a stock that closed at about:

$206 on 9/30/2024 and
$269 on 3/31/2025.

A six-month lookback feature might take the lower of the price at the beginning and end of six months before applying a 15% discount.

15% off $206 is about a $175 purchase price.

Funds contributed may result in a gain of 54%:

gain of $94 ($269 less $175)
divided by $175 purchase price.

For more, check out: How Does an ESPP Work?

Employer risk

We have a lot riding on our employers:

income,
retirement contributions,
insurance,
benefits…

Employees who live near a major office may also risk the value of their:

home,
rental, or
small business.

Risk and return

We love our employers. That’s why we work there!

However, on average - they’re average.

One company has more risk because of single stock exposure. That’s the chance something bad happens to a particular business:

a competitor enters the space,
an executive makes a poor strategic decision,
someone cooks the books, etc.

Owning a single stock has higher risk with a similar expected return. That’s a bad combo.

Of course, there are may possible outcomes. Volatility is good if the direction’s up!

A good investment can underperform. A bad one can do well.

For more, check out: Is It Worth Holding Employer Stock?

2. File tax return(s) or extension(s)

It’s worth double-checking for opportunities before filing a tax return.

There’s still time!

Some accounts will accept contributions for 2024 until April 15, 2025.

Those include:

traditional Individual Retirement Arrangements (IRAs),
Roth Individual Retirement Arrangements (Roth IRAs),
Health Savings Accounts (HSAs), and more.

IRA contributions are often overlooked. They’re especially helpful for someone whose employer doesn’t have a retirement plan.

A Spousal IRA contribution may reduce taxable income. It depends on:

whether the spouse was covered by a retirement plan at work and
the couple’s income.

The deduction is phased out above income limits for 2024:

$123,000 if covered by a workplace retirement plan and
$230,000 if not covered by a workplace retirement plan.

Running out of time

The deadline to file personal taxes is April 15, 2025.

May businesses had a deadline of March 15 to give investors time to include income on their personal returns.

A personal extension filed by April 15th pushes the filing deadline to October 15th. However, taxpayers still need to pay estimated taxes by April 15th to avoid interest and penalties.

3. Make tax payment(s) or plan refund(s)

In a perfect world, a taxpayer would neither owe a payment nor receive a refund. However, that rarely happens.

Bad extremes

It’s not ideal to either:

make a sizable tax payment or
receive a significant refund after filing.

A large payment is hard psychologically and on cash flow. Underpayment can also incur interest and penalties.

Receiving a big refund is also a problem. It’s an interest-free loan to the government!

How to pay the tax

Consider the best way to pay:

dip into an emergency / opportunity fund,
go on a payment plan,
sell an investment, etc.?

Selling an investment may drive up taxes this year!

If a household usually pays when filing, it may make sense to:

make quarterly estimated payments,
adjust W-4 withholdings, or
both.

What to do with a refund

Some options for a refund include:

build up a cash reserve,
pay down high interest debt,
increase deductibles,
pay in advance to get a discount, and more.

Will the money be needed over the next few months or can it be invested? It may take weeks for the refund to arrive.

Cash flow planning is especially important for tech professionals who are often flush with cash after receiving their:

annual bonus,
merit increase,
Restricted Stock Unit (RSU) vests, and
Employee Stock Purchase Plan (ESPP) shares.

How to invest the refund

Investment options for a refund include:

401(k) up to the company match or contribution limit,
Employee Stock Purchase Plan (ESPP),
traditional or Roth IRA,
Health Savings Account (HSA),
taxable brokerage account,
small business, and
real estate.

For more on saving and investing, check out:

Is an HSA Worth It?

Real Estate

Investments need to be profitable. Passive real estate losses may not lower taxes until the investment is sold.

Feeding a property cash every month can be particularly painful if:

income drops,
property values fall, or
both.

Check out: Investing in or Betting on Real Estate?

4. Review / rebalance investment portfolio

A household may have:

received a bonus - pushing their cash above what’s needed,
received shares from Restricted Stock Unit (RSU) vests, and
purchased shares through an Employee Stock Purchase Plan (ESPP).

In addition, the stock market has fallen recently. The S&P 500 index is down about 4% year to date.

Lower stock prices can make a portfolio more conservative. It’s important to check the allocation.

Dividends may need to be reinvested. Many investments can be set up to do so automatically.

Interest from high-yield savings and money market accounts can also build up cash. Investing excess cash may improve returns.

For more considerations, check out:

5 Ways to Lower Taxes Besides Donations

5. Replenish emergency fund

Now’s a great time to check up on cash reserves.

Recurring expenses

I generally suggest someone keep about three (3) to six (6) months of living expenses in cash or cash equivalents.

Factors that could push up the target include:

a single income,
variable compensation,
real estate, and
job uncertainty.

Major purchases

It’s important to plan for upcoming expenses like:

summer vacations and camps,
home improvement projects,
vehicle purchases,
new business ventures, and
real estate investments.

For me: stocks, bonds, vehicles, real estate, and cryptocurrencies don’t count toward the reserve fund! Although they might be sold quickly, the market can move even faster.

High-yield savings and money market funds might pay 4% or more. Since checking accounts pay little interest, 4% might earn an extra:

$400 a year on $10,000,
$2,000 a year on $50,000, or
$4,000 a year on $100,000.

However, it’s important to keep some in checking for ongoing expenses. It’s crucial to pay bills on time to avoid late fees, penalties, and credit score blemishes.

For more, check out: Is Your Cash Starving?

6. Review tax return(s)

It can be insightful to review a tax return with a professional - especially after tax season. Tax preparers often have more time after April 15th.

Here are some good questions to ask:

What were my marginal and effective tax rates?
What lowered my taxes?
Were there any missed opportunities?
Are there ways to minimize my lifetime taxes?

For more, check out:

Sammy Says: 13 Things the U.S. Tax Code Encourages

Hey, thanks for reading my post on financial steps tech professionals might take in April.

Just a reminder, I share a lot of resources that can help you!

How Salary Is Calculated

Kevin Estes — Tue, 18 Mar 2025 23:34:04 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home. We'll get to salaries in a moment.

But first - here are some links you may want to save for later.

What Percent of Workers Max Social Security?

Now, let's get on to the blog! 😀

Three Parts

This article has three sections:

How Salary Is Calculated
How Salary Is Determined
How to Get a Raise

1. How Salary Is Calculated

What Is Salary?

The word salary dates back to Roman soldiers.

According to Mark Kurlansky in Salt: A World History:

The Roman army required salt for its soldiers and for its horses and livestock. At times soldiers were even paid in salt, which was the origin of the word salary and the expression "worth his salt" or "earning his salt." In fact, the Latin word sal became the French word solde, meaning pay, which is the origin of the word, soldier.

Salary vs. Hourly

In private companies, salaries are paid to administrative, professional, and managerial employees. Those who work directly with customers are often paid hourly.

To get the equivalent of an hourly wage in salary, multiply by 2,080:

40 hours a week times
52 weeks a year.

For example:

$15 an hour is about $31,200 a year,
$30 an hour is about $62,400 a year, and
$50 an hour is about $104,000 a year.

However, it’s not that simple.

Hourly and Salary Differences

Some of the many pay differences between hourly and salary include:

hours worked,
overtime,
shift differential,
holiday pay, and
variable compensation.

Hours Worked

Some positions work more hours during peak seasons - like the holidays. Hours may be more limited the rest of the year.

Someone who averages more than 40 hours a week may see a decrease in their pay if they go on salary. There are also rate impacts.

Overtime

Employees might be paid overtime. That rate is often “time and a half” - or the base rate times 1.5 - for working more than 40 hours a week.

However, a position may not be subject to minimum wage and overtime rules depending on its duties and pay.

The minimum weekly compensation for a position to be exempt is currently $684 per week, or about $34,568 a year. That’s the salary threshold for exemption as of 3/18/2025. However, the limits are in flux.

Shift Differential

Some positions pay extra for working less desirable times of day or days of the week. For instance, there might be an incentive to work nights and weekends.

Salaried positions rarely have shift differential pay.

Holiday Pay

Hourly workers may also be paid a higher rate for working holidays. It could be twice (2x) the usual rate.

It may even be possible to stack overtime and holiday pay to earn 1.5 times the holiday rate. That triple (3x) compensation for those overtime holiday hours might be lost when moving to a salary.

Variable Compensation

An employee may also lose individual commissions or bonuses. A frontline leader might be bonused on their team’s performance.

However, a salaried position could have other benefits like:

an annual bonus,
extra stock grants,
more schedule flexibility…

Frequency

How much someone receives each paycheck depends on their salary and how often they’re paid.

Every Other Week

Many companies pay every other week - or 26 times a year. For example, T-Mobile pays biweekly.

With this frequency, an employee receives three paychecks two months a year. Extra paychecks can help someone pay off debt or save more.

Twice a Month

Other companies pay on the 15th and last day of the month. For instance, ServiceNow pays twice a month.

This cadence works well for monthly bills. However, an employee may need to save more regularly since they won’t have months with an extra paycheck.

Monthly

Still other companies pay once a month. For example, Amazon pays monthly for many salaried positions.

These income spikes require more planning. Since each paycheck needs to last a month, an employee must resist the urge to spend. They might also benefit from keeping a larger emergency/opportunity fund.

The size of each paycheck is based on the payment frequency and base salary.

For someone who earns $100,000 a year, their gross pay would be:

$3,846 if paid every other week (26 times a year),
$4,167 if paid twice a month (24 times a year), and
$8,333 if paid monthly (12 times a year).

Net Pay

However, that’s the gross pay. It’s not what’s deposited into the employee’s checking account(s).

Taxes taken out of the paycheck include:

state and federal income,
Social Security and Medicare,
state paid family leave insurance,
state paid medical leave insurance, and
state long-term care insurance.

There can also be payroll deductions like:

health, life, and disability insurance,
401(k) and Employee Stock Purchase Plan contributions,
auto and pet insurance, and
wage garnishments.

An employee may receive much less than their gross pay!

2. How Salary Is Determined

Perhaps more interesting than how salary is calculated is how it’s determined. Salary is set through a process that’s competitive, negotiable, and increasingly transparent.

Position

Companies often pay the least they can to attract and retain top talent. Pay primarily depends on position.

As of May 2023, the annual mean wage was:

$65,470 for all occupations,
$36,690 for retail salespersons,
$90,580 for business and financial operations occupations, and
$137,750 for management occupations.

Location

Compensation also depends on location.

For instance, the average wage for all occupations in May 2023 was:

$47,570 in Mississippi,
$60,210 in Forida, and
$80,300 in Massachusetts.

However, the position matters more.

The mean wage for a retail salesperson was:

$31,270 in Mississippi,
$35,190 in Forida, and
$40,490 in Massachusetts.

The mean wage for business and financial operations occupations was:

$70,000 in Mississippi,
$84,010 in Florida, and
$101,770 in Massachusetts.

The mean wage for management occupations was:

$95,560 in Mississippi,
$129,870 in Florida, and
$160,460 in Massachusetts.

Budget

On average, larger companies pay more.

Bigger companies tend to have more:

resources,
consistent cash flow, and
customers.

All Industries

Average salaries and wages per hour grow with company size:

$26.19 for 1-49 workers,
$28.27 for 50-99 workers,
$32.40 for 100-499 workers, and
$42.82 for 500+ workers.

Information Industry

The U.S. Bureau of Labor Statistics combines tech and media into one "information" sector.

As in total, average salaries and wages per hour for the Information sector grow with company size:

$39.78 for 1-99 workers,
$51.96 for 100-499 workers, and
$67.36 for 500+ workers.

Impacted by Benefits

The salary budget could depend on the company’s other benefits.

For instance, a company may pay lower salaries if they offer more:

flexible schedules,
holidays and Paid Time Off (PTO),
health benefits,
401(k) matching, or
stock compensation.

Consider two of my past employers: T-Mobile and Amazon.

T-Mobile offers:

fewer work hours,
more holidays and Paid Time Off (PTO),
better healthcare and other insurance,
4% match on the first 5% of employee 401(k) contributions,
immediate 401(k) match vesting,
a generous Employee Stock Purchase Plan (ESPP) discount,
annual bonuses, and
fewer Restricted Stock Unit (RSU) grants.

Amazon offers:

more work hours,
fewer holidays and less Paid Time Off (PTO),
worse healthcare and other insurance,
2% match on the first 4% of employee 401(k) contributions,
three-year cliff 401(k) match vesting,
no Employee Stock Purchase Plan (ESPP) discount,
sign-on bonuses, and
more Restricted Stock Unit (RSU) grants.

Marketability

Employees working in the same position may be paid differently even at the same location.

Compensation is generally based on pay grade, career band, or level. Companies call these ranges different things.

The salary range for a position may be 30%, 40%, or more!

Comp for new hires often depends on the perceived value of their:

skill,
experience, and
education.

Skill is tough to quantify. Experience is generally related to age. The impact of education on income is more direct.

Age

For the fourth quarter of 2024, the average median income extended out for a year was about:

$35,308 for those aged 16 to 19,
$40,768 for those aged 20 to 24,
$59,072 for those aged 25 to 34,
$70,512 for those aged 35 to 44,
$69,472 for those aged 45 to 54,
$65,936 for those aged 55 to 64, and
$60,268 for those aged 65+.

Education

More educated individuals tend to have higher incomes and less unemployment.

The median annual income in 2023 was about:

$109,668 with a doctoral degree,
$114,712 with a professional degree,
$90,324 with a master's degree,
$77,636 with a bachelor's degree,
$55,016 with an associate's degree,
$51,584 with some college and no degree,
$46,748 with a high school diploma, and
$36,816 with less than high school diploma.

People develop specific skills and knowledge through education. They’ve also shown some capacity for hard work, delayed gratification, and positive social interactions.

Performance

On the job performance drives promotions and raises.

Merit

Annual merit increases tend to match or beat inflation slightly. Raises of 3% to 5% are common.

They also depend on how the company’s performing:

Raises may be suspended in down years.
A company in distress might cut compensation across the board.

It also matters where someone's comp is within their pay grade:

Those newer and less proven in their role may be paid on the lower end of the range.
Established employees who consistently deliver value may be paid on the higher end of the range.

An employee at the very top of their range may not receive annual raises. They may instead receive spot bonuses.

Promotions

A promotion often comes with a 5% to 15% raise. Here again, the situation matters.

Someone at the top of their previous career band may receive less of a raise. On the other hand, someone who was promoted more quickly may receive a larger percentage increase. Also, the amount of additional responsibility could contribute to the raise.

Other compensation could grow as well, including:

target bonus as a percentage of salary and
stock options or grants.

3. How to Get a Raise

Potential steps to grow your compensation include:

Know Your Value
Improve Your Marketability
Add More Value
Prove Your Value
Explore Your Options
Get and Negotiate Offers
Choose the Best Offer

1. Know Your Value

The first step is to know the value of your position on the open market.

Research your position's salary range for both your company and your industry. It's even better if you can get that information for your city.

Sites like glassdoor.com and levels.fyi share data from other employees.

It's important to know where your compensation falls within the range.

2. Improve Your Marketability

Unfortunately, your performance may not be enough.

Compensation is based on other factors like:

skill,
experience, and
education.

Skill

Many skills are marketable.

However, it's important to determine which skills could help you most. That's where a mentor can prove invaluable.

Find someone doing what you’d like to do. Tell them you're inspired by what they've accomplished and would greatly appreciate the opportunity to learn from them.

When you meet, ask:

what worked for them,
what they recommend you do, and
what resources they'd suggest you use to achieve your goals.

Study topics related to your field. If your executives post content, study it carefully. Develop a point of view in case you meet them.

Check out resources beyond your company. Presentations, interviews, podcasts, and blogs can provide great insight on topics related to your current or future roles.

Experience

There's no substitute for experience.

Expand
If you're comfortable in your role, you likely aren’t growing enough!

Ask to join an important meeting.
Volunteer for a new project.
Request a stretch assignment.
Lead an initiative.

Mentor
It may be your turn to mentor someone!

Take a summer intern, recent hire, or more junior teammate to lunch. Share what you've learned. Others will notice your support.

Also, teaching helps clarify your thinking.

The way doctors often learn a new procedure is:

see one,
do one,
teach one.

Be Patient
Remember that some things just take time.

A relentless focus on improvement for years or decades can lead to incredible results.

Education

A lack of education could be holding you back! What are the desired qualifications for the position you want?

It may be an associate's, bachelor's, or master's degree. It might also be a certification or additional coursework.

Many employers cover the cost of education. Using benefits typically isn't looked down upon; quite the opposite!

An employee who uses them is often considered resourceful, proactive, and dedicated. If that's not the case, you may be in the wrong place.

3. Add More Value

Adding more value may be the quickest way to increase your pay.

Focus on your individual peformance:

Complete your projects on time.
Improve your metrics.

Then, help others achieve success:

Mentor teammates.
Collaborate with coworkers in other teams and departments.
Solve your supervisor's biggest problems.

Wherever possible, quantify the impact of your results.

4. Prove Your Value

A critical and often overlooked step is to prove the value you create to your supervisor.

Show them how you're adding a ton of value. Ask how you can make an even bigger impact.

Prepare for Raises

Among the most important conversations are those two to three months before raises:

Your manager needs to recommend your raise percentage.
He or she must then advocate for you.
Your skip-level manager (and perhaps other leaders) will then adjust your raise percentage.
Payroll needs time to implement the final numbers.
Your manager then needs to communicate the raise to you.

Start Early

If raises are typically in mid-February, start having these value-add conversations with your supervisor in December or January.

Update your resume with recent accomplishments. Expect to discuss your impact with your manager at any time.

5. Explore Your Options

More money is often only a temporary motivator. However, earning less than your value can be demotivating.

If your income doesn't rise significantly after a year of steady focus, something may be wrong. You might be in the wrong position, team, department, or company.

Explore your options.

Prepare

I suggest updating your resume at least once a year.

Edit it again before exploring your options. You'll want to be ready for any opportunity!

Calculate your count, percentage, and dollar impacts wherever possible. Create a different version of your resume for each position you’re considering.

Meet informally with coworkers and hiring managers on other teams. Also meet with friends and acquaintances at other companies.

Your goals are to:

strengthen your network,
learn more about other companies, and
better understand different positions.

You're trying to determine whether another opportunity could be better than your current position. Getting a referral would be a bonus.

You may also want to prepare for interviews:

Clarify your STAR (Situation, Task, Action, and Result) responses to “Tell me about a time when…” questions.
Review topics likely to be tested by technical questions.
Prepare your own questions about the company, position, and hiring manager.

Inform

If you have a good relationship with your supervisor, mention you're considering other opportunities.

Have a list of two to three open internal positions. Ask your manager whether they know the hiring managers or anyone else on those teams.

The conversation may inspire action from your manager. You might receive a raise just by mentioning you're exploring other options!

Also, find two to three interesting external positions. Don't share them with your manager or coworkers unless needed for a referral.

6. Get and Negotiate Offers

Apply

If your supervisor does nothing or - even more tellingly - encourages you to explore other options, start applying. Hopefully, he or she will give you time to interview.

Interview

It may take several rounds of interviews to secure a new position.

The hiring process for an internal role may be less extensive. Expect the hiring manager to reach out to your supervisor to learn more about you.

External positions will likely require references and a background check. The process may take weeks or months.

Here's something that’s served me well. Mentally, I prepare for the role above the open position.

My questions focus on how to thrive:

What have been some of your biggest accomplishments at [Company X]?
What are some of [Company X's] biggest areas for improvement?
Imagine it's a year from now and I'm thriving in this position. What would I have accomplished over the course of the first year?
How could I have the most impact in this role?
What would you recommend I do to ramp up quickly?
What might you suggest I do between now and when I'd start to hit the ground running?

Negotiate

Once you have an offer, work to get a second one!

Always know your Best Alternative To a Negotiated Agreement (BATNA). Your second option provides leverage.

If you're buying a home, find at least two good properties.
If you're refinancing, negotiate with at least two lenders.
If you're negotiating a job offer, get at least two good ones.

Without a second offer, your best alternative is your current position. However, you've likely informed your manager you're looking elsewhere.

Negotiate everything that's important to you or hiring firm:

work hours,
base salary,
sign-on bonus,
stock compensation,
schedule flexibility,
continuing education,
responsibilities, and more.

7. Choose the Best Offer

Determine and accept the best overall package.

It may not be the highest salary! Other factors could take priority.

Once you decide, never look back:

If it goes well, great!
If not, it’s a learning experience.

Hey, thanks for reading my post about how salary is calculated.

Just reminder, I share a lot of resources that can help you.

Potential Financial Steps for Tech Professionals in March

Kevin Estes — Wed, 05 Mar 2025 02:46:19 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to potential steps for March in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Growing season

This weekend was beautiful here in the Pacific Northwest.

Power outages were the biggest challenge for our area this winter. Our generator got a workout!

The days are getting longer, leaves are budding, plants are sprouting… spring has sprung!

Potential steps for tech professionals this month

Financial steps for March include:

Select employee stock contribution %
Plan major purchases
Finalize last year contributions
Prepare taxes
Schedule summer Paid Time Off (PTO)

1. Select employee stock contribution %

Some companies offer an Employee Stock Purchase Plan (ESPP) with a:

15% discount and a
six-month lookback.

That plan takes 15% off the lower price at the beginning and end of each six month period.

Example:

Mike works for a tech company and maxes his ESPP with 15% of his gross income each paycheck.

At the end of six months, his employer uses the funds to buy stock at a discount. If Mike leaves the company before the purchase, he’ll receive the cash instead.

What happens if the stock price rises from $100 to $110?

Mike would buy at $85, 15% off $100.
However, the stock’s worth $110!
That's a 29% gain ($25 / $85).

What happens if the stock price falls from $100 to $90?

Mike would buy at $76.50, 15% off $90.
However, the stock’s worth $90!
That’s an 18% gain ($13.50 / $76.50).

If able to sell right away, Mike might only hold the shares a day or two.

Participating in the Employee Stock Purchase Plan may offer higher returns and lower risk than holding company shares.

Maximum ESPP contribution

The maximum qualified Employee Stock Purchase Plan contribution each year is:

15% of compensation, up to
$25,000 a year.

Compensation includes salaries, wages, bonuses, and commissions. It doesn’t include Restricted Stock Unit vests.

Not for everyone

However, participating in an ESPP isn’t for everyone.

It may not make sense for households with:

high interest debt,
living expenses higher than income, or
large upcoming purchases.

For more, check out:

2. Plan major purchases

Now is a good time to prepare for big-ticket expenses.

Remodel

Home upgrades are often easier in the summer than in the winter. It’s much easier to move earth once it thaws! Also, planting in spring gives plants more time to grow before winter.

Buy a car

The least expensive time of the year to buy a car may be the fall. That’s when new models come out - which can result in good deals.

Someone may be able to minimize their costs by preparing now:

review their credit report,
pay down high balances,
update income (if it’s grown) with financial institutions…

Also, shopping around may save thousands on a car purchase. For more, check out: Buying a Car

Move

While it may be more expensive to buy a home in the summer, it’s easier to move. There’re also more homes on the market.

Families often prefer to move during the summer because it’s easier on children. Changing schools is hard enough without doing so during the school year!

3. Finalize last year contributions

There’s still time to make contributions for 2024!

Traditional IRA

Contributions to an Individual Retirement Arrangement (IRA) can be made up to April 15th, 2025.

It’s possible a family may earn too much to either:

receive a tax deduction on a pre-tax (traditional) IRA or
be able to contribute directly to a Roth IRA.

Roth IRA

A Roth IRA works differently. There’s no tax deduction for the contribution on the front end. Contributions are taxed initially.

However, they may never be taxed again if certain conditions are met!

Spousal IRA

A spouse without earned income might still be able to contribute to a traditional or Roth IRA!

The couple would need to earn enough to fund all their retirement contributions. This is known as a spousal IRA.

Whether pre-tax contributions would lower taxable income depends on:

whether the spouse was covered by a retirement plan at work and
how much the couple earned in 2024.

Here’s a quick decision tree with the income limits:

Health Savings Account

If someone was on a qualifying High Deductible Health Plan (HDHP) by December 1st, 2024, they have until April 15th, 2025 to contribute to a Health Savings Account for last year.

The primary benefit of an HSA is that contributions are triple tax advantaged. They:

lower taxable income when made,
grow tax-free, and
can be used tax-free for qualified medical expenses.

According to the IRS, the 2024 contribution limits are:

$4,150 for individual coverage and
$8,300 for family coverage.

For more, check out:

4. Prepare taxes

Even if taxes are self-prepared, it’s important to dedicate time to them.

Scheduling time is even more important when working with a tax professional! They’re overworked and in high demand.

Get organized and come prepared.

Tax checklist

Everyone’s busy. Things get missed - even by tax preparers!

Crashes happened frequently in the early days of aviation. Using checklists significantly improved safety.

Checklists have expanded to other areas like:

building construction,
truck driving, and
surgery.

We even use checklists when getting ready to sail!

One thing I like to do both for myself and for clients is draft a tax checklist. It lists everything I know that could impact taxes for the year!

A good place to start is the previous year’s tax documents:

Which still apply?
Are there any changes?

Creating the checklist also reminds me of other tax items!

5. Schedule summer Paid Time Off (PTO)

Now’s a wonderful time to book Paid Time Off (PTO) for the summer!

Vacation rentals begin to book.
Flight prices start to rise.
Calendars get full.

Call Dibs

It’s not just the calendars of your friends and family members. You also have to worry about your coworkers’!

Summer coverage can be a struggle for many teams. People who schedule late may have limited say in which days they can take off. 😯

Claim the days which work best for you and your family now!

Use It or Lose It

Many companies limit how many hours can be rolled over from year to year. Hours above the limit are involuntarily donated to the company.

Full time employees can often roll over two weeks (80 hours) at the end of the year. However, it can vary.

During my tenure with T-Mobile, the rollover:

shrank to as little as 1 week (40 hours) and
grew to as much as 3 weeks (120 hours).

Avoid the drama. 🎭 Schedule Paid Time Off (PTO) now!

Hey, thanks for reading my post on potential steps tech professionals can take in March.

Just a reminder, I share a lot of resources that can help you.

What to do with $100k

Kevin Estes — Wed, 12 Feb 2025 02:50:01 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to what to do with $100k in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Congrats!

Whether you’ve saved diligently or received a windfall, you now have $100,000. Congratulations! 🎉

Good on you for taking time to consider your options.

Without a plan, $100k can disappear faster than you’d expect. However, smart decisions can help secure your future.

Opportunities

Some of your many options include:

Protect yourself
Cut expenses
Invest in yourself
Make a major purchase
Invest wisely

Let’s explore each.

1. Protect Yourself

It all starts with a solid foundation.

Self-Care

Self-care is an often overlooked yet crucial part of a successful life. Investing in your physical and mental health can lead to a longer, more productive career.

**Nutrition
**Fueling your body with essential vitamins and minerals can help you:

maintain your energy all day,
improve focus and memory,
lower your risk of illness,
improve your mood, and
reduce anxiety.

A balanced diet can also limit the effects of aging and promote a longer, healthier life. Don’t skimp on food!

Exercise
Regular exercise provides many of the same benefits.

Physical activity can also help you:

fall asleep faster and wake up more refreshed,
develop discipline, and
reduce the risk of chronic disease.

Exercising with others is a bonus that can:

share accountability,
improve motivation, and
build community.

Adding an exercise routine can be a great use of both time and money.

Hobbies

A hobby can help you:

escape from daily stress,
foster creativity, and
develop new skills.

It can also help you connect with like-minded individuals and build meaningful relationships outside of work.

Paid Time Off

Your company gives Paid Time Off (PTO) for a reason. Use it or lose it!

Breaks can refresh, connect, and even inspire. Prevent burnout and boost productivity with a vacation.

Scheduling early can be important:

rentals, camps, and sites book,
flight prices rise, and
calendars fill.

It’s not just the availability of your friends and family members. Your team’s schedule can limit your options.

Summer and holiday coverage is often a struggle. Avoid the drama. 🎭 Call dibs. Schedule your Paid Time Off early.

Emergency/Opportunity Fund

Too little cash can lead to a vicious cycle:

less cash
increases expenses
especially interest charges, which
lowers cash and
restarts the cycle.

However, more cash can can start a virtuous cycle.

**How Much
**I generally recommend keeping three to six (3-6) months’ of living expenses:

$15,000 to $30,000 for a $5,000 monthly spend and
$30,000 to $60,000 for a $10,000 monthly spend.

That may need to be more with:

a single income,
variable compensation,
employment concerns,
real estate investments,
major upcoming expenses…

For instance, tax returns are due in a couple months. Someone expecting to pay may need to set some money aside.

Direct Benefits

Having cash is like driving with good shocks.

There will still be bumps in the road. They just hurt less.

Ample funds can:

avoid late charges and penalties,
reduce high interest debt, and
earn discounts by paying in advance.

Psychology

Even the wealthy can feel poor without ready access to funds.

When we’re stressed, our animal brain takes over. It’s fight or flight.

We make poor decisions when we’re anxious.

Time Savings

Several people I know played what I call a shell game.

They were constantly moving money around. It was like a part-time job!

Extra cash stopped the madness. Having more time and less stress helped them focus on more important activities.

Health, Life, and Disability Insurance

Proper insurance is a safety net when disaster strikes.

Health

Few things can bankrupt an American faster than medical expenses. It’s critical to have sufficient insurance.

A high deductible plan may not be best for someone with ongoing medical expenses. Higher premiums could pay off in the long run.

The opposite may be true for someone with few medical bills. Either way, insurance is a must.

Disability

The Social Security definition of disability is very limited. It requires an adult to be unable to work in any substantial gainful activity.

Think of a surgeon who loses the use of a hand. If she can work as a retail greeter, she might not receive any benefits!

Workers’ compensation is primarily for work-related injuries. That may only cover 40 of the 168 hours a week.

Disability can be worse than death financially:

costs - especially medical and caregiving - often rise
while income falls.

Disability insurance is crucial early in careers. That’s when we have the most future earnings to lose!

Life

Another advisor tells a tragic story about his neighbors.

They were a family of four: husband, wife, daughter, and son. The husband earned about $500,000 a year. They lived the good life!

Unfortunately, the father was driving down the highway with his son when a semi-truck lost control, jumped the median, and smashed into their vehicle.

Both the father and son perished at the scene.

The husband didn’t have enough life insurance. His surviving wife and daughter were ruined.

The financial devastation was preventable. A tiny fraction of the husband’s income could have covered the family.

Home, Auto, and Umbrella Insurance

Insurance protects not only us and our property but also damage we may cause.

Home Insurance

Real estate values and construction costs have risen. For many, home insurance coverage hasn’t kept pace.

An underinsured home may not receive full compensation after a loss.

Land typically isn’t insured. Covering the building’s full replacement cost may provide peace of mind without costing much more.

Auto Insurance

Auto coverage limits are often much too small.

Based on a report from the U.S. Department of Transportation, the average cost of an accident was:

$7,400 with property damage only,
$44,900 with a possible injury,
$79,000 with an evident injury,
$216,000 with a disabling injury, and
$4,008,900 with a fatality.

Those are in 2001 dollars.

I see coverage limits like $10,000, $25,000, and $50,000. They may be an order of magnitude too low!

Umbrella

There’s no way to compensate for the loss of human life. However, the American judicial system tries!

Umbrella insurance sits on top of other insurance - home, auto, motorcycle, etc. It pays claims that exceed those policies’ limits.

As a result, umbrella insurance requires higher limits on the other policies. It pays only in rare circumstances.

Since it’s used infrequently, umbrella insurance is quite affordable:

$1 million of coverage may only cost $200 a year and
$2 million of coverage may only cost $400 a year.

A general guideline is $1 million of umbrella insurance for every $1 million of net worth. However, it depends on the situation.

2. Cut Expenses

$100,000 can help lower expenses.

Insurance Deductibles and Prepay Discounts

Many people haven’t shopped their home and auto insurance in years, if not decades!

Key Factors

I feel the most important elements of insurance are the:

coverage limits and
solvency of the insurer.

It can be expensive to hire an agent who’s just down the street. Someone has to pay for their office!

I like to shop online insurers like Geico and Progressive. Trust everyone… and cut the deck.

Higher Deductibles

Insurance deductibles are what you must pay before the insurance company starts to reimburse for a loss.

It’s often win/win:

The insurance company pays fewer claims.
The insured pays lower premiums.

Insurance is for what you can’t afford to replace. It isn’t for regular expenses.

Raising deductibles can lower premiums a surprising amount.

Prepay Discounts

Some insurers offer steep discounts for paying early. The discount can be 25% or more paying six months in advance.

That’s like a 50% annual benefit!

Few opportunities have so much return with so little risk.

High Interest Debt

Paying off debt is another way to lower costs.

Consumer Debt

Interest on credit cards and personal loans are especially high.

As of November 2024, the national average interest rates were:

21.47% for credit cards and
12.32% for 24-month personal loans.

These might be the first places to start.

However, debt may be at a low promotional rate. It could make sense to focus on other opportunities until a low rate expires.

Car Loans

An auto loan may have the next highest interest rate.

The national average in November 2024 was a little less than 8%.

However, these are installment debts which could help improve credit scores with regular on-time payments.

Also, rising vehicle prices have led to bigger loan balances. It’s hard to pay off large balances.

Student Loans

Interest rates on student loans vary.

For federal loans, the current rates are:

6.53% for undergraduate loans,
8.08% for direct unsubsidized graduate or professional loans, and
9.08% for direct PLUS loans.

It may not make sense to accelerate student loan repayment if there’s a chance of student loan forgiveness. Also, up to $2,500 of student loan interest may be tax deductible each year.

Home Mortgage

The average home mortgage interest rates for the week ending February 6, 2025 were:

6.89% for a 30-year fixed-rate mortgage and
6.05% for a 15-year fixed-rate mortgage.

The interest paid on someone’s main or second home may be tax deductible. Lower interest and tax benefits may lower the priority of repayment.

Products Instead of Services

Tech companies have done well turning one-time purchases into monthly service charges. Flip the script!

Renting a Router

Are you renting your home internet router? If so, you may be shocked by how much it costs.

Buying a good router can pay for itself within a year. If it doesn’t work, you can simply return it.

Dining Out

Do you often:

eat out,
order take-out, or
have meals delivered?

If so, it may make sense to invest in a pressure cooker, slow cooker, air fryer, or other device.

Appliances can simplify meal prep and make it easier to cook. With enough use, one might pay for itself weekly.

Lawn Care

Do you hire a service for your lawn? If so, you might buy the equipment and do the work yourself.

Saving one season of lawn care fees may pay for a mower and other tools which last years.

3. Invest in Yourself

You may be your best investment!

Continuing Education

Courses, professional certifications, and advanced degrees can boost your earning potential.

The right program for you depends on your strengths, career interests, and opportunities.

Many employers reimburse tuition for degree-seeking students. These benefits are often capped at the tax-free federal limit of $5,250.

It’s important to complete a program once begun. Not finishing may incur costs without benefits.

Business Investment

Do you own a business or plan to in the future?

Grow

Owners have no shortage of growth opportunities.

Unfortunately, not all investments work.

Investing into a business is risky in part because it isn’t diversified. However, doing so may be the right move.

Buy

There are many ways to buy or build a business:

Purchasing an established company could be more expensive because of the lower risk.
Starting a franchise comes with the support of a network and more overhead cost.
Founding a company from scratch may be the least expensive option and come with almost no support.

If you’ve never owned a business, it may make sense to shadow an owner. Help out where you can and ask lots of questions.

An owner/operator often wears many more “hats” than employees.

4. Make a Major Purchase

Big ticket purchases could have long-term benefits. However, they could increase costs for years - if not decades.

Auto

Reliable transportation is key.

Lost Income

Not having dependable wheels can cost income. Punctuality can directly improve your compensation.

Time and Hassle

Breakdowns are a stressful waste of time.

Regular maintenance can help. However, it may not be worth the effort to further extend the life of an automobile.

If you’re spending more than $5,000 a year in repairs, it may be time to buy another vehicle.

Lease

Leases are designed to help people upgrade to newer vehicles every few years.

New vehicles have more depreciation. Dealerships must be compensated for that loss. As a result, leasing could be much more expensive long-term than buying.

Ride Sharing

Having a private chauffeur at your fingertips is amazing!

However, the cost of these rides can add up to more than owning a vehicle.

According to the Bureau of Labor Statistics, the average expense of owning an automobile was $12,182 in 2023.

Public Transportation

The quality of public transportation varies by location.

Although the cost may be low, it can add time to your commute.

Of course, that time may be used to:

relax,
study,
watch content,
read a book,
work, and more.

Home

A home is a long-term commitment.

If you’re confident you’ll live in an area for many years and your lifestyle supports home ownership, you might consider buying.

Lifestyle

Buying a home is like buying a lifestyle.

If it were an investment, it’d be an expensive one!

Switching homes often can drive up the cost of ownership. Dividing the purchase and sale costs by the years owned can be enlightening.

Rent

Rent is not just throwing money away! You’re paying for housing.

Your rent is often the most you’ll pay. Landlords pay for much - if not all - of repairs and maintenance.

A mortgage may be the least you’ll pay.

Since you’d pay to prevent issues and fix problems, you could need a larger emergency fund. Also, most of the initial mortgage payments go to interest.

Nonetheless, much of America’s wealth is in real estate.

5. Invest Wisely

Let’s assume you’ve:

protected yourself,
cut expenses,
invested in yourself, and
passed on major purchases.

You might invest the rest.

There’s no shortage of investment options. I prefer those that are truly passive, low-cost, and diversified.

Specific recommendations would depend on your situation. However, below are some accounts to consider.

401(k)

If your employer provides a company match on your retirement plan, contributing could be a high priority.

A match of 4% on 5% employee contributions is like an 80% gain!

Pre-tax contributions generally:

lower taxable income the year they’re made,
grow tax-deferred, and
are taxed when withdrawn.

Roth contributions generally:

do not lower taxable income the year they’re made,
grow tax-free, and
can be withdrawn tax-free if conditions are met.

Think of it like an orchard:

With a pre-tax account, the seed isn’t taxed but the harvest is.
With a Roth account, the seed is taxed but the harvest isn’t.

It may be possible to strategically minimize lifetime taxes.

Income taxes are progressive. The more you make, the more they take.

If your income is currently low, it may make sense to contribute to a Roth account.
If your income is currently high, it may be better to contribute to a pre-tax account.

It depends on many factors.

Employee Stock Purchase Plan (ESPP)

Are you able to buy employer stock at a discount?

How It Works

An Employee Stock Purchase Plan can be a powerful wealth-building tool.

A participant sends part of their paychecks to the plan.

Contributions are after-tax. Funds sent to the plan reduce what reaches an employee’s checking account dollar for dollar.

At the end of a time period - often six months - shares are purchased at a discount. The maximum discount is 15% for a qualified plan.

Lookback

The plan may also have a lookback. If so, the discount is based on the lower price at the beginning and end of each offering period.

Let’s say a plan offers a 15% discount with a lookback feature. The stock rose from $100 to $110 over the six months.

The employee’s purchase price would be $85:

15% off the
lower of the price at the beginning ($100) and end ($110) of the offering period.

If someone leaves before the shares are purchased, their money will be returned to them.

Check out this article for more.

Impact

After the purchase, the employee owns the shares. They may be able to sell right away for a gain.

A 15% discount is more like an 18% gain. It could be more with a lookback feature. That’s not bad for six months!

Contributing to the plan could be better than owning the stock outright. Here’s how a 10% increase or decrease might play out:

In both scenarios, contributing to the ESPP has a higher pre-tax return than owning the stock:

With a price increase, participants leverage the discount to buy more shares.
With a price decrease, participants avoid a loss and purchase shares at a discount.

Health Savings Account (HSA)

Contributing to a Health Savings Account may also be an option.

Not Use It or Lose It

Unlike a Flexible Spending Account (FSA), a Health Savings Account isn’t use it or lose it.

HSA funds are portable and can go with the employee when they leave the company.

Qualifying Plan

In order to contribute to a Health Savings Account, someone needs to be on a qualifying high deductible health plan.

A higher deductible may force you to pay more out of pocket for medical expenses. That might not be right for you!

Triple Tax Advantage

Health Savings Accounts offer a rare opportunity.

Contributions can:

lower taxable income when contributed,
grow tax-free, and
be used tax-free for qualified medical expenses.

That income may avoid tax altogether!

Check out the this article for more.

Spousal IRA

Someone who’s married and doesn’t work may still be able to add to their retirement account.

Adding to a spousal IRA may help a couple:

save for retirement,
lower their taxable income, and
reduce their tax bill.

The deadline to make a contribution for last year is 4/15 of this year. You may still be able to lower your 2024 tax bill!

Whether a contribution is tax deductible depends on:

how much the couple makes and
whether the spouse is covered by a workplace retirement plan.

For more, check out Ignoring the Spousal IRA?

Roth IRA

Someone may save even more with a Roth IRA.

Direct

As with a Roth 401(k), contributions:

are made after income taxes have been paid,
grow tax-free, and
can be withdrawn tax-free if conditions are met.

Those funds may never be taxed again!

An individual or couple must be below income limits to be able to contribute directly to a Roth IRA. Those limits depend on filing status.

Backdoor

Taxpayers above the limits may still be able to contribute to a Roth IRA.

Doing so is a two-step process:

contribute to a pre-tax IRA and
convert the funds to a Roth IRA.

However, watch out for the pro-rata rule!

Also, this process would lose the tax deduction. Choosing can be complicated.

529 Plan

Someone may want to save for the education of a loved one. This has become even more important with recent education uncertainty.

More Options

Funds can grow and be withdrawn tax-free if used for qualified education expenses.

529 plans can pay for:

K-12 private school tuition,
trade schools,
college, and more.

Contributions

There aren’t any income limits, which makes them popular with higher income families. Contributing may also lower state income taxes.

How much can be contributed is based on the annual gift exclusion, which is $19,000 for 2025.

Up to five years can be contributed at once. This “superfunding” enables gifts of:

$95,000 (5 * $19,000) from an individual and
$190,000 (double) from a married couple who files a joint tax return.

Remainder

Unused funds can be transferred to another family member or rolled into a Roth IRA if conditions are met.

A 529 plan could even allow you to save for your own education or retirement.

Mega Roth

A plan some companies have added recently is the after-tax 401(k). That’s different from a Roth 401(k).

Combined Roth and Pre-Tax Limit

Contributions directly to a Roth 401(k) and pre-tax 401(k) are subject to one employee contribution limit.

The most an employee under 50 years old can contribute is $23,500 between the two account types (2025). Adding to one reduces how much can be added to the other.

After-Tax Limit

An after-tax 401(k) works differently.

The contribution limit is $70,000 less:

employee contributions to their Roth/pre-tax 401(k) and
employer matching.

Someone who adds $23,500 and receives an $8,000 company match may still contribute another $38,500 to their after-tax 401(k).

Taxation

Unfortunately, the growth in an after-tax 401(k) may be taxed.

The original contributions aren’t taxed when funds are withdrawn. However, the growth likely would be.

In-Service Conversion

Fortunately, many companies with the after-tax 401(k) option also allow in-service distributions. That feature allows employees to move funds from the account while still employed.

Funds may be converted from an after-tax to a Roth 401(k).

That has two big benefits:

growth in a Roth 401(k) generally isn’t taxed when withdrawn and
conversions don’t count toward the $23,500 limit.

This two-step process is called “Mega Roth” or “Mega Backdoor Roth.”

Automatic

A custodian (Fidelity, Vanguard, Schwab, etc.) may automatically convert after-tax 401(k) contributions to a Roth 401(k) at the employee’s request.

While it may require a call to the custodian, it could save a lot of hassle.

Roth IRA

It may also be possible to convert the funds from an after-tax 401(k) to a Roth IRA.

That’s good news because many employees who’d take advantage of this option earn more than the Roth IRA income limits.

However, a Roth IRA conversion may not be possible until the employee leaves the company. Even if they could, it may be simpler to convert from an after-tax to Roth 401(k) since they’re both employer plans.

Taxable Brokerage

A regular taxable brokerage account is also worth a look.

Investments there could benefit from long-term capital gains tax treatment. Funds can be withdrawn from a taxable brokerage account penalty-free.

That may come in especially handy early in retirement.

Hey, thanks for reading my post on what to do with $100k.

Just reminder, I share a lot of resources that can help you.

Potential Financial Steps for Tech Professionals in February 2025

Kevin Estes — Wed, 05 Feb 2025 02:42:11 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for February in a moment.

But first - here are some links you may want to save for later.

What to Do with RSUs

Now, let's get on to the blog! 😀

Most wonderful time of the year

Forget December. The most wonderful time of the year for many tech professionals is February!

That’s when they may:

get their raise,
receive their annual bonus, and
vest Restricted Stock Units (RSUs).

Potential steps for tech employees this month

Financial steps could include:

update saving for raise and bonus,
schedule tax prep meeting,
gather tax forms and create checklist,
accept Restricted Stock Unit (RSU) grant, and
review / rebalance investment portfolio.

1. Update saving for raise and bonus

As an example, the T-Mobile annual raise and bonus are typically communicated around Valentine’s Day. I always loved getting the good news and celebrating with my wife!

Raise

The annual merit increase is often a whole percentage.

**Keeping Up With Inflation?**It’s important to consider whether a raise beats inflation.

The 12-month percentage change in the Consumer Price Index (CPI) ending December 2024 was 2.9%.

If someone’s raise was below 3%, it may be because they:

recently received a raise,
accepted a promotion, or
are at the top of their pay band.

It might also be a sign of trouble in their current position.

Nonetheless, raises help employees automatically save more.

**Example:
**Let’s say Bob was earning $100,000 and got a 4% raise. He now earns a $104,000 salary. Congratulations!

Bob contributes 5% of his gross income to his pre-tax 401(k) to get the full company match.

Without any other changes, his pre-tax 401(k) contributions would rise $360 for the year.

Bob contributes $200 more:

from $5,000 (5% of $100,000)
to $5,200 (5% of $104,000).

The company matches $160 more:

from $4,000 (4% of $100,000)
to $4,160 (4% of $104,000).

**Gain Without Pain
**Raises are a great time to save more without feeling it.

Let’s say Bob bumped his pre-tax 401(k) contribution rate from 5% to 7%.

His 401(k) contribution rises $2,440 for the year!

Bob contributes $2,280 more:

from $5,000 (5% of $100,000)
to $7,280 (7% of $104,000)

…plus the company matches $160 more.

The best thing is that Bob’s take-home pay might still rise! It could grow from $2,740 to $2,790 per paycheck. That’s nearly $1,300 more a year!

Getting more while saving more is a win!

This trick comes courtesy of my grandmother. She consistently saved half of her and my grandfather’s raises.

Bonus

Tech bonuses are no joke.

At T-Mobile, salaried employees are on the Short-Term Incentive Plan (STIP). The annual bonus has both an individual and company component. The split varies by pay level.

**Individual Bonus
**The individual piece is based on the employee’s performance according to their leaders:

above 100% is good;
below it… not so much.

Individual payouts were about 100% for years. However, variation was added to reward extra effort.

**Company Bonus
**The company piece is tied to T-Mobile’s overall performance. It’s based on a set of targets.

In good years, it’s been well over 100%.

**Bonus Considerations
**My wife and I never took my annual bonus for granted. We knew the company might pay a reduced bonus - or no bonus at all.

Bonus paychecks are mixed:

good - they provide significant income;
bad - they can be heavily taxed.

**Bonus Retirement Saving Options
**A company may offer:

pre-tax 401(k),
Roth 401(k), and
after-tax 401(k).

There’s also a spousal IRA option outside of the employer.

**Pre-Tax 401(k)
**Saving some of the bonus to a pre-tax 401(k) has three primary benefits:

reduces taxable income (and likely income tax),
gives investments more time to grow, and
reduces how much needs to be taken out of the biweekly paychecks to reach the contribution limit.

The 2025 employee 401(k) contribution limits are:

$23,500 for those less than 50 years old,
$31,000 for those aged 50-59 as well as 64+, and
$34,750 for those aged 60-63.

New for 2025 is a higher catch-up limit for workers aged 60-63. It’s $11,250 instead of $7,500 generally for those 50 years old and wiser.

**Roth 401(k)
**Another option is the Roth 401(k) - sometimes shortened to Roth(k).

The Roth benefit is that someone pays income taxes now and - if certain criteria are met - never pays income tax on the funds again!

The Roth option might appeal to someone if they:

don’t need the money for living expenses or debt payments,
anticipate their income will grow significantly in the future,
expect to continue to work until full retirement age, and/or
might move to a state with a higher income tax rate.

Here’s a quick comparison of the Roth and pre-tax 401(k) features:

After-Tax
Many tech companies added the after-tax option more recently.

This plan is especially helpful for higher income employees looking to save on top of pre-tax contributions like their:

401(k) and
Health Savings Account (HSA).

The 2025 contribution limits are:

$23,500 for employee pre-tax/Roth 401(k) contributions and
$70,000 in total defined contributions.

The company match also counts toward the $70,000 limit.

**Example:
**Jen is a 45 year-old who earns a $200,000 salary and a $50,000 annual bonus. Congratulations!

Jen maxes her pre-tax 401(k) contributions at $23,500. Her employer also matches $10,000 (4% of $250,000).

That leaves $36,500 for her to contribute to the after-tax account:

$70,000 total defined contributions limit
less the $23,500 employee contribution
less the $10,000 company match.

That’s important because gains in an after-tax 401(k) are taxed when withdrawn. Distributions from a Roth 401(k) or Roth IRA typically aren’t.

It may be easier to roll funds into the Roth 401(k). Jen may even be able to get her custodian (such as Fidelity) to transfer her after-tax 401(k) contributions to a Roth 401(k) automatically.

The fancy term for this process is Mega Roth or Mega Backdoor Roth.

**Spousal IRA
**A fourth retirement plan is outside the employer altogether.

A spousal Individual Retirement Arrangement (IRA) is an account a spouse can contribute to despite earning little or no income.

If the couple is married and files a joint tax return, they may be able to:

stash some cash into the spouse’s account,
reduce their tax bill, and
invest for long-term growth.

Here’s the best part: a 2024 contribution can be made until 4/15/2025! The February bonus may be perfect for a last-minute spousal IRA contribution.

Whether the contribution would lower taxable income depends on:

whether the spouse was covered by a retirement plan at work and
how much the couple earned in 2024.

Below is a quick decision tree based on whether the spouse is or is not covered by a workplace retirement plan.

For more tax saving ideas, check out 5 Ways to Lower Taxes Besides Donations. Whether to contribute to pre-tax, after-tax, or both depends on someone’s situation and goals.

Yikes - that was a lot about raises and bonuses!

However, it’s so important that it deserved some extra love. ❤️

2. Schedule tax prep meeting

Another step tech professionals and their families might take in February is to schedule their tax prep conversation.

Even if taxes are self-prepared, it’s important to dedicate time to them.

Scheduling time is even more important when working with a tax preparer! They’re generally overworked and in high demand.

Get organized and come prepared!

3. Gather tax forms and create checklist

One way to get organized is to create both a physical and digital folder for 2024 tax documents.

Physical folder

All tax documents received in the mail would ideally go right into the tax folder.

W-2: salaries, wages, and taxes withheld;
Form 1095: health insurance coverage details;
Form 1098: mortgage repayment, interest, and property taxes;
Form 1099: many uses;
Form 3922: details on stock purchased through a qualifying plan like an Employee Stock Purchase Plan (ESPP); and
Schedule K-1: income, losses, and dividends for partnerships, S corporations, trusts, and estates.

Some of the most common types of Form 1099 are:

NEC: Nonemployee Compensation (freelance income);
B: gain or loss on stock;
INT: interest;
DIV: dividends;
R: retirement plans;
T: tuition payments;
MISC: miscellaneous, etc.

A custodian (Fidelity, Vanguard, Schwab…) may include several forms in one file.

Digital folder

It’s best to save digital versions of all tax documents.

Two options include:

downloading directly from financial institutions and
scanning a copy of forms received in the mail.

Even if I receive a physical copy, I like to download the forms. It’s a way for me to double-check I don’t miss anything and that I’m using the latest version.

Places to download forms include:

banks and credit unions for interest paid or received,
custodians for investments, and
employer portals for W-2 compensation detail.

Since personal credit card interest usually isn’t deductible, those statements rarely need to be downloaded.

However, it’s a good idea to check every other financial account for important tax documents. Streamlining the number of accounts reduces workload - especially during tax season!

Tax checklist

Everyone’s busy. Things get missed - even by tax preparers!

Checklists
Crashes happened frequently in the early days of aviation. Adding checklists significantly improved safety.

Checklists have spread to other areas like:

building construction,
truck driving, and
surgery.

We even use checklists when preparing to sail!

Example:
One thing I like to do both for myself and for clients is draft a tax checklist. It lists everything I think could impact taxes for the year!

A good place to start is the previous year’s tax documents:

Which still apply?
Did anything change?

Creating the checklist reminds me of other things!

My personal checklist is in Microsoft Excel. I:

start with last year’s list,
remove what’s no longer relevant, and
add new items.

As I work through the list, I cross them off and record the date accomplished.

Measure twice, cut once.

4. Accept Restricted Stock Unit (RSU) grant

Restricted Stock Unit grant

It typically makes sense to accept RSU grants once they’re available.

Even if someone is certain they’re going to leave their employer, it still makes sense to accept grants!

Some situations might result in a partial or complete vest:

new manager, team, department, or role,
layoff,
merger or acquisition,
employee death…

Accepting the grant early ensures it isn’t forgotten.

Restricted Stock Unit vest

The RSU vesting schedule depends on the company.

Last year, T-Mobile started issuing grants which vest every six months instead of once a year. For employees with grants from multiple years, they’ll likely still receive more shares around February 25th. However, they’ll probably also receive a sizable vest around August 25th. It may take a business day or two for shares to settle into employee accounts.

There’s good, bad, and great news for employees:

good - may not have to manually pay the RSU taxes;
bad - receive fewer shares of company stock; and
great - may be able to sell shares without paying additional tax.

Choosing to keep the shares is like an employee taking cash out of their checking account to buy more company stock.

Is that what they want to do? 🤔

For more, check out:

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5. Review / rebalance investment portfolio

After a bonus is paid or Restricted Stock Units (RSUs) vest is a great time for a tech professional to rebalance their portfolio.

It may be important to have at least three to six (3-6) months’ of living expenses in an emergency and opportunity fund.

Asset allocation

Next, check that the family’s investment categories are close to their target percentages.

It’s common for market performance and recent income to throw off the allocation.

For example, tech stocks have had a wonderful run recently. Families might have too much riding on this one industry!

Asset location

Then consider whether each investment is held in the right account.

If either the asset allocation or location is off, it likely makes sense to adjust. However, it’s important to consider the tax impact.

Hey, thanks for reading my post on potential financial steps for tech employees in February. Happy Valentine’s Day! 💝

Just a reminder, I share a lot of resources that can help you.

Get a HELOC Before Retirement?

Kevin Estes — Tue, 28 Jan 2025 23:48:45 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to whether to take out a Home Equity Line Of Credit (HELOC) before retirement in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

This article explores an often overlooked strategy.

Recent Retiree

Imagine you recently retired. Congratulations!

Bad Timing

Unfortunately, the market fell soon thereafter and has continue to slide. Your portfolio is down over 20% in mere months.

Your solid emergency fund has dwindled. You may need to sell assets which have fallen in value.

Home Equity

Fortunately, your home’s worth much more than what you owe on the mortgage. The property’s appreciated and your mortgage balance has fallen with regular payments.

You love your home! Both you and your spouse want to live there as long as you can.

It could make sense to tap into your home’s equity.

What Is a HELOC?

A Home Equity Line Of Credit (HELOC) is potential debt secured by your home. It’s revolving credit - like a credit card.

Unlike a traditional loan that provides a fixed lump sum, a HELOC gives you the flexibility to borrow only:

what you need
when you need it
up to the credit limit.

Key Features of a HELOC

Home Equity Lines Of Credit aren’t like traditional mortgages.

Draw and Repayment

A HELOC typically has two phases:

Draw Period: lasts 5 to 10 years and allows you to borrow funds as needed. Interest is based on the amount borrowed. Longer draw periods offer more flexibility.
Repayment Period: spans 10 to 20 years and requires you to repay the borrowed principal and interest. You can no longer draw additional funds. The outstanding balance usually converts into something like a second mortgage with an adjustable interest rate.

Other Features

HELOCs differ from standard mortgages:

Variable Interest Rates: HELOCs typically charge variable interest rates. Monthly payments may fluctuate with market conditions. Some lenders offer fixed-rate options for borrowers seeking more predictable payments.
Credit Limit: The credit limit is set by lenders based on many factors. The home’s appraised value, amount of equity, and credit history of the borrower help determine the limit. The maximum is often around 80%.
Flexible Borrowing: A big advantage of a HELOC is that you only pay interest on the amount you borrow - not the credit limit. This feature is especially helpful for those who use it sparingly.

Credit Limit Example

Say a home is worth $400,000. The bank is willing to lend up to 75%. The owner has a traditional mortgage with a balance of $200,000.

In that case, the HELOC credit limit would be $100,000:

$400,000 appraisal
less 25% is $300,000
less $200,000 existing mortgage
equals $100,000.

Benefits of a HELOC

A Home Equity Line Of Credit has several advantages:

Access to Funds as Needed: A HELOC is a flexible source of funding. It can be used on college tuition, a home renovation, or ongoing expenses. You can withdraw funds as needed instead of taking out a lump sum.
Lower Interest Rate: Since they’re secured by your home, HELOCs generally charge lower interest rates than credit cards or personal loans. However, the lender’s margin - like an extra 2% - usually drives the interest rate above a new traditional mortgage.
Tax Advantages: The interest paid on a HELOC may be tax-deductible if the funds are used for home improvements. Please consult a tax professional.
Increased Home Value: Using a HELOC for home renovations or upgrades can enhance the property value. Improvements can also make living in the home more enjoyable.
Debt Consolidation: A HELOC can be used to pay off higher interest debts like credit card balances or personal loans. Doing so can simplify finances and save money over time.

Risks of a HELOC

Although a Home Equity Line Of Credit can be a powerful tool, it comes with risks:

Variable Interest Rates: Rising rates can increase the monthly payment and strain cash flow. HELOC payments are in addition to those for other debt - including a traditional mortgage.
Foreclosure: The home serves as collateral. Failure to pay could result in foreclosure. It’s crucial to borrow responsibly and make on-time payments.
Overspending: Easy access to funds can tempt someone to overspend. Loose lending in the early 2000’s let borrowers take out too much debt. Rising interest rates, tighter lending, and falling real estate prices led to the Great Recession.
Closing Costs and Fees: HELOCs often have upfront costs like appraisal charges, application fees, and closing costs. These expenses are sunk whether or not the line of credit is used.
Cancellations: Lenders can freeze a line of credit. That’s more likely if the home value falls or something changes with the borrower’s credit. Some HELOCs automatically shrink the credit limit throughout the draw period.

HELOC in a Down Market

A Home Equity Line Of Credit could help someone postpone selling assets in a recession.

Interest Rates

HELOC interest rates are usually variable. The rate is often tied to the prime rate - a benchmark influenced by the Federal Reserve.

For instance, a loan might be set at the prime interest rate plus a 2% margin. That’s known as “prime plus 2%.”

Interest rates have historically fallen with recessions. The Federal Reserve wants to maintain full employment and takes steps to lower interest rates. Lower rates encourage investment, which hopefully increases economic activity and hiring.

Falling markets could lower HELOC interest rates. Funds may become more affordable when they’re needed most.

Stock Values

Stock prices generally trend down in recessions.

Revenues and profits fall. Less cash flow restricts corporate investments - further limiting short-term growth.

A company with less profit and growth is less attractive. Fewer investors buy and some sell. Lower demand drives down the stock price.

Bond Values

A bond is usually debt owed by a corporation or government. Bonds typically pay a fixed interest rate and then return the original amount borrowed to the investor.

The impact of a recession on bonds is mixed:

Increased Risk Lowers Price: Falling revenue makes it less likely a borrower can pay its debts. Higher default risk lowers demand for the bond.
Lower Rates Raise Price: The price of bonds generally rise when interest rates fall. A bond that matures further into the future is more effected by interest rate changes.

Bonds can help stabilize a portfolio. That benefit may be especially important to investors in or near retirement.

Delayed Sale and Lower Interest Rate

In a recession, a HELOC may help a borrower:

avoid selling assets which have fallen in value and
pay a lower interest rate.

The hope is to never have to use the HELOC.

However, it can provide a temporary safety net in case a recession hits soon after retirement. That’s called an unfavorable sequence of returns.

No Guarantee

A quick market recovery would be ideal. Unfortunately, there’s no guarantee.

Investment prices could continue to fall for a prolonged period. Growing debt and higher monthly payments could be problematic.

Application

It might make sense to apply for a HELOC before retiring. Stable income may give a lender the confidence to approve the line of credit.

The application process can be similar to applying for a traditional mortgage. It would likely include:

an appraisal,
credit review,
income verification,
and more.

There will likely be initial charges like:

an application fee,
appraisal fee, and
closing costs.

Personal Decision

Whether getting a HELOC is the right move depends on your financial situation and goals.

A Home Equity Line Of Credit can provide signficant funding as needed at a relatively low interest rate. Those funds could be especially helpful if markets decline early in retirement.

However, the:

effort to complete an application can be high,
upfront costs may be sizable,
the credit limit could be cancelled,
variable interest rates can reduce cash flow,
easy access could tempt someone to overspend, and
the risk of foreclosure rises.

Hey, thanks for reading my post on whether to get a Home Equity Line of Credit before retirement.

Just a reminder, I share a lot of resources that can help you.

What Supersavers Miss

Kevin Estes — Wed, 22 Jan 2025 01:01:01 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to what supersavers miss in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Finanial Independence

I love the Financial Independence (FI) community!

Retirement Optional

It’s more commonly know as “Financial Independence, Retire Early” - FIRE for short. However, many in the movement focus more on financial independence than retiring early!

Solving the money problem gives people flexibility to pursue their passions. I know many work optional people and they all do something:

take care of family members,
manage real estate,
run a blog or forum,
work part-time,
run a business,
volunteer,
organize events,
host meetups…

Personal Connection

My mom’s best friend from high school got involved in the Your Money Or Your Life (YMOYL) movement in the 1990s. It was the Financial Independence community before the term existed.

Researching even more ways to save when I worked at Amazon led me to Mr. Money Mustache’s blog and later The Mad FIentist’s podcast. It also connected me to the vibrant FI community.

I’ve:

participated in countless meetups,
attended retreats, and
spent hundreds of hours in the Facebook groups.

I was energized by our discussions and decided to change careers to become a financial planner.

However, I was a bit of an outsider in both worlds. I found myself:

defending the FI community in advisor meetings and
defending financial advisors at FI meetups!

Many Benefits

Financial Independece members learn a lot of valuable information! The importance of low fees, diversification, and saving are just three examples.

Members are highly intelligent, work hard, and live below their means.

They’re refreshingly willing - even eager - to buck conventional wisdom. FI folks jettison anything that doesn’t stand up to logic. The movement’s countercultural ethos supports unconventional lives!

Many community members have been investing for decades. They often have more first-hand experience (and larger balances) than similarly-aged financial advisors.

Drawback

At times, members are uninformed. A blindspot can derail finances.

Profession

I sometimes see things like:

I don’t need a financial advisor. I max out my 401(k) and Health Savings Account.

Would that logic work for another profession?

I don’t need a dentist. I brush and floss.

Are you using the right toothbrush?

How do you remove plaque buildup?

How do you check for cavities?

What would you do with a cavity?

Do you need braces?

Would you give yourself a root canal?

This article explores opportunities often overlooked by supersavers.

No Formal Study

It’s impressive how much time people in the Financial Independence community spend optimizing their finances. However, it’s surprising how few of them formally study the subject.

Decisions are made based on third-hand sources such as:

a discussion
about an article
which reviewed a study.

Soundbites are retold - further distancing the information from its source.

Have you ever played the telephone game?

Statements morph.
Details are lost.

I’d encourage anyone interested in personal finance to study it. Read Bill Bengen’s original article and The Trinity Study. Check out content created by Michael Kitces and other financial professionals.

The Certified Financial Planner™ coursework is wonderful. I started it in late 2019 because:

I was genuinely interested in learning more about personal finance,
a mentor convinced me my last career would be investor, and
I wanted to explore this as an encore career.

The program cost over $5,000. What I learned was worth more than that for my family’s finances - even without working in the profession.

The education helped me decenter. My experience is an n of 1. The CFP® education helped me analyze situations I hadn’t encountered.

Too Much

Cutting costs only goes so far. That’s why many people in the Financial Independence community work long hours or multiple jobs.

Working a lot may increase someone’s short-term income and beloved saving rate. However, it can be unhealthy or downright dangerous.

A career is more like a marathon than a sprint. Burning the candle at both ends can force someone into early retirement.

Breaks are crucial. Companies realize employees are healthier, happier, and more productive after they recharge.

Focus on the Known

Many people in the community view themselves as intelligent. They also like to be seen that way!

Unfortunately, that can cause them to focus on topics they already understand.

For instance:

Good fuel economy isn’t enough.
Learn how to hyper-mile!

What about insurance coverage or estate planning?

What we know won’t sink us. What we don’t know can.

Single Stock Exposure

Many in the FI community work at large tech companies. The sector has done well and driven up the value of stock from Restricted Stock Units (RSUs), Incentive Stock Options (ISOs), and Employee Stock Purchase Plans (ESPPs).

People often don’t sell it because:

it’s done well and
they don’t want to pay the tax.

Past Leaders

Past performance is no guarantee of future results.

Look at the tech leaders from a few decades ago. Do those acronyms still dominate their industries? GM, GE, IBM, AT&T…

(This isn’t a recommendation to buy or sell any of those companies.)

Taxes

After Restricted Stock Units vest, they can be sold with little or no additional tax impact.

Also, the 15% long-term capital gains tax bracket is wide. It’s possible the only tax saved by waiting to sell would be the 3.8% Net Investment Income Tax (NIIT) for higher earners.

Doubling Down

It gets worse!

An employee might buy an index that includes their employer’s stock. They may inadvertently buy more!

Diversification

A stock’s meteoric rise could build wealth yet fail to keep it.

Getting rich and staying wealthy are two different things.

Imbalanced Portfolio

Many supersavers own an interesting set of investments.

Single Stock

Their employer’s stock may have appreciated.

Lowering single stock exposure could be a step in the right direction.

Allocation

A bigger imbalance may be caused by:

neither having a target
nor checking their current allocation!

Knowing is half the battle.

Fortunately, many people save into retirement funds. Those accounts can usually be rebalanced without an immediate tax impact.

Discipline

Rebalancing is the first step. However, it needs to be done regularly.

People in the Financial Independence community are famous for their disciplined spending. Their portfolios could use more attention.

Insufficient Emergency Fund

Investing every dollar can be a mistake.

That may not leave enough for:

home repairs,
insurance deductibles, or
unique opportunities.

The psychology is also important. Even the wealthy can slip into a scarcity mindset without ready access to funds.

The opposite could be true. Someone might hold too much cash.

Asset Mislocation

Some investors have taken diversification too far.

Each account might be balanced! That can be very tax inefficient.

A portfolio needs to be diversified. Each account does not.

For instance, it could make sense to invest accounts which might never be taxed again more aggressively. Money which will be used soon may need to be invested conservatively.

Each account needs a purpose and timeline. Those factors drive its allocation. Just one investment might work!

Think of it like a symphony. Each musician plays one instrument at a time in harmony with the rest of the orchestra.

Diversifying each account is like hiring a bunch of one-man bands to play together. Chaos!

Annual Tax Focus

A retiree may have years of low income - especially if they retire early. The progressive tax system lends itself to tax planning.

Default Taxation

Without planning, someone might pay:

a high tax rate while working,
a low tax rate in early retirement, and
a high tax rate once they start Required Minimum Distributions (RMDs).

They may be able to minimize lifetime taxes by:

lowering income in high-income years and
raising it in low-income years.

Less Income

Many supersavers are already taking some of these steps!

Opportunities include:

pre-tax retirement plans,
Health Savings Accounts (HSAs), and
Flexible Spending Accounts (FSAs).

However, it may make sense for someone to contribute to a Roth or After-Tax account. They might forego the HSA contribution to benefit from a lower deductible health plan.

It may also make sense for someone to harvest tax gains. That could be especially helpful if they owe an Alternative Minimum Tax (AMT).

More Income

It’s psychologically harder for someone to raise income in low-income years. However, it might be the right move!

Doing so could reduce future Required Minimum Distributions (RMDs). Pre-tax distributions, Roth conversions, and part-time work are just three options to explore.

Higher Expenses
However, higher income could:

raise taxes,
lower financial aid for higher education, and
increase healthcare premiums through the Affordable Care Act exchange or Medicare’s Income-Related Monthly Adjustment Amount (IRMAA).

Cautionary Tale
An early retiree got the message that Roth conversions can help lower taxes. They converted a pre-tax account to a Roth account.

The problem? The account had a balance of about $500,000!

That unusually high income was nearly taxed at a very high rate. Fortunately, their advisor was able to educate their client and help reverse the massive Roth conversion.

Tax Penalties

Penalties are often avoidable.

Estimated Payments

Someone who owes when they file their return may also have to pay an underpayment penalty and interest.

They might want to make estimated tax payments once a quarter.

That’s especially common:

for self-employed individuals,
after the sale of appreciated assets, and
when too little tax is withheld for stock compensation.

The IRS has an online payment option. A taxpayer would need to validate their information, make a payment, and save the receipt.

Increase Withholding

If someone owes taxes with their return, they could increase their withholding. Spreading out the tax payment could ease the burden and avoid penalties.

They would update their Form W-4 to:

reduce the number of dependents,
make extra withholdings, or
both.

Non-Qualified Distributions

The government encourages long-term saving. That’s why there’s a penalty for withdrawing retirement funds before age 59.5.

Exceptions to the 10% penalty depend on the account type and situation. If no exception applies, it may be better to take out a loan.

Other account distributions may be penalized if not used as intended:

20% penalty for Health Savings Account (HSA) distributions not used for qualified medical expenses and
10% penalty for 529 Plan or Coverdell ESA distributions not used for qualified education expenses.

Real Estate Exemption

Real estate enjoys many tax benefits, including the ability to exclude a portion of the gain from a home sale.

The taxpayer(s) would need to own and live in the property for:

at least two (2)
of the last five (5) years.

The excluded gain can be up to:

$250,000 single and
$500,000 married, filing jointly.

The tax break may sway the decision to sell or rent after a move.

An owner might even do both by:

renting it for a few years
and moving back into the property before selling it.

Home Receipts

Another opportunity takes little effort.

Saving home improvement receipts could:

increase depreciation expenses,
lower the taxable gain on a sale, or
both.

The home investments would either need to add value or extend its life. Save a copy digitally!

Personal Real Estate

Many supersavers own investment real estate. However, they often don’t keep it in a business entity - such as an LLC.

That may be an unnecessary risk.

One highly intelligent individual said something like:

Since someone could pierce the corporate veil anyway, I might as well save the hassle and legal fees.

This isn’t legal advice. However, the topic came up at a conference.

An attorney on a panel mentioned that how a business is run matters. Running it as a business means doing things like:

keeping personal and business expenses separate,
using a business email and mailing address,
maintaining good books and records, etc.

Running it professionally may lower the risk of a lawsuit reaching the owner’s personal assets.

Why ride a motorcycle without a helmet?

Underperforming Real Estate

Many people love real estate. Unfortunately, it doesn’t always love them back.

Interesting Dynamics

There seems to be a selection bias toward real estate in the Financial Independence community. Those who bought real estate during the Great Recession - including my family - enjoyed a strong recovery.

Also, real estate is highly leveraged. A 20% downpayment is 5:1 at the time of purchase! Gains and losses are multiplied.

The wealthiest Americans own relatively little real estate. It falls as a percentage of net worth.

Cash Flow Negative

There’s more to investment real estate than the rent and mortgage:

vacancy,
repair & maintenance,
insurance,
property tax,
Home Owner Association (HOA) fees,
management fees, etc.

Many properties are cash flow negative. The owner has to feed the rental every month!

Solution

The fix could be as simple as charging market rent.

With a cash flow negative property, the owner is betting on appreciation. That feels more like speculating than investing.

Spousal IRA

Many married couples overlook a key opportunity.

If one spouse works and the other does not, the spouse without earned income could contribute to their own retirement account. Contributions may even lower the household’s taxable income!

Whether they can be deducted depends on:

the couple’s tax filing status (file jointly),
whether the spouse without income is covered by a workplace retirement plan (rare), and
how much the couple earns.

College Financial Aid

Many savers assume they won’t qualify for financial aid.

That may be a mistake!

Need Aid

Financial need aid depends more on income than assets.

Also, the Free Application for Student Aid® excludes:

retirement accounts,
home equity, and
other items.

Colleges and universities use their own processes to award financial aid. However, they’re required to post a Net Price Calculator (NPC) on their website as long as they participate in federal student aid programs.

The NPC results can be surprising:

Financial aid may be offered to higher income families, especially at expensive private schools.
An Ivy League school may be less expensive than an in-state public university for lower income families!

Consider filling out the Net Price Calculator carefully before applying. Save the results. It should give the family a good sense of the cost.

If not, the results could be grounds for an appeal to the college for professional judgment. That’s especially true if the student wouldn’t have applied without that NPC estimate.

Merit Aid

There’s another option for families who don’t receive financial aid.

A student may be a good candidate for merit aid if their statistics are in the top quartile (25%) for the school:

Grade Point Average (GPA) and
standardized test scores (PSAT, SAT, ACT).

Applying to target and safety schools can increase the odds of receiving merit aid packages. However, read the fine print! Many packages require a student to maintain a high GPA in college.

Low Insurance Coverage

Some people save at all cost. Skimping on insurance is risky.

Auto Insurance

I’ve seen coverages like $10,000 and $50,000. Those may an order of magnitude too low!

Injuries

People often think of their vehicle when they think of auto insurance. However, causing an injury or death could be devastating.

Insurance is for what can’t be replaced. It’s not for ongoing expenses.

Premium Savings

Many people haven’t shopped their insurance in years.

They may be able to increase their coverage limits and lower their premiums by:

shopping around,
increasing deductibles, and
paying in advance.

Some insurers offer big discounts for high deductibles and paying early! Whether those options make sense depends on their situation.

No Umbrella Insurance

Umbrella insurance sits on top of other policies like home and auto. It’s designed to pay claims above other policy limits.

Umbrella generally requires higher limits on other insurance policies. Since it rarely pays claims, umbrella insurance can be quite affordable:

$1 million might only cost $200 a year.
$2 million might only cost $400 a year.

A general guideline is $1 million in umbrella insurance for every $1 million in net worth. Again, it depends on someone’s situation.

Life and Disability

Many people have too little life and disability insurance.

Young Families

Newer families are especially prone to underinsurance.

They may not understand the risk.
They might not have much cash for premiums.
However, their children could need decades of support.

Many employers offer affordable coverage. It may be as simple as clicking a box during open enrollment.

Tragedy

Another advisor tells a story about his neighbors. The husband earned a few hundred thousand dollars a year.

The father and his son were driving down the highway when a semi-truck jumped the median and collided with them. Both the father and son died at the scene.

Unfortunately, the husband didn’t have enough life insurance. His surviving wife and daughter were ruined financially.

The life insurance premium may have only been a fraction of the husband’s income.

Disability Insurance

Disability could be worse than death financially.

Someone might:

lose their income,
have significant medical expenses, and
require additional family support.

Many employers provide some disability insurance by default.

However, is it enough?

Mega Roth

Many employers added a benefit over the last few years.

Some employees missed the update.

After-Tax

Contributions to an after-tax 401(k) are made from income that’s already been taxed.

It works like a Roth 401(k) with three major differences:

contributions generally don’t receive employer matching,
it has a different contribution limit, and
the investment growth may be taxed.

The after-tax limit for 2025 is $70,000 less other employee and employer contributions for the year.

Say an unmarried 35-year-old earns $200,000 between salary and bonus. They contribute the maximum $23,500 to their pre-tax 401(k). Their employer matches another $8,000.

The employee could contribute $38,500 in 2025 to their after-tax 401(k):

$70,000 - employee contribution - employer contribution = after-tax max

$70,000 - $23,500 - $8,000 = $38,500

Mega Roth Steps

The after-tax plan may allow an employee to withdraw funds while still working for the employer. That’s called an in-service distribution.

The in-service feature may let them move contributions to a Roth 401(k) or IRA. The benefit of the extra move is to avoid tax on the growth.

Investment growth in an after-tax 401(k) is taxable. Therefore, it may be best to quickly move contributions to a Roth account.

Some custodians will automatically sweep after-tax contributions at the employee’s request. Setting that up may take a phone call to the custodian (Fidelity, Vanguard, etc.)

This process is called a few thiings, including Mega:

Roth,
Backdoor Roth, and
Two-Step Roth.

It’s a legal way to save more for retirement. Also, the funds might never be taxed again.

Roth accounts are especially helpful for heirs. If they inherit a pre-tax account, the withdrawals would be subject to income taxes. Withdrawals from a Roth account generally aren’t!

Someone may have already reached the limits on their:

Health Savings Account (HSA),
pre-tax 401(k), and
Employee Stock Purchase Plan (ESPP).

Contributions to an after-tax account could make sense. However, it depends on many factors.

No Social Security

Some people assume Social Security will go bankrupt before they receive benefits.

I feel that’s unlikely.

Funding Status

The Social Security Act was passed in 1935 - 90 years ago!

The Old-Age and Survivors Insurance Trust Fund is forecasted to be depleted in 2033. That assumes no major changes to the program.

The income is then is expected to fund 79% of scheduled benefits.

The total income and cost were close in 2023:

income of $1.351 trillion and
cost of $1.392 trillion.

The projected depletion was extended a year in the 2024 report primarily due to growth in the economy.

Tax Rate Changes

The payroll tax both employees and employers pay for the Old-Age, Survivors, and Disability Insurance (OASDI) has risen over time:

from 1% in 1937
to 6.2% since 1990.

Normal Retirement Age

Congress passed a law in 1983 to delay the normal - or full - retirement age from 65 to 67.

The law passed over 40 years ago and still hasn’t fully taken effect.

If history is a guide, Social Security benefit changes will likely be communicated well in advance.

Political Nightmare

Americans feel they have a right to benefit from the system they funded. Cutting benefits for retirees would be a political nightmare.

Assuming no Social Security benefits seems overly pessimistic to me.

Claiming Strategy

Knowing how Social Security works may help a couple decide who works when.

Also, it matters when someone starts taking benefits:

Starting Social Security benefits at age 62 instead of 67 could lower benefits 30% every year for life.
Delaying Social Security benefits beyond full retirement age increases the monthly benefit 8% each year, up to age 70.

State Estate Tax

Few things are more certain than death and taxes. However, the combination is less clear!

What Is Estate Tax?

It’s basically a tax on those who - according to state and federal government - accumulated too much wealth by the end of their lives. The estate and/or inheritance tax is paid after death.

There are exemptions! However, the exemptions are subject to change and vary by state.

Current Federal Exemption

For 2025, the federal estate tax exemption is $13.99 million.

Married couples can double it with the Deceased Spouse Unused Exemption Amount.

A married couple can combine their exemptions to $27.98 million if conditions are met.

Past Exemptions and Rates

The federal exemption has grown quickly:

$650,000 in 1999,
$3.5 million in 2009,
$5 million in 2011, and
$13.99 million in 2025.

Also, the top-end federal estate tax rate has fallen:

55% in 1999,
45% in 2009, and
40% since 2013.

The Tax Cuts and Jobs Act of 2017 raised the exemption to $11.18 million. The amount has grown with inflation.

However, the higher exemption only goes through the end of this year. It’s scheduled to fall back to $5 million plus inflation since 2011 at the start of 2026.

State Estate and Inheritance Taxes

As of 2024, 18 states had an estate tax, inheritance tax, or both.

Here in the Pacific Northwest, estate taxes start at:

High Tax Rate

In Washington, the highest estate tax rates are:

40% federal plus
20% state.

Those exclude probate fees.

Estate Minimization

There are many ways for someone to lower estate taxes, including:

contributing to a 529 plan,
withdrawing pre-tax retirement funds,
funding a trust,
giving to charity,
performing Roth conversions, and
using the Deceased Spouse Unused Exemption Amount.

It can help to plan ahead.

Step-Up in Basis

There’s an often overlooked estate benefit.

Someone who inherits a taxable account, real estate investment, or similar asset may receive a step-up in basis.

Say someone:

bought a home for $300,000
which grew in value to $1 million and
owned it the rest of their life.

An heir who receives the home would likely have their basis “stepped up” to $1 million. It’s as if they paid $1 million for the home.

Neither the heir nor the deceased paid tax on the $700,000 gain!

Someone nearing the end of their life might want to hold onto an appreciated asset. It depends on their situation and goals.

Charitable Giving

Many people are charitably inclined. However, giving cash is often a bad idea.

Appreciated Assets

Nonprofits don’t pay income taxes!

It hurts to see someone sell an asset which has risen in value only to give cash to charity. The taxpayer likely paid tax the nonprofit wouldn’t!

A donor could instead give the appreciated asset directly to charity.

Doing so could help the:

charity receive a larger donation,
donor avoid taxes, or
both!

Bunched Donations

Donations might not lower taxes.

A strategy called bunching could help.

Instead of giving every year, someone could give double one year and nothing the next. This process could grow itemized deductions and lower taxes.

Contributing to a Donor-Advised Fund (DAF) could combine both of these techniques in a powerful way. A sizable contribution can be especially effective in a year with high income or just before retirement.

Pre-Tax Accounts

Distributions from a traditional retirement account typically cause income taxes for the year.

If someone’s planning to donate the account, it may make sense to spend other funds. Roth conversions likely wouldn’t make sense!

There’s even an opportunity to avoid taxes on Required Minimum Distributions (RMDs). Someone could donate their RMDs directly to charity. Those are called Qualified Charitable Distributions (QCDs).

QCDs could have an even bigger effect. They may also lower the Income-Related Monthly Adjustment Amount (IRMAA) for Medicare.

Hey, thanks for reading my post on what supersavers miss.

Just a reminder, I share a lot of resources that can help you.

January 2025 Questions

Kevin Estes — Wed, 15 Jan 2025 01:32:08 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to the January Q&A in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Q&A Session

T-Mobile employees asked some great questions recently!

How do I reduce the tax on stock grants?
What should I do with the money after I divest from a single stock?
What investments are there besides the S&P 500?
Should I contributed to a 529 plan?

Below are some quick thoughts. None of them include any financial, tax, or legal advice.

1. How do I reduce the tax on stock grants?

Units are almost always withheld when Restricted Stock Unit grants vest. As the units turn into shares, some are sold to pay taxes.

An employee could then sell their shares right away at the price when the units vested and pay no additional tax.

Example

Let’s say a stock price did extremely well and rose:

from $100 when RSUs were granted
to $200 when they vested.

Ten (10) shares vest and four (4) of them are withheld to pay taxes. The percent withheld may be based on the employer’s estimated tax rate for the employee sent to the custodian (such as Fidelity) for state and federal taxes.

The four (4) shares withheld are sold, with the proceeds sent to the government(s) for taxes. The remaining six (6) shares are deposted into the employee’s taxable account.

Example:

10 units vest
4 units withheld for taxes
6 shares deposited to the employee’s account

The employee could then sell those six (6) shares for $200 each without incurring any additional taxes!

Holding onto the stock is like an employee taking cash out of their checking account to buy more company stock.

Is that what they want to do?

Cash for Taxes

Depending on the stock plan, it may be possible for an employee to:

move money to their account and
direct the custodian to use those funds to pay the taxes due on the RSU vest.

Then, all the vesting stock shares might be deposited into the empoloyee’s account

However, I’ve never seen anyone do that.

2. What should I do with the money after I divest from a single stock?

it depends.

Single Stock Exposure

Employees often accumulate a bunch of company stock through:

Restricted Stock Units (ESPP),
Employee Stock Purchase Plans (ESPPs),
Incentive Stock Options (ISOs), and the like.

We love and believe in our company. That’s why we work there!

Unfortunately, people who work at other companies often feel the same way. On average, employers are average. They have an average total return.

A single action can take down a company:

a poor strategic decision by an executive,
fraud or a significant Accounting error,
the entry of a major competitor…

One stock is generally riskier than a portfolio of stocks.

An average expected return with an above average risk is suboptimal (though the investment might outperform despite the math).

Also, employees already had a lot riding on their employer. That’s especiall true if they live near a major office:

much of their income,
the value of their home,
their spouse’s income, etc.

It’s often prudent to diversify. Getting rich and staying wealthy are two different things.

ESPP

It could make more sense to contribute to an Employee Stock Purchase Plan (ESPP) than hold employer stock.

For instance, an ESPP may provide a 15% discount off the lower of the price at the beginning and end of six months.

10% Increase
Assume the stock price rises from $100 to $110 over the six months.

The ESPP purchase price would be $85: 15% off $100. The employee would purchase shares for $85 worth $110.

If they sold at $110, they would realize a 29% gain for participating. Someone who held company stock would have only had a 10% gain.

10% Decrease
Let’s say the stock fell from $100 to $90 over the six months.

The ESPP purchase price would be $76.50: 15% off $90. The employee would purchase shares for $76.50 worth $90.

If they sold at $90, they would realize an 18% gain for participating. Someone who held company stock would have had a 10% loss.

Health Savings Account

Contributing to a Health Savings Account (HSA) may be another opportunity to consider.

Limits
It’s possible for someone on a qualified High Deductible Health Plan to contribute to a Health Savings Account (HSA).

The contribution limit in 2025 for those under age 55 is $4,300. Employer contributions reduce how much the employee can contribute.

There’s a $1,000 catch-up for those age 55 and wiser. However, someone cannot contribute to a Health Savings Account once they go on Medicare.

Triple Tax Advantage
Health Savings Account contributions are unique in that they can:

lower taxable income the year contributed,
grow tax-free, and
be withdrawn tax-free for qualified medical expenses.

Usually, a certain balance (often $2,000) must be held in cash. Anything above that can be invested for long-term growth.

Uses
Health Savings Account funds can be used for many expenses like:

hearing aids,
Medicare premiums, and
the medical portion of long-term care.

Withdrawing funds from a Health Savings Account is a bit like taking money out of a Roth IRA. Those funds might not be taxed again!

It might even make sense to pay medical expenses out of pocket and save the receipts. If HSA funds are needed later, the account holder can submit old receipts for reimbursement.

Pre-Tax 401(k)

The big benefit of contributing to a 401(k) is the employer match.

Match
Many companies (including T-Mobile/) match:

100% of the first 3% and
50% of the next 2% an employee contributes.

That is, a company may match 4% of the first 5% an employee contributes to their 401(k). That’s like an 80% gain.

Tax Savings
Pre-tax 401(k) contributions often lower taxable income. This can be especially important if the employee anticipates they’ll earn less in future years than they do today.

Early retirement is a good example. Somoene may have years or even decades with little earned income.

The tax system is progressive. The more you make, the more they take.

It may be possible to minimize lifetime taxes by:

lowering taxable income in high-income years and
raising it in low-income years.

Let’s say that without planning someone would pay a:

32% marginal tax rate in their peak earning years and
10% in early retirement.

Contributing to a pre-tax 401(k) when working and then distributing the funds in retirement might lower their lifetime tax bill. Even if the distributions bump them into the 12% tax bracket in retirement, they might still save 20% on income taxes!

Contribution Limit
The maximum 401(k) contribution for someone under age 50 in 2025 is $23,500. Someone who maxes out their pre-tax contribution might lower their lifetime taxes $4,700 ($23,500 * 20%).

Investment gains may extend the benefit.

After-Tax 401(k)

Employers sometimes have three options for 401(k) contributions:

pre-tax,
Roth, and
after-tax.

Pre-Tax
The U.S. government allows pre-tax contributions to:

lower taxable income the year contributed,
grow tax-deferred, and
be taxed when they’re withdrawn.

However, the government gets impatient. It wants people to pay taxes and requires them to take out a minimum amount each year once they reach a certain age.

These Required Minimum Distributions (RMDs) currently start at age 73 and last until the pre-tax account balance is exhausted. Fortunately, the RMD starting age is scheduled to rise to age 75.

RMDs could spike taxable income, causing someone to pay higher taxes. Withdrawing more than someone needs may not be ideal.

Think of it like a fruit tree. With pre-tax 401(k) contributions, the federal government doesn’t tax the seed but does tax the harvest.

Roth
Roth 401(k) contributions work the other way. These contributions are made with money that’s already been taxed. The Roth 401(k) gets what otherwise would have hit their checking account.

The contributions:

are taxed in the year they’re made,
grow tax-free, and
can be withdrawn tax-free if certain conditions are met.

For Roth accounts, the federal government generally taxes the seed but not the fruit.

Combined Pre-Tax and Roth Contribution Limit

As with pre-tax accounts, Roth 401(k) contributions can be matched by the employer.

However, the $23,500 employee contribution limit is for both the pre-tax and Roth 401(k).

If someone:

contributes $10,000 to their pre-tax 401(k),
they can only contribute $13,500 to their Roth 401(k).

Additional After-Tax Contributions

There’s a newer 401(k) option called after-tax.

It works like a Roth 401(k) with three major differences:

after-tax 401(k) contributions generally don’t receive employer matching,
the after-tax 401(k) has a different contribution limit, and
the investment growth of an after-tax 401(k) may be taxed.

The after-tax limit for 2025 is $70,000 less the employee and employer contributions for the year.

Say an unmarried 35-year-old earns $200,000 between salary and bonus. They contribute the maximum $23,500 to their pre-tax 401(k). Their employer matches $8,000 of their contribution.

The employee could contribute $38,500 in 2025 to their after-tax 401(k):

$70,000 - employee contribution - employer contribution = after-tax max

$70,000 - $23,500 - $8,000 = $38,500

That’s more than they can otherwise contribute to retirement accounts!

In fact, they wouldn’t have been able to contribute directly to a Roth IRA. Their $200,000 income exceeds the 2025 limit of $165,000.

Mega Roth

The after-tax plan may allow an employee to withdraw funds while still working for the employer. Those are called in-service distributions.

The in-service feature may let them move contributions to a Roth 401(k) or IRA. The benefit of that additional move is to avoid tax on growth.

Investment growth in an after-tax 401(k) is taxable. Therefore, it may be best to quickly move those contributions to a Roth account.

Some custodians will automatically sweep after-tax contributions at the employee’s request if in-service distributions are allowed. Setting that up may take a phone call to the custodian.

This process is called a few things, including Mega:

Roth,
Backdoor Roth, and
Two-Step Roth.

This process is a legal way to save even more for retirement. The funds might never be taxed again!

Roth accounts are especially helpful for heirs. If they inherit a pre-tax 401(k), the withdrawals would be subject to income taxes. Withdrawals from a Roth account generally aren’t!

An employee may already have reached the limits on their:

Employee Stock Purchase Plan (ESPP),
Health Savings Account (HSA), and
pre-tax 401(k).

Contributing to an after-tax account could make sense. However, it depends on many factors.

3. What investments are there besides the S&P 500?

Ah, the S&P 500. It sounds like a NASCAR race!

However, it’s a stock index that includes stocks from about 500 companies. S&P stands for Standard & Poor’s.

It isn’t especially diversified. The index includes the largest 500 publicy traded companies in the United States.

It’s currently weighted toward technology companies. As of December 31, 2024, “Information Technology” accounted for 32.5% of the S&P 500.

Seattle area employees often own employer stock. Investing in the S&P 500 could buy even more of their company stock!

Other Stocks

There are other stock investments like:

small-cap,
mid-cap, and
international.

Investing in these could put eggs in different baskets and help lower risk. It’s possible to buy essentially every public company with a single index.

Of course, investment costs matter. It’s also important to consider whether it’s right for someone’s portfolio.

Bonds

Another option is to invest in bonds or bond funds.

A bond is usually debt issued by companies and government entities. The interest rates for the U.S. government are typically lower than those of companies because of the lower perceived risk.

Investing in bonds can add stability to a portfolio. It’s a different type of investment altogether. Bond values generally depend more on market interest rates than the overall economy.

Other Investments

Other potential investments include:

private businesses,
real estate, and
alternative investments.

Each of these has its own costs, benefits, limitations, and time commitments.

Insurance

It can help to take a broader view of opportunities.

People are often underinsured. Their income and net worth may have risen faster than their coverage!

Coverage
We often think of auto insurance for vehicle damage. However, injuries can be much more expensive.

I like to see coverage limits like $100,000, $250,000, $500,000, or more.

Without enough coverage, one bad accident could wipe someone out financially.

Umbrella
Umbrella insurance rests on top of other insurance such as auto and home insurance. It helps pay for expenses above other limits.

Let’s say someone causes an accident which knocks a trailer carrying luxury vechicles off the road. The bill could easily exceed $500,000!

Umbrella insurance might pay the extra.

It may make sense to have at least as much umbrella coverage as net worth. That way, an accident (hopefully) wouldn’t take everything!

For instance, someone with a $2 million net worth may benefit from a $2 million umbrella insurance policy. However, it depends on their situation.

Umbrella insurance is surprisingly inexpensive. It requires minimum coverage limits on other insurance policies like home and auto.

Deductibles
In addition to being underinsured, people often have low deductibles.

The good news with low deductibles is that many expenses would be covered if there was an issue. The bad news is the premiums may be very high.

Insurance is for what someone can’t afford to replace. Those are major losses - not regular expenses.

It’s possible someone could both increase their coverage and pay less by raising their deductibles! Of course, a higher deductible requires enough cash to pay expenses.

Prepayment
Insurers sometimes offer massive discounts for paying six months or a year in advance.

Our family’s auto insurer offers a 26% discount for us to pay six months upfront. Other insurance companies offer discounts for paying a year in advance.

If someone has the cash, it may make sense to prepay insurance premiums. They may also save a lot by shopping insurance.

Replace Services with Products

Software companies have had success turning products into services and charging monthly. The opposite might help an individual!

A few examples include:

buying a router instead of renting it from the cable company,
buying a pressure cooker to simplify meal prep, and
buying a lawn mower to replace a lawn care service.

4. Should I contribute to a 529 plan?

A 529 plan is an option to save for future education expenses.

Features

Funds can be used for vocational, community college, and graduate school - not just for four-year degrees.

Technology has made it easier to contribute, invest funds, and change beneficiaries.

Over time, the laws have also been relaxed to include more options:

Since 2017, families can use up to $10,000 a year for K-12 private school tuition.
As of 2019, up to $10,000 can be applied to qualified student loans.
A change effective last year (2024) enables families who saved more than they needed to roll up to $35,000 into a Roth IRA.

Funding

A contribution to a 529 plan is treated like a gift.

However, there’s a special 529 funding rule. Someone can contribute up to five years at once and avoid gift and estate tax impacts. This “superfunding” is based on the annual gift tax exclusion limit, which is currently $19,000.

That is, someone could contribute $95,000 to a 529 plan:

5 years * $19,000 annual exclusion

However, they may not be able to give additional gifts to the 529 plan beneficiary for the next five years without impacting the combined gift and estate tax. They would also need to complete IRS Form 709.

A married couple could double that contribution amount to $190,000 to a single 529 plan in 2025!

Matching

One potential way to supercharge 529 saving is to offer to match relatives’ contributions.

We did this for our daughter and have matched contributions from both sets of grandparents and a couple uncles.

Sending them a link to the 529 makes it easier to give. Matching all contributions also guarantees we contribute more than anyone else.

Caution

However, there may be better opportunities. Funds in a 529 plan are included in financial aid calculations… at a low percent of assets.

Also, it’s a gift. There aren’t scholarships for retirement like for college.

Think of it like when an airplane cabin depressurizes. Take care of yourself before assisting those around you!

Hey, thanks for reading my post on the T-Mobile January 2025 Question & Answer session.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for T-Mobile Employees in January

Kevin Estes — Tue, 07 Jan 2025 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for January in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Potential Steps This Month

Financial steps T-Mobile employees might take in January include:

Submit dependent care reimbursements
Update net worth estimate
Refresh long-term projections
Evaluate Mega Roth
Begin gathering tax forms
Plan summer vacations and camps

1. Submit Dependent Care Reimbursements

The biggest benefit of the dependent care Flexible Spending Account (FSA) is tax savings.

Limits

A single filer or a married couple filing jointly may contribute up to $5,000 to a dependent care FSA. Doing so saves federal and often state income taxes.

The biggest downside is potentially losing the funds! A carryover does not apply to a dependent care FSA.

Fortunately, there’s a 2.5 month grace period to incur expenses - until March 15th. Participants then have until April 30th to receive reimbursement for expenses during the grace period. However, it’s best to do so well in advance in case there are any issues!

The goal of the Flexible Spending Account is to provide a tax break so family members can work. These funds can’t be used to pay for:

Kindergarten or other tuition expenses,
overnight camps, or
for dependent children age 13 or older - unless they’re physically or mentally unable to care for themselves.

Others Uses

Dependent care FSA funds can be used for the care of an adult who is unable to care for themselves and lives with the employee. That’s why the FSA is named dependent care, not child care!

2. Update Net Worth Estimate

Net worth = what you owe - what you owe.

Consider a car worth $20,000 with a loan of $15,000. The impact on net worth is +$5,000 ($20,000 - $15,000).

Depends on Wealth

Asset type depends on wealth:

Less affluent households tend to have more real estate and consumer durable goods.
More affluent households tend to have more corporate equities and private businesses.

What’s More Important?

Some people focus on growing income. Why sweat the small stuff when you can spend that time to earn more?

Others try to spend less. How much can you really impact your income?

A third option is to focus on growing net worth! It’s more direct and what drives financial independence. One of the episodes in this course is devoted to what net worth is and isn’t.

3. Refresh Long-Term Projections

The step after calculating net worth is to forecast it.

This is crucial! It’s empowering - and shocking - to see how much impact small changes can have.

For instance, multiple clients owned real estate and charged below market rent. Raising rent $200 a month and earning an 7% return on investments might result in an extra:

$14,000 after 5 years,
$34,000 after 10 years,
$104,000 after 20 years, and
$245,000 after 30 years!

My family and I used a template to forecast our net worth each January. I don’t budget. However, I consider forecasting the most important part of financial planning.

The episode after Net Worth in the Financial Independence Course is devoted to helping people Forecast The Potential. You may be less behind than you think!

4. Evaluate Mega Roth

T-Mobile Match

The biggest benefit of contributing to the 401(k) is the company match. T-Mobile matches:

100% of the first 3% of contributions and
50% of the next 2%.

Let’s say a single, unmarried employee earns $100,000 a year. If they contribute $3,000 (3%), T-Mobile will also contribute $3,000 (3%).

If the employee contributes $5,000 (5%), T-Mobile will contribute $4,000 (3% + half of the 4% and 5% contributions).

Many of us are willing to trade $5,000 for $9,000 each year!

Tax Savings

However, there’s another benefit: tax savings.

Contributing to a pre-tax retirement account like a 401(k) reduces taxable income for the year. That reduces state and/or federal income taxes for the year.

It may be possible for someone to minimize their lifetime taxes by:

lowering taxable income in high-income years and
raising it in low-income year.

Tax Benefit

Let’s revisit the six-figure earner.

A single employee earning $100,000 a year would likely fall in the 22% federal income tax bracket after the standard deduction. They might be in their state’s 8% income tax bracket.

That’s 30% of income off the top. Poof!

Contributing $5,000 could lower taxable income $1,500 for the year:

$5,000 * 30% = $1,500

The maximum 401(k) contribution for an employee in 2025 is $23,500.

There are also catch-ups of:

$7,500 for those aged 50 and wiser or
$11,500 for those aged 60-63.

Assume the employee is 35 years old. If they contribute the full $23,500, they may save $7,050 in taxes for the year:

$23,500 * 30% = $7,050

That’s not bad! Between the T-Mobile matching contribution of $4,000 and the $7,050 tax savings, the employee would be $11,050 ahead.

After-Tax 401(k)

However, there’s another contribution limit. In 2025, it’s a combined $70,000 for both employee and employer contributions.

Our saver has only used $27,500 of the $70,000:

Employee contributions of $23,500
Employer contributions of $4,000

How could they contribute the extra $42,500 ($70,000 - $27,500)?

Through after-tax 401(k) contributions!

This example isn’t realistic. Almost no-one who:

makes $100,000 a year and
pays up to $30,000 in income taxes
could contribute $70,000 to retirement accounts!

The limits are high enough that most employees run out of cash first.

Benefits of a Mega Roth

After-tax contributions can then be transferred to a Roth Individual Retirement Arrangement (IRA) account. That’s called a Mega Roth.

A few years ago, T-Mobile enabled employees to contribute to an after-tax 401(k) and take in-service distributions. That opened up the Mega Roth to employees.

Unlike pre-tax 401(k) contributions, after-tax contributions 401(k) are included in taxable state and federal income. They don’t save income taxes on the front end.

However those funds may never be taxed again! They may avoid taxes as the investments grow and be withdrawn tax-free if criteria are met.

This is especially helpful for estate planning, as it avoids forcing heirs to pay an unpaid income tax bill.

It’s such a good deal that high earners aren’t allowed to contribute directly to a Roth Individual Retirement Arrangement (IRA). That’s why a Mega Roth is sometimes called a Mega Backdoor Roth.

It’s a rare situation in which both Congress and taxpayers are happy:

Congress receives taxes now and
taxpayers avoid taxes later!

Costs of a Mega Roth

The primary costs of a Mega Roth are:

administrative complexity and
cash flow.

The pain of both can be reduced by contributing some of the annual bonus to the 401(k). That would be done through the after-tax bonus contribution option. A salaried employee would receive less to their checking account when the bonus (Short Term Incentive Plan) is paid in the back half of February.

Someone would only need to transfer the after-tax 401(k) contribution to their Roth IRA once a year. It’s best to do so immediately before the investment values change. Fidelity may be able to whisk these contributions away if the employee calls to set that up in advance.

Ideally, someone would be able to save all of their bonus! However, that may not be possible and bonuses aren’t guaranteed.

Mega Roth Example

Let’s assume our employee who earns $100,000 a year is paid:

$80,000 base salary paid throughout the year
$20,000 annual bonus paid in February

They’ve already saved $23,500 into their 401(k). Now, they might be able to:

save $15,000 into their after-tax 401(k) and
then transfer it immediately to their Roth IRA.

T-Mobile caps the contribution rate at 75% for 401(k) contributions.

The employee might save $42,500 into their retirement accounts:

$23,500 traditional 401(k) employee contributions
$4,000 T-Mobile traditional 401(k) match
$15,000 after-tax 401(k) contribution transferred to their Roth IRA

Caution! it may not make sense for someone earning $100,000 a year to make heavy Mega Roth contributions. It depends on many factors.

5. Begin Gathering Tax Forms

It’s important to store tax information in a safe place.

Employers are still required to mail paper versions of these forms. My wife and I dedicate a special folder to taxes each year.

Some important tax return forms for T-Mobile employees are:

Form W-2 - income and tax withholding information,
Form 3922 - detail on stock purchased through the Employee Stock Purchase Plan (ESPP),
Form 1099-B - investment capital gain or loss detail, and
Form 1099-DIV - investment dividend information.

The W-2 and 3922 forms must generally be sent by January 31st. However, they may take longer to hit mailboxes.

The 1099-B and 1099-DIV typically need to be downloaded from a custodian like Fidelity, Vanguard, etc.

6. Plan Summer Vacations and Camps

Finally, it’s important to schedule summer vacations and camps!

Camping spots book early - especially for national parks.
Some summer camps fill up by January or February.

Paid Time Off

Booking early can save on travel expenses and ensure others can join.

Many T-Mobile teams have limited coverage. Requesting Paid Time Off (PTO) early can be like calling dibs!

Summer Camps

If you have younger children and aren’t certain which camps to attend, consider visiting a camp fair. They’re often at a nearby school on the weekend and give you the opportunity to interview many camps on one day.

Hey, thanks for reading my post on potential steps for T-Mobile employees in January.

Just a reminder, I share a lot of resources that can help you.

December 2024 Questions

Kevin Estes — Wed, 18 Dec 2024 04:36:42 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to the December Q&A in a moment.

But first - here are some links you may want to save for later.

Transactions in Retirement Aren't Taxed… Yet

$200,000 at age 30 could grow to over $13 million by age 90.

Now, let's get on to the blog! 😀

Q&A Session

T-Mobile employees asked many good questions recently!

How can T-Mobile employees make the most of their paycheck and resources in ways non-T-Mobile employees cannot?
What will happen to the RSUs that haven’t vested when I retire?
Can I have an HSA if I’m on Medicare?
How do you reduce exposure to T-Mobile stock without a huge tax impact?
What is recommended to put into a 401(k) before retirement age?
How much is too much to contribute to a pre-tax 401(k)?
What are some good apps for individual investing?
What are stable options to invest in long-term growth?
What are some things to consider when inheriting a Roth IRA?
What are your thoughts on investing in crypto?

Below are some quick thoughts. None of them include any financial, tax, or legal advice.

1. How can T-Mobile employees make the most of their paycheck and resources in ways non-T-Mobile employees cannot?

T-Mobile employees have many compelling benefits!

Restricted Stock Units

It’s rare for a company to grant Restricted Stock Units (RSUs) to every full-time employee in the company. I believe T-Mobile was the first!

RSUs help align incentives. Employees think like owners because they are owners!

Starting February 2024, T-Mobile began granting Restricted Stock Units which vest every six months instead of once a year. That’s better!

The August Restricted Stock Unit vests will slowly grow over time.

In theory, the February RSU vests would fall. However, they might not because of the:

recent increase in the stock price and
increase in the dollar value of RSU grants.

Bonuses

Salaried employees typically receive an annual bonus for the Short-Term Incentive Plan (STIP) in late February.

Hourly employees often receive monthly bonuses from comissions (Retail) or monthly cash incentives (Care).

There’s an opportunity for employees to contribute different percentages of their pay to a 401(k) based on whether it’s:

regular pay or
bonus.

Contributing a higher percentage of bonuses may be a way to save without restricting cash flow.

Employee Stock Purchase Plan

T-Mobile’s ESPP is generous. It offers employees the chance to buy at a a 15% discount off the lower price at the:

beginning and
end of each six-month period.

If the price rises over the six months, the discount is bigger than 15%.

Even if the price falls or stays the same, the expected gain is about 18%. That’s because the discount lowers the purchase price.

For example:

$100 stock price
less 15% discount
equals $85 purchase price.

$15 / $85 is about an 18% gain every six months. It could be more if the stock price rises. It may be less if the price falls after purchase.

Health Benefits

T-Mobile’s health benefits are generally good.

It’s a way the company has chosen to compensate employees. It’s also because Retail and Care employees skew the average age younger than many other companies.

A High Deductible Health Plan (HDHP) could be right for an employee. If so, it’s worth considering a Health Savings Account (HSA).

Insurance

Life and disability insurance is relatively inexpensive for T-Mobile employees for many of the same reasons.

As we age, we trade:

human capital (time) for
financial capital (money).

Life and disability insurance can be especially important for young families.

After-Tax 401(k)

This option was added a few years ago. The after-tax 401(k) plan allows in-plan distributions, which opened up the Mega Roth.

After-tax has a much higher contribution limit than the combined pre-tax/Roth 401(k). The 2024 limits are below.

Pre-tax/Roth: $23,000 combined
After-tax: $69,000 - employee contributions - employer contributions

The after-tax 401(k) offers supersavers a chance to save even more for retirement.

Legal Assistance Plan

The legal assistance plan can be especially helpful for T-Mobile employees who haven’t yet completed their estate documents.

The cost is reasonable and signing up provides some accountability to create these important documents.

2. What will happen to the RSUs that haven’t vested when I retire?

Unvested Restricted Stock Units (RSUs) are usually forfeited upon leaving T-Mobile.

That’s part of why I waited until April 1st to leave. I noticed much of my compensation was in the first three months each year:

Restricted Stock Unit (RSU) vests,
annual bonus (Short Term Incentive Plan), and
the larger of the two Employee Stock Purchase Plan (ESPP) buys.

It’s become a little less lumpy with T-Mobile’s new RSU grants vesting every six months instead of once a year.

If an employee is laid off, some additional units may vest as part of the severance package. That’s part of why it almost always makes sense to accept RSU grants.

3. Can I have an HSA if I’m on Medicare?

Yes. An employee who’s on Medicare can have and spend a Health Savings Account (HSA).

However, they can no longer contribute to an HSA.

Health Savings Account funds can be used for a variety of expenses, including:

preventative care,
insurance premiums, and
ongoing expenses.

4. How do you reduce exposure to T-Mobile stock without a huge tax impact?

Whether to sell a stock depends on someone’s specific situation. However, diversifying out of a concentrated position may raise taxes less that they think.

Restricted Stock Units

Usually, some shares of stock are withheld for taxes when Restricted Stock Units vest. Their employer can advise how much to withhold.

The remaining shares are treated as if the employee purchased them the day the units vested:

If they sell right away at the price when the units vested, they won’t own additional taxes.
If they sell the shares within a year, they’ll realize a short-term gain or loss.
If they hold the shares over a year and then sell, they’ll have a long-term capital gain or loss.

Employee Stock Purchase Plan (ESPP)

The taxation is a bit different for shares purchased at a discount through the Employee Stock Purchase Plan.

For the long-term capital tax treatment to apply, shares must:

be held longer than a year from purchase and
held more than two years from the start of the ESPP offer period.

T-Mobile’s ESPP offer periods are six months. Someone would need to hold the shares over a year and a half after purchase for part of a gain to be treated as long-term.

The discount of at least 15% is generally taxed as ordinary income. However, the gain above the fair market value on the date of purchase may be a long-term capital gain.

Current Taxes

T-Mobile’s stock has done well in recent years! Many employees have unrealized gains.

The federal government encourages long-term investing. That’s why long-term capital gains are taxed at a lower rate than ordinary income.

There are essentially three long-term capital gain tax rates:

0% for low income,
15% for moderate income, and
20% for high income.

Many of us are taxed at the 15% long-term capital gains rate. For instance, the 15% rate applied to 2023 taxable incomes of:

$44,626 to $492,300 for single filers
$89,250 to $553,850 for married, filing jointly.

Short-term capital gains are usually taxed at someone’s ordinary marginal tax rate.

Future Taxes

There’s really no telling where tax rates will go from here. Given the result of the recent election, my hunch is that taxes may remain lower for the next four years.

However, we’re going to have to pay for the heavy pandemic spending at some point. My guess is that tax rates will rise in the coming decades.

Net Investment Income Tax (NIIT)

The Net Investment Income Tax was introduced at the start of 2013. That extra 3.8% tax applies to investment income above certain limits.

It’s also known as the unearned income Medicare contribution tax because it helps fund Medicare.

The Modified Adjusted Gross Income (MAGI) thresholds are:

$250,000 for married, filing jointly and
$200,000 for single filers.

One strategy is to sell enough stock to stay below these income limits. However, other considerations like diversification and cash flow might cause someone to take a different approach.

5. What is recommended to put into a 401(k) before retirement age?

How much to contribute depends on someone’s situation.

Minimize Lifetime Taxes

Many people think of taxes as an annual event: their tax return. It’s an annual ritual to minimize their tax bill.

Taking a longer view can help minimize lifetime taxes.

For instance, it may make sense to:

lower income during high-income years and
raise it during low-income years.

Paying no tax often isn’t ideal because it could miss out on the:

standard deduction and
low tax brackets (10%, 12%).

Minimizing taxes in a low-income year could cause someone to pay a higher tax rate later!

Base Case

Let’s assume someone makes good money, saves diligently, and already has a large pre-tax retirement balance. Their high income while working forces them to pay a lot of tax.

They plan to retire early at age 58. They may have very little income and pay almost no tax the following 17 years.

At age 75, they’ll likely be subject to Required Minimum Distributions (RMDs). Those are amounts the federal government requires someone take out of their pre-tax retirement accounts each year. It’s based on a percentage, which grows with age.

Uncle Sam essentially get impatient. It allowed:

contributions to lower taxable income when contributed and
then grow tax-deferred for decades.

Now, the government wants the taxes!

However, the process is challenging. Americans in their mid-70’s are expected to calculate how much to withdraw from each account every year based on a changing percentage.

Lower Income While Working

It may make sense to lower taxable income when working.

Someone may contribute to:

a pre-tax 401(k),
spousal IRA,
Health Savings Account (HSA),
or some other tax advantaged account.

It might also make sense to:

defer compensation,
delay the sale of appreciated stock,
give more to charity, and more.

Raise Income in Early Retirement

The opposite may hold once someone retires.

They might:

distribute funds from a pre-tax retirement account,
convert balances from pre-tax to Roth,
sell appreciated assets, and more.

Doing so could lock in lower tax rates using the:

standard or itemized deductions and
lower tax brackets.

Taking action early in retirement may reduce or even eliminate Required Minimum Distributions.

Lower Income Later in Life

It may make sense to pivot back to income reduction once someone’s in their mid-70’s.

Required Minimum Distributions really only matter if someone must withdraw more than they want from their pre-tax retirement accounts.

Large pre-tax distributions could be taxed at high rates. The highest marginal federal tax rates are currently 32%, 35%, and 37%.

Other opportunities could include:

using a Health Savings Account (HSA) instead of pre-tax retirement funds to pay for qualified medical expenses,
donating to charity - especially through Qualified Charitable Distributions (QCDs), and
giving income-producing assets to loved ones.

The right steps at each age depend on someone’s specific situation.

6. How much is too much to contribute to a pre-tax 401(k)?

It’s possible to oversave to a 401(k)!

Negative Cash Flow

The first sign someone may be investing too much is negative cash flow.

If someone’s racking up credit card or other high-interest debt, it may make sense to pull back on contributions.

However, it depends. Debt isn’t always bad.

Low Current Tax Rate

Someone who makes less income may be better off contributing to an after-tax account.

That’s especially true for the lowest tax brackets: 0%, 10%, or 12%. Young and part-time workers often pay these low rates.

High School
For instance, a high schooler may not need the funds they earn from a summer job. They also might not pay much - if any - federal income tax!

It may make sense for them to open and fund a Roth IRA.

Recent Grad
A recent college graduate may be in a similar position their first year. Their income from a partial year may put them in a low tax bracket.

Roth or After-Tax contributions may grow tax-free for decades. The lifetime savings could exceed the benefit of pre-tax contributions.

Career Break
The same could apply to someone who’s not working as much as they normally would.

A year spent helping a family member or finding a new position after a layoff may be a good one to:

contribute to an after-tax account or
convert funds from pre-tax to after-tax.

Lower income is also less likely to exceed the Roth IRA income limits.

If someone’s tax rate is lower than it will be later in life, it may make sense to contribute to after-tax instead of pre-tax!

Run Out Before 59.5

Funds taken out of a pre-tax retirement plan before age 59.5 may be:

taxed and
charged a 10% penalty.

While there are exceptions, there are drawbacks to each.

One sign someone may be contributing too much to their pre-tax 401(k) is if they won’t have enough in taxable accounts to fund their living expenses until age 59.5. That’s a major risk for early retirees.

Having an emergency/opportunity fund may be the first step.

I typically suggest someone keep at least three to six months’ of living expenses handy. I may extend that to one or two years if someone’s nearing retirement.

An emergency/opportunity fund can delay selling when the market dips. It also provides peace of mind.

Miss Opportunities

Contributing too much to a pre-tax 401(k) can cause someone to miss out on bigger opportunities.

It helps to explore many options, including:

debt reduction,
reliable transportation,
higher insurance deductibles,
pay in advance discounts,
Employee Stock Purchase Plan,
real estate repairs,
continuing education, and more!

Required Minimum Distributions

A fourth sign someone may be contributing too much to their pre-tax 401(k) is if they’ll be subject to Required Minimum Distributions (RMDs).

Someone’s real estate investments, Social Security, pension, or other income might fund their expenses later in life! That’s especially likely if they can delay Social Security benefits past their full retirement age.

It’s worth considering how much:

they have now,
they plan to save, and
their investments could grow.

The “rule” of 72 estimates how long it takes an investment to double.

An investment with a 7.2% annual return is expected to double about every decade (72 / 7.2).

Estate Tax

Not to get too literal but the final step somoene may be saving too much into their pre-tax 401(k) is if doing so impacts their estate plan.

It matters where their assets will go after they pass.

Charity
A large pre-tax 401(k) account may not be a problem if they plan to leave it to charity. Nonprofits generally don’t pay income taxes!

Getting a tax saving and then leaving the money to charity could avoid income tax altogether.

Higher Tax Rate
A large pre-tax retirement account could also incur a big tax bill.

All funds may need to be withdrawn within 10 years. Those distributions would likely be taxed as ordinary income. The heir pays the taxes the deceased didn’t!

Worse, the beneficiary may be in their peak earning years. Adding to their already high income could force them to pay a higher tax rate than the original owner would have!

**Estate Tax
**Pre-tax accounts are often larger than their after-tax counterparts. The difference is the income taxes to convert the funds from pre-tax to after-tax.

It matters if their estate would be taxed.

Although the federal estate tax exemption is currently high:

it’s scheduled to fall to about $7 million by 2026 and
many states have a much lower exemption.

For instance, Oregon taxes estates above $1 million. Washington’s estate tax starts at $2.193 million.

It may make sense for someone whose estate will be taxed to convert funds from pre-tax to after-tax.

Doing so could lower the combined taxes:

owner’s lifetime taxes,
estate taxes, and
heir’s lifetime taxes.

7. What are some good apps for individual investing?

I don’t have a lot of passion about investing apps. There are pros and cons to using them.

Pros

Access
A good app can make investing easier. That can be helpful for someone who might otherwise not invest!

Improved access is a big benefit.

Aggregation
Several apps pull information from multiple custodians. The combined view can help someone see and adjust their portfolio allocation.

Visibility
An app can also help someone keep track of old accounts.

That feature may be especially helpful if someone were to become disabled or die. An app listing the custodian, account, and balance can help a loved one find lost accounts!

Tracking
It’s also handy to track spending and net worth over time.

Transaction detail can help someone identify which expenses aren’t worth it and possible even catch fraud! A net worth graph can be empowering.

Cons

Better Investments
The thing I like least about investment apps is that they might cause someone to overlook better investments.

An app is unlikely to offer:

an employer match on retirement contributions,
a discount through an Employee Stock Purchase Plan,
favorable insurance premiums,
rental investment opportunities,
pofessional development, and more!

What’s easy may not be what’s important.

More Trading
Ease can also cause someone to trade too frequently.

Often, the worst thing someone can do in a down market is panic sell. An app which flashes red and trades with a click can make it all too easy to bail out of the market.

Overhead
It takes work to keep the connections live. Links seem to break even when passwords don’t change.

Complexity
Technology has given rise to unnecessary complexity.

It’s possible to maintain dozens of accounts and hundreds of investments. However, that’s poor financial hygiene.

Simplicity is the ultimate sophistication.

Security
Each access point adds risk to personal security and privacy. Fewer accounts with strong passwords and dual factor authentication is better than many accounts with less security.

8. What are stable options to invest in long-term growth?

Stability and long-term growth tend to oppose each other.

A savings account offers stable returns at or near inflation.
Bonds tend to have more risk and higher expected returns.
Stocks tend to have still more risk and even higher expected returns.

Long-term investments may be invested more aggressively. The hope is higher returns offset larger short-term declines.

The opposite is true for funds needed soon. A short-term drop matters less on a multi-decade investment than on this week’s grocery money!

9. What are some things to consider when inheriting a Roth IRA?

Thank you for sharing. I’m sorry for your loss.

No Rush

There likely isn’t a hurry to do anything with the Roth IRA. That money can be emotional so it’s important to give everyone grace.

It sounds like you may be a designated beneficiary - not a:

spousal or
eligible designated beneficiary.

You may be subject to the 10-year rule. Here’s the IRS description:

Empty the entire account by the end of the 10th year following the year of the account owner's (or eligible designated beneficiary's) death.

No Income Tax

Good news! Since it’s a Roth IRA, distributions likely won’t increase taxable income.

Your tax bill probably won’t rise due to the inheritance - at least initially.

Steps Depend on Use

When to withdraw funds and how to invest them is more than I can share without knowing someone’s situation and goals.

Consider a couple examples:

buy a home and
invest long-term.

Buy a Home
Let’s say someone has dreamed of buying a home. They’ve been planning and saving for years.

The inheritance may help fund the downpayment. In that case, it might make sense to distribute the funds quickly.

Buying a home is more of a lifestyle decision than an investment.

Invest Long-Term
On the other hand, someone may already own a home and save aggressively. They may not need the inheritance anytime soon!

In that case, it might make sense to leave the funds invested in the Roth IRA as long as possible.

The funds may be invested aggressively to hopefully benefit from years of tax-free growth. Of course, other investments might need to be invested more conservatively to reach a desired total allocation.

It just depends.

10. What are your thoughts on investing in crypto?

It’s cool technology!

Investment

However, we saw in the early 2000’s that cool technology is one thing and a good investment is another.

Amazon had layoffs when the internet stock bubble burst. Many .com companies went out of business.

To me, there are two important questions to answer before investing in any technology:

What is the incremental value to society?
How much of that incremental value can be monetized?

Value Add to Society
The U.S. dollar is already digital. We use money around the world without touching it.

The pandemic showed we can survive with very little physical cash. Some countries are even considering going cashless!

What are the incremental benefits to society?

Yes, cryptocurrencies aren’t as subject to central bank influences. The value may not drop a few percent a year due to inflation.

However, is that good for society? Is there value in dollars becoming worth less over time to encourage:

heirs to work instead of live off their inheritance and
companies to invest for long-term growth?

Yes, cryptocurrencies may be harder to track. That adds some privacy.

Again, is that good for society? It can also make it easier to launder money, deal drugs, evade taxes, and other illegal activities.

Yes, cryptocurrencies could make some governments less powerful.

Is that all good? Does North Korean access to international funds benefit the world?

Some crypto “benefits” might actually harm society.

Monetization
Let’s assume some of the issues above are resolved and a cryptocurrency’s net benefit to society is positive.

How would that benefit be monetized? What could a cryptocurrency charge for its services?

Not Like Other Investments

Cryptocurrency isn’t like other investments:

government bonds pay interest,
real estate earns rent, and
businesses generate profits.

Crypto is a currency.

Its value is based on supply and demand. The intrinsic value is almost impossible to estimate because it lacks ongoing cash flow.

For these reasons, I’m unable to distinguish cryptocurrency from bubbles like:

Hey, thanks for reading my post on the December 2024 T-Mobile Question & Answer session.

Just a reminder, I share a lot of resources that can help you.

17 Investment Signs You Need a Financial Plan

Kevin Estes — Wed, 11 Dec 2024 01:47:09 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to investment signs you need a financial plan in a moment.

But first - here are some links you may want to save for later.

No Tax on Investment Gains?

Now, let's get on to the blog! 😀

When to Plan

When do you need a plan? The time might be now if you have any of these investment situations!

You might need a financial plan if…

Your financial advisor “doesn’t charge you anything.”
You don’t know why you’re receiving information.
You own a muni in a retirement account.
You own company stock and don’t contribute to the ESPP.
You’re married and don’t know what a spousal IRA is.
You don’t invest funds in a Health Savings Account.
You feel you must earn at least 15% a year to retire.
Your accounts are all diversified.
You own art or antiques.
You think you wear large, mid, and small caps.
You don’t know what Required Minimum Distributions are.
You aren’t getting your company’s full match.
You pull from retirement accounts while still working.
You own a small business and don’t know what QSB stock is.
You think Roth 401(k) and IRA are the same.
You take investment advice from a Luber driver.
You think an investment is a “sure thing.”

Let’s explore each.

1. Your Financial Advisor “Doesn’t Charge You Anything”

Financial advisors rarely work for nonprofits. Even not-for-profit organizations earn revenue!

Many financial institutions charge without clients’ knowledge. Their “expense ratios” can be hefty.

If you don’t think you’re being charged for your investments, do the following:

identify your top five holdings,
locate the symbol or full investment name, and
search online for each investment’s expense ratio.

For instance, search:

“American Funds The Growth Fund of America Class C expense ratio” or
“GFACX expense ratio.”

I like to review the results from Morningstar. That’s this page for this fund. As of this writing, the fund’s expense ratio is listed at 1.36%.

The annual cost rises with investment size:

$1,360 a year for $100,000,
$6,800 a year for $500,000, and
$13,600 a year for $1 million.

I’m not trying to pick on this fund. This also isn’t a recommendation to buy or sell it.

What bothers me is that some investment expenses aren’t itemized. Many investors simply don’t know they’re being charged! Hidden fees simply lower their performance.

2. You Don’t Know Why You’re Receiving Information

Another advisor told me the following story.

A couple retired at a normal retirement age. They had enough money to live frugally.

However, they kept receiving letters from his former employer. They were confused why they were receiving letter for stock with no value.

The couple consulted an advisor, who realized the letters were for stock options with a $0 strike price.

The husband could buy valuable company stock for nothing! These options were worth millions and expiring soon.

The advisor recommended they exercise the options and then sell immediately.

He then asked a wonderful question:

Now that you have millions more than you thought, how might that change your life?

The couple thought for a moment. She turned to her husband and said:

Well, I guess that means we can afford to buy the name brand tea.

3. You Own a Muni in a Retirement Account

This next one comes courtesy of my father-in-law.

He had a financial “professional” recommend a municipal bond (muni) for his retirement account.

A municipal bond is debt issued by a state, city, county, or similar government. It’s used to fund a project or ongoing expenses. Interest on municipal bonds can avoid federal income tax.

Tax Equivalent Yield

The tax savings is bigger for taxpayers with more income.

Assume a tax-exempt municipal bond earns 3.35%.

For someone in the 35% federal tax bracket, that’s like a 5.15% taxable investment return:

3.35% / (1 - .35)

For someone in the 12% federal tax bracket, that’s like a 3.81% taxable investment return:

3.35% / (1 - .12)

The tax-equivalent yield is higher for those in a higher tax bracket.

Pre-Tax Retirement Account

However, funds withdrawn from a pre-tax (traditional) retirement account are taxed as ordinary income. It doesn’t usually matter what the investments were.

That means municipal bonds lose the tax benefit!

After-Tax Retirement Account

Holding municipal bonds in an after-tax or Roth account also rarely makes sense. Earnings there are typically tax-free regardless of the investment type.

However, municipal bonds usually earn less than taxable bonds of the same risk. That’s because high income individuals bid up the price! A higher price for the same payout lowers the return.

It generally makes more sense to invest in taxable bonds instead of municipal bonds in a retirement account.

Holding a municipal bond in a retirement account is a red flag.

4. You Own Company Stock and Don’t Participate in the ESPP

Some companies offer a generous Employee Stock Purchase Plan (ESPP).

An option I had twice in my career was to purchase shares of company stock at:

15% off
the lower price at the beginning and end of six months.

If the stock price rises during that period, the discount is even bigger.

Whether the price rises or falls, participating in the ESPP is generally better than owning the shares outright:

Rises: buys more shares with the leverage of a 15%+ discount.
Falls: buys at a 15% discount instead of having a negative return.

Whether it makes sense to do either or both depends on someone’s specific situation.

5. You’re Married and Don’t Know What a Spousal IRA Is

A spousal Individual Retirement Arrangement (IRA) is a way for a spouse to save for their retirement even if they don’t work!

Doing so:

requires the couple be married and
files a joint tax return.

Contributions can help lower taxable income for the year.

Income limits which depend on whether the spouse is covered by a workplace retirement plan. Also, contributions require sufficient:

cash on hand and
income from the working spouse.

While it isn’t appropriate in every situation, a spousal IRA is an often overlooked way to lower taxable income.

6. You Don’t Invest Funds in a Health Savings Account

Health Savings Accounts (HSAs) may require some funds be kept in cash. The assumption is that the participant needs some funds to pay for medical expenses. $2,000 is a common limit.

Anything above the limit may be invested. That’s good since contributions are triple tax advantaged in that they:

avoid tax on the front end,
grow tax free, and
can be withdrawn tax free if used for qualified medical expenses.

Qualified Medical Expenses

If the expenses qualify, Health Savings Account funds are treated like those in a Roth IRA. The funds grow and can be withdrawn tax free.

It may make sense to invest those funds aggressively.

Non-Qualified Expenses

If the funds aren’t used for qualified medical expenses, they’re treated more like a traditional (pre-tax) IRA. That’s often how remaining funds are treated at the end of someone’s life.

Here’s what the IRS says:

Spouse is the designated beneficiary. If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse’s HSA after your death.
Spouse isn’t the designated beneficiary. If your spouse isn’t the designated beneficiary of your HSA:
- The account stops being an HSA, and
- The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die.

If someone won’t use Health Savings Account (HSA) funds for qualified medical expenses, it may make sense to treat the account like a traditional (pre-tax) retirement account.

7. You Feel You Must Earn at Least 15% a Year to Retire

People sometimes feel they need to earn a higher return than they do!

This can lead them to:

chase returns,
become discouraged, or
both.

Income

It may help to think of returns like income.

A 7.2% annual return is:

$7,200 on $100,000,
$36,000 on $500,000, and
$72,000 on $1 million.

Compound Growth

Avoiding lifestyle inflation despite investment growth can improve someone’s trajectory.

Earning more without spending more increases savings! More saved increases investments, which restarts the virtuous cycle.

Funds left to grow could compound.

The “rule” of 72 approximates how many years it takes an investment to double. The number of years is roughly 72 divided by the annual return.

A 7.2% steady return would roughly double every decade:/

72 / 7.2% = 10 years.

$200,000 might grow to nearly $13 million over 60 years:

$200,000 at age 30,
$400,000 at age 40,
$800,000 at age 50,
$1.6 million at age 60,
$3.2 million at age 70,
$6.4 million at age 80, and
$12.8 million at age 90.

More precisely, the growth may be:

Less Behind

Someone who starts saving later may be less behind than they think!

They value of their Social Security could be high and their investments may grow substantially in the coming decades.

8. Your Accounts Are All Diversified

I often see portfolios where each account is diversified.

That’s likely a mistake.

Money that will be used much later can typically be investmed more aggressively than funds which will be spent soon. Long-term investments have time to recover if values drop.

That’s why an emergency/opportunty fund needs to be in liquid assets like a checking, savings, money market, or high yield savings account.

On the other hand, investments in a Roth IRA or Health Savings Account may never be taxed again. A Roth account someone expects to keep for the rest of their life can be invested more aggressively than this week’s grocery money!

The total portfolio needs to be diversified. Each account does not.

9. You Own Art or Antiques

A lot goes into owning collector’s items.

They could require:

extra care and attention,
more security, and
additional insurance.

It’s also important to know who’ll care for the items when something to the owner. There could be gift and estate tax impacts.

Selling collectibles as part of an estate can be tricky. Items may fetch a much higher price if:

authenticated,
given additional care, and/or
moved to a different market.

Marketing matters! It may even pay to auction the items.

Gains on long-term collectibles could be taxed up to 28%.

10. You Think You Wear Large, Mid, and Small Caps

All kidding aside, even financial institutions don’t agree on these stock classifications!

Market capitalization (cap) is the number of shares outstanding multiplied by the stock price:

Market cap = shares outstanding * stock price
$100 million = 5 million shares * $20 per share

FINRA defines them as:

large-cap: market value of $10 billion or more,
mid-cap: market value between $2 billion and $10 billion, and
small-cap: market value of less than $2 billion.

However, that isn’t what mutual funds use.

11. You Don’t Know What Required Minimum Distributions Are

Required Minimum Distributions (RMDs) are a way for the U.S. government to collect taxes on traditional (pre-tax) retirement accounts during someone’s lifetime.

The federal government let contributions:

lower taxable income initially and
grow tax-deferred.

Now, Uncle Sam wants his money!

Think of it like an apple tree. The federal government gave a tax break on the seed. Now, it wants to tax the fruit.

Specifically, the IRS requires a certain percentage of traditional retirement accounts be distributed each year once someone reaches a certain age. The percentage grows each year in the hope that essentially all funds are withdrawn before death.

The Required Minimum Distribution age is scheduled to change. It’s:

currently 73 years old and
expected to rise to age 75.

Required Minimum Distributions are onerous to remember, calculate, and pay each year starting in our mid-70’s!

It may be best to avoid them.

12. You Aren’t Getting Your Company’s Full Match

Many companies offer an 100% match on employee contributions up to a certain amount and 50% up to another level.

For instance, a company may match:

100% of the first 3% and
50% of the next 2%.

If an employee contributes 5% of their eligible pay to the retirement plan, the company may add another 4%.

That’s like an 80% gain!

Very few opportunities are so large. Prudent tradeoffs may help someone get the full employer match.

13. You Pull from Retirement Accounts While Still Working

It may be possible to minimize lifetime taxes by:

lowering income in high-income years and
raising it in low-income years.

Withdrawing funds from a retirement account while still working may do the opposite!

In addition, retirement plan distributions before age 59.5 are subject to a 10% penalty unless an exception applies.

A loan may be better. Workplace retirement plan loans are often available up to the lesser of:

50% of the vested balance or
$50,000.

14. You Own a Small Business and Don’t Know What QSB Stock Is

The Small Business Association (SBA) says:

Imagine owning stock in a company where the price appreciates greatly, you sell it, and pay no tax on your profit. That’s what can happen with qualified small business stock (QSBS).

The company must:

be a C corporation,
have total assets of $50 million or less,
be an active business (not a holding company),
not provide personal services (a manufacturer, retailer, technology, or wholesale business is OK), and
report certain documentation.

The shareholder must:

also provide some documentation,
have acquired the stock with money/property or as pay for services,
purchased it after 9/27/2010, and
have held the stock more than five (5) years.

Less gain may be tax-free for stock purchased on or before 9/27/2010.

The IRS refers to it as “Qualified Small Business (QSB) stock”, which is often shortened to QSBS. For more, check out IRS Section 1202.

This can be complicated. Some top search results for “QSBS IRS” are clarification letters. Please consult a tax professional if you feel Qualified Small Business stock treatment may apply to your situation.

15. You Think a Roth 401(k) and IRA Are The Same

There are some similarities and important differences between a Roth 401(k) and Roth Individual Retirement Arrangement (IRA).

Similarities

After-Tax Contributions
Contributions to both types of Roth accounts are after-tax. Money added to a Roth generally don’t lower taxable income the year they’re made. They aren’t tax deductible.

Tax-Free Growth
The big benefit of a Roth account is that the money may never be taxed again!

Funds can:

grow tax-free and
be withdrawn tax-free if certain conditions are met (qualified).

No Required Minimum Distributions (RMDs)
Neither the Roth 401(k) nor Roth IRA are subject to Required Minimimum Distributions. The government received tax revenue before the contributions were made!

However, that’s a recent change for a Roth 401(k)! The Secure Act 2.0 removed the Required Minimum Distributions during the owner’s lifetime starting in 2024.

Differences

Sponsor
A Roth 401(k) is sponsored by an employer. In contrast, a Roth IRA is established and funded by an individual person.

Employer Match
An employer may match employee Roth 401(k) contributions. That’s not an option for a Roth IRA.

Loan
A loan may be possible for a Roth 401(k) balance. However, that’s not an option for a Roth IRA.

Contribution Limits
The Roth 401(k) contribution limit is combined between Roth and traditional pre-tax.

The combined limits for 2024 are:

$23,000
plus a $7,500 catch-up for those age 50 and over.

The Roth IRA contributions limits are much lower:

$7,000
plus a $1,000 catch-up for those age 50 and over.

The catch-up contribution limit for a 401(k) is larger than the regular contribution limit for a Roth IRA!

Income Limits
A Roth 401(k) isn’t subject to income limits. A Roth IRA is. Someone who earns too much can’t contribute directly to a Roth IRA.

The Roth IRA Modified Adjusted Gross Income (MAGI) limit for 2024 is:

$240,000 married, filing jointly and
$161,000 single.

Investment Options
The Roth 401(k) investment options are limited to what the plan offers. A Roth IRA typically has more investment choices.

Withdrawals
Roth 401(k) withdrawals are subject to the terms of the plan. Roth IRA funds can be withdrawn anytime.

Tax on Nonqualified Distributions
According to the IRS, nonqualified Roth 401(k) distributions are:

pro-rated between Roth contributions (nontaxable) and earnings (taxable).

However, nonqualified Roth IRA distributions have a specific tax order:

nontaxable contributions and
taxable earnings.

A 10% penalty may apply to the taxable earnings from a nonqualified distribution.

16. You Take Investment Advice from a Luber Driver

I love ride-sharing services! I’ve taken hundreds of rides. However, I’ve had a few drivers pitch me investments.

In the past, some investment professionals suggested doing the opposite of the stock tip from the taxi driver or shoeshine boy!

For me, that puts too much faith in an amateur to be consistently wrong. Even a broken clock is right twice a day.

Problems

There are many issues with taking financial advice from someone other than a professional, including:

Insider information: It’s possible someone picked up material nonpublic information! You both could go to jail if you trade on that information.
Confidentiality: Someone else may not keep your private information to themselves. It’s important to consider how sharing with friends and family could impact your relationship with them.
Limited experience: People who haven’t formally studied personal finance are often limited to their personal experience. What worked in one situation may not work in another.
Ulterior motive: Incentives are sneaky! Someone may not realize how a personal benefit could influence their recommendation. Professionals work hard to proactively identify, disclose, and manage conflicts of interest.
Don’t know you: They may not understand your full financial situation. They don’t know your options and goals. If someone doesn’t know where you are and where you’re going, why would you take their directions?

Of course, this doesn’t just apply to drivers. It also applies to friends, family members, coworkers, media personalities, and more!

17. You Think an Investment Is a “Sure Thing”

Investments with higher expected returns typically have higher risk.

Risk and Return Tradeoff

For insance:

savings acounts have low expected risk and return,
corporate bonds have medium expected risk and return, and
stocks have high expected risk and return.

People generally shy away from riskier investments:

less demand lowers the price,
a lower price increases the expected return, and
higher expected returns convince some people to invest.

For instance, Warren Buffett said in his 1996 Berkshire Hathaway Chairman’s Letter:

I would much rather earn a lumpy 15% over time than a smooth 12%.

Riskier investments have a higher required return.

Full Cost

Some investments seem to have a high return at first glance. However, their returns are more modest including all costs.

Coffee Stand
The gross margin on coffee is high!

The key inputs are:

coffee beans, milk, syrups,
water, electricity,
cups, lids, and straws.

All are inexpensive - especially when purchased in bulk.

However, there are other expenses like:

rent for the location,
marketing, and
labor.

The cost of someone’s time is often overlooked!

I often divide how much someone earns by how many hours they work. Could they make more per hour doing something else?

Real Estate
Some people are accidental business owners, especially in real estate.

They might own a home and then need to move for whatever reason. The market rent may have risen above their mortgage payment.

Instead of selling the home, they rent it.

However, they may not plan for expenses like:

repair and maintenance,
HOA fees,
property taxes,
utilities,
marketing,
vacancy,
what the equity could otherwise earn, and
their time.

The property might be cash flow negative. In that case, the owner is betting on appreciation.

Alternative Investments

There are other investments like private debt, private equity, and venture capital.

Such investments aren’t available to everyone. They haven’t gone through the reporting process to become investments offered to the general public.

Less information must be disclosed. The investments may be less liquid. The risk could be higher.

Accredited Investor Definition
For these investments, the SEC requires an investor be accredited. The thought is that some households have enough wealth or income to fend for themselves if they lose all their investment.

An accredited investor must either:

earn at least $200,000 a year themselves,
earn at least $300,000 a year jointly with a spouse, or
have a net worth of at least $1 million excluding their home.

However, the thresholds were set in 1982 and haven’t been adjusted for inflation. More people have become accredited.

According to the Securities and Exchange Commission (SEC), the percent of American households who are accredited has grown more than tenfold:

1.8% of households in 1983,
3.0% of households in 1989, and
18.5% of households in 2022,

It’s likely even higher now.

Marketed

Private investments are marketed to a large and growing segment of American households.

These investments feel exclusive since they aren’t available to everyone. Less disclosure adds to the mystique.

Social Benefits

It’s gauche to say you’re wealthy. However, it’s fine to mention you own an investment… which is only available to accredited investors.

Tell me you’re wealthy without telling me you’re wealthy.

Private investment companies host exclusive events. They’re opportunities to hobnob with other accredited investors.

A private investment’s social benefits may be more certain than its financial returns.

Signs You Need a Financial Plan

This article is part of a series which also includes:
12 Emotional Signs You Need a Financial Plan

Hey, thanks for reading my post on 17 investment signs you need a financial plan.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for T-Mobile Employees in December

Kevin Estes — Tue, 03 Dec 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for December in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

The Holidays!

The nights are long. The shops are full. Mariah Carey, Brenda Lee, Bobby Helms, Burl Ives, and Wham! are playing everywhere.

I hope you had a wonderful Thanksgiving and are ready for December. Ready or not, it’s heeere! 🎁

Potential Steps for T-Mobile Employees This Month

Financial steps to take in December may include:

Make year end retirement contributions
Update resume and career plan
Harvest tax losses or gains, if applicable
Review Social Security statement(s)
Update 401(k) contribution rate(s)

1. Make Year End Retirement Contributions

401(k)

If the goal is to max out the employee 401(k) contribution, make sure that’s on track.

The 2024 employee contribution limits are:

$23,000, up $500 from 2023, plus a
$7,500 catch-up contribution for those aged 50 and over.

From a cash flow perspective, now may be a good time for heavy contributions:

we’re only a few months away from the tax benefit,
many employees have reached the Social Security taxable maximum income, and
annual bonus payouts as well as Restricted Stock Unit (RSU) vesting are expected in mid-February.

Someone in the 24% federal and 8% state tax brackets might get $0.32 of every dollar contributed back in a few months with their tax return.

Individual Retirement Arrangement (IRA)

Contributing to an IRA might be especially helpful for a spouse. Doing so could reduce the income tax for a married couple who files jointly.

The IRA deduction income limits are higher for someone not covered by an employer retirement plan. That’s especially common in single income families. The spouse with earned income would need to have earned enough to covesr both of their contributions.

Although the deadline to contribute to an IRA is usually tax day, it may make sense to do so now. It’s easy to forget!

It might also take a while to open and fund the account. Setting them up now could avoid a fire drill later. 🚒

Whether to contribute pre-tax (traditional) or after-tax (Roth) would depend on the situation.

2. Update Resume and Career Plan

Bonuses and raises generally occur in mid-February each year for salaried T-Mobile employees.

Here’s a rough timeline (working backward):

Late January: The Human Resources and Payroll teams need time to process the changes before the changes in mid-February.
Mid January: Senior leadership needs time to review / adjust / approve proposed raises and bonuses.
Early January: Supervisors need to submit their raise and bonus decisions by mid-January. That means they’re making decisions in early January or even December!

Let’s consider a couple scenarios.

Review Is Positive or Excellent 😎

A manager might want to do everything they can for the employee!

If they know where the employee wants to go in their career, it’s much easier to help them get there. The manager might be able to:

develop stretch assignments,
begin preparing the employee for a promotion, or
help the employee find a great opportunity with another team.

Review Is Less Than Stellar or Poor 🤔

Sometimes, a role or team is a poor fit.

An employee might apply for a lateral position somewhere else in the company. In extreme cases, they may need to consider positions outside of T-Mobile.

Either way, an updated copy of their resume would come in handy!

Time to Think

It’s typically a quiet time around the office. That provides an excellent opportunity to reflect on accomplishments throughout the year.

It’s also a good time to review uncompleted projects. Why weren’t they completed? Is there anything that could be done about it? Any progress is better than a goose egg! 🥚

What Worked for Me

Here’s what I liked to do:

Go through my calendar month by month. What were my biggest projects? What did I accomplish?
Review my sent emails. What were my key deliverables? What impact did they have?
Review my folders. What did I create? How did that help business partners, teammates, and customers?

I’d then consider the work I did and the people I worked with:

What did I really enjoy?
What didn’t I get a chance to do that I wished I could have?
Who did I like working with?

That information helped me and my manager set my direction for the next year:

“It seems like there may be an opportunity with X. I’ve been thinking about it and I feel we might be able to do Y.”
“I really enjoyed working with Z on that project. I heard they’re leading a new opportunity. Could I explore that a little further?”
“W is making great progress. I feel they could be great at T. I have a fair bit of experience with that. Would there be an opportunity for me to mentor W on T?”

This bottom-up approach then led to a one-page self-appraisal, which I’d normally print out and share with my manager.

It’s a bit like discussing a letter of recommendation with a high school teacher. They shouldn’t have to work to remember:

what I do well,
what my development opportunities are, and
what I’d like to do next.

I tried to make it easy for my manager to support me!

December is a good time to update resumes, CV’s, and career goals. They’re particularly helpful for performance review conversations.

3. Harvest Tax Losses or Gains, if Applicable

I wrote about tax loss and gain harvesting last month.

Here are some highlights:

Tax Loss Harvesting: Selling an investment at a loss can offset up to $3,000 of earned income. That’s especially helpful in a high-income year.
Tax Gain Harvesting: Selling an investment for a gain can increase taxable income in a low-income year.

Each of these tactics need to be completed by year end, making December an excellent time for an investment review! However, they can help minimize lifetime taxes.

4. Review Social Security Statements

Social Security statements are updated once a year. December is a good time to check them!

Retirement Income

The latest statement can help dial in financial independence plans. Social Security benefits can exceed living expenses for some families!

However, the default Social Security statement assumes someone will earn the same real income they did the previous year until at least age 62. That assumption may be fine for someone with over 35 years of earnings. However, someone who’s worked fewer years will have $0 assumed, lowering their average income and retirement benefits.

The Social Security Administration now includes a calculator to estimate what the benefits will be based on assumed future income. I like to have clients assume no future income to see how that impacts their estimated benefits.

Fraud

Another good reason to review Social Security statements regularly is to check for fraud. Some criminals report income with a stolen Social Security number. Any one of us could be a victim!

Knowing as soon as possible may help catch the fraudster and minimize the financial impact. It’s not ideal to learn about it when being audited by the IRS!

5. Update 401(k) Contribution Rate(s)

One final step a T-Mobile employee might take in December is to update their 401(k) contribution percentages.

Matching

T-Mobile matches:

100% of the first 3% an employee contributes and
50% of the next 2% they contribute.

If someone contributes 5%, T-Mobile will generally match 4%.

Qualifying income includes:

regular salaries and wages,
commissions, and
bonuses - including the short-term incentive plan, monthly cash incentive plan, spot bonuses, etc.

Many people adjust their contribution rates toward the end of the year for a variety of reasons. However, it’s important to refresh the contribution rates before the new year.

If someone’s planning to max out their employee 401(k) contributions, it might make sense to do so throughout the year. If someone reaches the maximum before the last paycheck of the year, T-Mobile doesn’t make a catch-up contribution until the following year - usually in March.

2025 maximum

The 401(k) employee contribution limits for 2025 are a bit different:

$23,500, up $500 from 2024,
$7,500 catch-up for those age 50 and over, and
$11,250 catch-up for those age 60-63.

To avoid impacting the 2024 contributions, it may make sense to wait until after the last paycheck of the year to make the changes in Fidelity.

Don’t forget to consider both the regular and bonus 401(k) contribution rates for next year!

Hey, thanks for reading my post on potential financial steps for T-Mobile employees in December.

Just a reminder, I share a lot of resources that can help you.

Happy Thanksgiving!

Kevin Estes — Wed, 27 Nov 2024 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to Thanksgiving 2024 in a moment.

But first - here are some links you may want to save for later.

Do You Have the 3 T's to Manage Finances Well?

Now, let's get on to the blog! 😀

So Grateful 🦃

Gratitude is both free and priceless. ❤️

Thanksgiving is one of my favorite holidays. It gives me a chance to reflect on the many wonderful parts of my life, including:

Family
Health
Time
Clients
Support
Generator

Family 👨‍👩‍👧

My family is incredible! It’s been a busy year.

We’re also savoring the time we have left with our teen at home.

Health 🏃‍♀️

Fortunately, we have our health! Although we had a bout earlier this year, COVID-19 continues to fade into history.

The major health scare has passed for now. All family members who’d like to work are able!

Time ⏱

I'm so thankful for the flexibility my new career provides. I've been able to take my daughter to multiple practices most weeks and attend her various activities.

We also had the opportunity to take most of a month off this summer. We visited Yosemite National Park, San Francisco, San Juan Island, Leavenworth, and more!

Clients 🤝

I've been blessed to work with many clients. It’s hard to believe it’s only been a year and a half! They feel like family.

The highlight has been letting multiple clients know they’ve achieved financial independence!

Support 🏋‍♂️

Thank you to the many wonderful people who've supported my family, me, and my business throughout the year!

Generator ⚡

A big storm hit when we were moving to our new home a few years ago. Both homes were without power for over four days, which convinced us to buy a generator.

Thank goodness! We lost power at our house for five days starting Tuesday of last week. I'm so thankful we have, maintain, and keep fuel for our backup generator!

Hey, thanks for reading my post on things I’m thankful for Thanksgiving 2024.

Just a reminder, I share a lot of resources that can help you.

Is All Debt Bad?

Kevin Estes — Wed, 20 Nov 2024 02:08:25 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to whether all debt is bad in a moment.

But first - here are some links you may want to save for later.

Never Finance a Toy

Now, let's get on to the blog! 😀

Debt is a Tool

It’s a powerful one at that!

Like any tool, it has uses and must be handled with care.

Pros and Cons

Using debt has big benefits and drawbacks.

Pros:

current spending
credit score
protection
rewards
current opportunities

Cons:

higher spending
interest and fees
future flexibility
credit availability
financial risk

Pro: Current Spending

Credit lets someone to buy today and pay later.

It’s often better to delay gratification! However, that may not be ideal in some situations.

Lifetime Income and Spending

Income generally varies more than spending throughout our lives.

According to household data from the U.S. Bureau of Labor Statistics:

Income for 45-54 year olds was nearly three times that of those under 25 or over 75 years old.
Expense for 45-54 year olds was less than double that of those under 25 or over 75 years old.

College Students

Full-time college students have it worse. Their income is often low while their expenses are high.

It’s jarring how little college students spend!

Living two or three people to a room is common.
Meals are often instant ramen, microwave pizza, and the like.

The standard of living is especially surprising at top universities. Students who’ll earn well over $100,000 a year mid-career live like paupers while attending.

Lifetime Earnings

A young adult has their whole life to earn money. Their greatest asset is usually their human capital.

After they complete their education, they start work. They trade human capital for financial capital.

Most of the money earned is spent. Hopefully, some is saved!

Savings will be needed later in life when income is lower.

Lifetime Spending

American society forces young adults to prove themselves.

Young people generally aren’t allowed to spend until they earn. Older family members don’t want financially dependent adults!

Debt is a rational way to align spending and income. The benefits of eating a complete meal instead of instant ramen may be huge!

Using credit is especially enticing for someone who expects their income to rise.

Young adults use relatively little debt. The debt they have is for long-term assets: homes, cars, and themselves!

According to recent data from the Federal Reserve Bank of New York, 18-29 year olds have the following debt:

Pro: Credit Score

Credit isn’t fair:

Those who need it can’t get it.
Those who have it don’t need it.

Debt is also a bit of a Catch-22. It takes credit to get credit.

Credit scores take years or even decades to build.

Pure Risk

Someone who pays for their expenses out of pocket is responsible! They spend less than they earn and have no need for debt.

Consider who’s riskier:

someone with debt
or without it?

The person without debt has less financial risk!

Proven Behavior

The problem is that expenses are often funded by a family member. How responsible their parents are has little impact on how responsible they are!

Young adults must prove they’re trustworthy. That’s why getting a credit card at age 18 isn’t a terrible idea.

Using the card and paying it off monthly can help build credit history. That keeps their utilization low and slowly ages the account.

Authorized User

Adding a younger family member as an authorized user on a credit card can be a huge gift!

It’s like credit training wheels. Children gain experience using credit without the risk of missed payments.

My family ran a real estate business.

We were surprised that four Notre Dame undergraduate students had credit scores over 800! Their parents had added them as authorized users years before.

The risk is that the children will overspend.

However, that’s a feature, not a bug! Irresponsible students aren’t added as authorized users.

Impacts of Good Credit

It’s hard to understate the importance of a solid credit.

A good credit score can can help someone:

get student loans,
rent an apartment,
buy a car,
lower insurance premiums,
get a job,
buy a home…

According to the Consumer Financial Protection Bureau, the average total cost of credit card debt for superprime borrowers was about a third that of deep subprime borrowers in 2023:

12% for superprime (800+ credit score) and
36% for deep subprime (579 or less).

The benefits are why I usually suggest people keep debt accounts open even when they no longer need them.

Pro: Protection

Fraud cost consumers more than $10 billion in 2023, according to the Federal Trade Commission.

If someone sees fraud on their account, they should immediately dispute it. Both credit and debit cards have protections.

Credit and Debit Difference

However, a key difference can really matter:

Credit card fraud has taken the institution’s money.
Debit card fraud has taken the account holder’s money!

Denied Fraud

What happens if a lender denies a fraud claim?

If it was a credit card transaction, the money in dispute was paid by the credit card company.
If it was a debit card transaction, the money in dispute came out of the individual’s account!

Different Escalation Path

It may seem like splitting hairs. However, play it out a move.

For a denied fraud claim on a credit card, the “borrower”:

doesn’t pay the charge and
continues to dispute it.

The financial institution may have to take legal action against the fraudster (or “borrower”). The company may have to write it off. That’s one reason merchant costs are higher for credit than debit card transactions!

For a denied fraud claim on a debit card, the owner:

continues to dispute it and
hopes the bank gets them their money back.

The account owner may have to take legal action against the bank to retrieve the funds!

Pro: Rewards

Credit cards usually have more favorable benefits than debit cards.

That’s because credit card companies know some people will carry a balance, which earns:

interest charges,
late fees, and
other revenue.

Points

There’s a healthy debate on whether points or cash back is better.

Travel hacking is an art. It can pay for someone who has the time, desire, and patience.

However, racking up airline miles and hotel stays can cause someone to travel more. We’ve also seen how valuable travel rewards can be during a global pandemic.

Fortunately, points can often be traded for cash back. The conversion rate matters.

Cash Back

Cash rewards can significantly improve cash flow:

2% on $50,000 spending is $1,000 a year!

Better yet, it’s usally tax-free. The IRS generally views it as a spending rebate instead of income.

Some cards offer additional cash back for specific categories. Special rates may apply for restaurant, gas, grocery, and other transactions.

Retailers sometimes offer additional cash back for their own transactions. These programs reward loyalty.

Pro: Current Opportunities

Using credit to pay for everyday expenses can take advantage of current opportunities such as:

insurance,
products, and
investments.

Insurance

Someone may be able to lower their insurance premiums by:

increasing their deductibles or
paying six months or a year in advance.

For more, check out Shop Auto Insurance!

Products

Owning is often less expensive than renting long-term.

Furniture is a good example. Owning furniture can be less expensive than renting and it requires someone keep the furniture a while.

Other examples include buying a:

WiFi router instead of renting it from the cable company,
pressure cooker or air fryer instead of eating out,
auto instead of leasing,
home instead of renting…

Investments

Some investments provide a higher “return” than the debt cost:

Contributing up to the full company match in a retirement plan could be a 50% benefit or higher.
Participating in an Employee Stock Purchase Plan with a 15% discount every six months may be more than a 36% annual benefit.

A married couple in the 24% federal tax braket may save that plus some state taxes by contributing to a Spousal IRA.

Education can also fall into the investment category. It works best when evaluated that way!

What’s the expected income upon graduation?
How much will the program cost?

Con: Higher Spending

Cash is psychologically harder to spend. Credit cards reduce resistance and increase spending.

Paying with cash may even activate different parts of the brain. Using a phone is even easier!

Track speding. If it’s much higher with credit, consider switching to cash.

Con: Interest and Fees

Interest rates depend on the debt type.

Payday Loan

According to the Consumer Financial Protection Bureau:

Many state laws set a maximum amount for payday loan fees, ranging from $10 to $30 for every $100 borrowed.
A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent.

Charging 400% interest a year is outrageous!

Credit Card

The consumer bank interest rate on credit cards was 21.76% in August 2024. That was a sharp increase from 14.56% in February 2022.

Board of Governors of the Federal Reserve System (US), Commercial Bank Interest Rate on Credit Card Plans, All Accounts [TERMCBCCALLNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TERMCBCCALLNS, November 18, 2024.

Student Loan

As of February 2024, the average student loan rate for all existing borrowers was 6.87%.

Hanson, Melanie. “Average Student Loan Interest Rate” EducationData.org, February 21, 2024, https://educationdata.org/average-student-loan-interest-rate

Current Interest Rates
New student loan interest rates depend on the borrower and loan type. They’re currently:

Undergraduate direct loans 6.53%
Graduate or professional direct unsubsidized loans 8.08%
Parent, graduate, or professional direct PLUS loans 9.08%

Limits
The federal direct loan limits for dependent undergraduate students depend on their year in school:

First-year $5,500
Second-year $6,500
Third-year and beyond $7,500

These direct loan limits fall laughably below the cost of education for many students.

**Income-Driven Repayment
**If someone’s total student loan debt is larger than their income, it may make sense to go on an income-driven repayment plan.

These plans can:

lower the monthly payment and
increase the chance of forgiveness.

Forgiveness
Opportunities for student loan forgiveness include:

Public Student Loan Forgiveness (PSLF),
Mercy after repaying on an income-driven plan for 20-25 years,
Teacher Loan Forgiveness (TLF), and
other forgiveness options.

There’s even a chance student loans will be discharged at death. It’s a non-trivial reason to consider paying slowly.

Auto Loan

The average new car loan interest rate in the second quarter of 2014 was 6.34%, according to the Board of Governors of the Federal Reserve System.

The average loan length was about 5.5 years (66 months).

HELOC

Bankrate’s nationwide survey of large lenders reported that the average Home Equity Line Of Credit (HELOC) interest rate was 8.61% as of November 13, 2024.

**Upcoming Expenses
**A HELOC may provide options for a homeowner with significant equity who may have upcoming expenses.

Home improvements are a good example. The interest may even be deductible.

Early retirement is another good example. Home equity may be a better option than:

selling investments when the market’s down or
paying income taxes and possibly a 10% penalty for accessing retirement funds before age 59.5.

It can be easier to secure the HELOC before retiring. The lender will want to verify income.

Not a Loan (Yet)
A line of credit isn’t a loan!

It’s more like a credit card limit. Just because someone has one doesn’t mean they must use it.

Application
Applying for a Home Equity Line Of Credit is like applying for a mortgage. The home acts as collateral, which lowers the interest rate.

Terms
As with any loan, the terms matter.

The Consumer Financial Protection Bureau has this to say:

If you get a HELOC, you can generally spend up to your credit limit anytime during the borrowing period, also called the “draw period.” The draw period could last 10 years, for example.
After the draw period ends, you stop being able to borrow from your HELOC and enter the “repayment period.” Your lender may set a schedule so that you repay the full balance, often over ten or 20 years.

Mortgage

The Federal Housing Finance Agency (FHFA) reports the average outstanding interest rate at the time of origination was 4.2% as of the second quarter of 2024.

However, interest rates have risen. The average new 30-year mortgage interest rate was 6.78% the week ending November 14, 2024.

Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, November 18, 2024.

Con: Future Flexibility

Although credit expands current options, it can limit future them in the future.

Future Options

If someone must pay for past purchases, they may not be able to:

take a big trip,
help out a family member, or
invest in a business.

Using credit now can reduce cash later.

Life Impacts

Debt can force lifestyle decisions. A couple may wait to buy a home until after their student loans are repaid.

The promise of Public Service Loan Forgiveness (PSLF) may convince someone to work for a government entity instead of accepting a higher paying private role.

Interest and fees constrain cash flow. Someone may have to work a higher stress job to pay off debt. Debt can even delay retirement!

Con: Credit Availability

Using some credit can improve access to credit. Using more can cause the opposite.

The reduction is one for one to start. Someone who:

uses $2,000
of a $10,000 credit limit
has $8,000 left.

However, taking on more debt can lower credit worthiness.

Lines of credit may be lowered or even cancelled. Falling limits reduce available credit faster than use alone.

It’s ideal to use less than half of the available balance on each account. Using more can worry lenders that someone’s struggling to pay their bills.

Con: Financial Risk

Growing account balances and falling credit limits is a dangerous combination. Higher charges, fees, and payments restrict cash flow.

Someone can get behind - or worse. Missed payments have an even bigger impact on credit score than higher utilization.

If this situation continues long enough, a borrower may need to seek creditor protections through bankruptcy.

What Americans Owe

72% of American household debt is for real estate:

70% mortgage and
2% Home Equity Line Of Credit (HELOC).

Auto and student loans each make up about 9% of the total. Credit cards account for about 6% of household debt.

Over 90% of household debt is home, auto, and student loans!

These data come from the Household Debt and Credit Report published by the Federal Reserve Bank of New York in the third quarter of 2024.

About 88% of debt is with predictable installment loans:

70% mortgage,
9% auto loan, and
9% student loan.

Student loan payments can vary based on income and other factors.

Hey, thanks for reading my post on whether all debt is bad.

Just a reminder, I share a lot of resources that can help you.

12 Emotional Signs You Need a Financial Plan

Kevin Estes — Wed, 13 Nov 2024 00:00:42 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for November in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

When to Plan

When do you need a plan? The time might be now if money stirs up strong emotions!

You might need a financial plan if…

You lose sleep thinking about money.
You fret when the market drops.
You watch financial news more than once a week.
You spend more than an hour a week on finances.
You want to travel but can’t afford it.
You worry about healthcare costs.
You fear Social Security will go bankrupt.
You worry you may never be able to retire.
You feel you need $1, $3, $5, or $10 million to retire.
You think retirement is quilting/shuffleboard/Bingo!
You believe your finances will “work out eventually.”
You feel your money could do more.

Let’s explore each.

1. You lose sleep thinking about money.

Worrying about money is counter-productive.

Less sleep can cause someone to underperform at work. That can lead to less income or even a job loss.

We make poor decisions when we’re stressed. That’s part of why I generally suggest people keep at least three to six months’ of living expenses in an emergency/opportunity fund.

Even the wealthy can slip into a scarcity without ready access to funds!

2. You fret when the market drops.

The worst thing to do when markets fall is panic sell.

Cash Cushion

A big enough emergency and opportunity fund helps insulate from a downturn. Not all of the portfolio will fall!

You might be able to wait longer to sell investments. Cash buys time for a recovery.

Risk Tolerance

If you’ve lost it when markets have fallen in the past, your investments may not align with your risk tolerance.

Although I feel risk capacity matters more, risk tolerance is still important. An assessment is an important part of a comprehensive financial plan.

Environment

It’s worth considering how you get news when markets react.

Do you speak with a trusted investor or advisor who’s been through multiple downturns?
Do you discuss it with family, friends, and coworkers? Do those conversations calm you or raise your blood pressure?
Do you watch financial news - complete with shouting heads and doomsday predictions?

3. You watch financial news more than once a week.

Media’s primary goal is to get you hooked on their channel.

The entertainment value is off the charts.
The financial value? Not so much.

When I watch financial news, I get excited and sometimes anxious. That’s why I rarely watch it!

If you consume more than an hour of financial news a week, consider reinvesting that time somewhere more productive.

4. You spend more than an hour a week on finances.

An hour a week is a good goal for how much time to spend on personal finances total!

Spending more could be a sign of other issues:

not having a large enough emergency/opportunity fund,
investing more aggressively than your risk tolerance,
worrying with family, friends, and coworkers,
watching too much financial news,
spending more than income…

Time spend on finances can be either:

an investment that saves time or
an administrative cost.

Automation is a good example of a time investment. It takes a bit to set up automatic payments which then save time.

Energy spent on “drinking bird” tasks could be redirected to better uses. How could you set yourself up to benefit from inertia?

5. You want to travel but can’t afford it.

If travel’s important to you, now might be the right time to go!

Our senses diminish with age. Rome literally may not look, smell, or taste the same in 20 years.

We might not be able to do what we can now:

Bicycling through Provence could be a challenge at age 50.
Doing so at 90 is nearly miraculous.

Consider those close to you:

children grow up and start families of their own,
friends lose mobility,
family members pass...

Although it may be tough to afford a trip earlier in life, it’s physically possible. That may not be the case later.

6. Your worry about healthcare costs.

Yes, healthcare costs generally rise with age.

However, total household spending trends down after age 55.

Category Spending

Healthcare is a small percentage of income early in life. It grows to the second largest expense category by age 75.

However, healthcare spending at 75+ is still lower than four other category expenses at age 25-64:

housing,
transportation,
pensions and Social Security, and
food.

After age 55, households spend less on:

children - once they move out of the house and graduate,
housing - as mortgages are paid down,
food - since they eat less, go out less, and get senior discounts,
transportation - as they drive less and own fewer vehicles,
pensions/Social Security - especially once they stop working,
entertainment - as they attend fewer events, and
clothing - since there’s less need to dress to impress.

Healthcare

Even healthcare has a surprisingly consistent element.

Insurance premiums accounted for 61-71% of total healthcare expenses across all age groups! Health insurance is also moderated by Medicare starting at age 65.

7. You fear Social Security will go bankrupt.

The Social Security Act was passed in 1935 - nearly 90 years ago!

Funding Status

According to the 2024 Social Security Trustee Report, the Old-Age and Survivors Insurance Trust Fund is expected to be depleted in 2033. That assumes no major changes to the program.

In 2033, the Old-Age and Survivors Insurance is expected to be:

sufficient to pay 79 percent of OASI scheduled benefits.

Fortunately, OASDI total income was close to its cost in 2023:

income of $1,351 billion and
cost of $1,392 billion.

The projected depletion was extended a year from the 2023 report largely based on economic growth (Gross Domestic Product).

Tax Rate Changes

The payroll tax both employees and employers pay for the Old-Age, Survivors, and Disability Insurance (OASDI) has risen over time:

from 1% in 1937
to 6.2% since 1990.

Normal Retirement Age

Congress passed a law in 1983 to delay the normal - or full - retirement age from 65 to 67.

The normal retirement age increase was phased in over 23 birth years:

from 65 for those born in 1937 or earlier
to 67 for those born in 1960 or later.

The law passed in 1983 - over 40 years ago! Those born in 1960 are about 64 years old now so the change still hasn’t fully taken effect.

If history is a guide, Social Security benefit changes would likely be communicated well in advance.

Political Nightmare

Americans feel they have right to benefit from the system they funded. Reducing benefits for retirees would be a political nightmare.

Assuming no Social Security benefits is likely overly pessimistic. It probably doesn’t make sense to ignore Social Security altogether.

8. You worry you may never be able to retire.

You could be less behind than you think!

Working until full retirement age could lift Social Security benefits.
Retirement accounts can benefit from catch-up contributions.
Household expenses may fall… and more!

At 7.2% annual growth, investments could double about every decade.

A 40-year-old might see $200,000 grow to roughly:

$400,000 by age 50,
$800,000 by age 60, and
$1.6 million by age 70.

9. You feel you need $1, $3, $5, or $10 million to retire.

Round numbers are arbitrary. Consider the definition of a millionaire.

As of eary November 2024:

a million Canadian dollars is about $720,000 US dollars and
a million British pounds is about $1.29 million US dollars.

Using a round number as a financial guide is not best practice. A comprehensive financial plan can be more informative.

10. You think retirement is quilting/shuffleboard/Bingo!

Financial independence provides the opportunity to do what you like.

It’s tough to consider other lifestyles while working full-time or more!

Dream a little.

Visualize your perfect day.

What did you do?
Who did you spend it with?

At some point, wealth becomes more about who than what.

Below are some resources which may help:

The Long View podcast, Fritz Gilbert: Early Retirement Made Simple
George Kinder’s Three Questions
Ernie Zelinski’s How to Retire Happy, Wild, and Free

11. You believe your finances will “work out eventually.”

Hope is not a plan. Ignoring a problem rarely makes it better.

Time is our greatest ally. Starting now can help.

Look at how $200,000 could grow with a 7.2% annual return:

12. You feel your money could do more.

Some things just take time.

However, you may be right! An objective review of your finances may uncover significant opportunities.

Hey, thanks for reading my post on 12 emotional signs you need a financial plan.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for T-Mobile Employees in November

Kevin Estes — Tue, 05 Nov 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for November in a moment.

But first - here are some links you may want to save for later.

What to Do with RSUs
How Are Restricted Stock Units Taxed?
Frequent RSU Vests May Be Win Win Win

Now, let's get on to the blog! 😀

Oh, What a Night!

I hope you had a Happy Halloween!

As usual, ours was a magical celebration with neighbors and friends. Think: bonfire, snacks, drinks, and trick or treaters. 🔥

Potential Steps for T-Mobile Employees This Month

Financial steps T-Mobile employees might take in November include:

Schedule spring Paid Time Off (PTO)
Plan tax loss or gain harvesting, if any
Finalize year end charitable contributions
Purchase holiday gifts
Review / rebalance investment portfolio

Of course, this assumes the open enrollment elections have been finalized. If not, do that first!

1. Schedule Spring Paid Time Off (PTO)🌴

You’ve already booked all your vacation for 2024 (right, RIGHT?! 😆). Now, it’s time to consider spring.

Remember those cold and dreary days in February? It could be a good time to plan a vacation before prices rise!

The biggest benefit of scheduling Paid Time Off now is to call dibs! Many teams have limited coverage so get yours approved early.

2. Plan Tax Loss or Gain Harvesting, If Any

Income generally falls into three buckets for taxes:

Earned
Investment
Passive

Earned

Earned income is what someone receives from working. That could be working for a company, self-employment, or both!

Investment

Investment income is money earned from investments like stocks, bonds, mutual funds, etc. The U.S. government encourages capital funding by taxing investments at a lower rate than wages.

Passive

Passive income is for investments like rental real estate, limited partnerships, and equipment leases. If someone materially participates in the business, it may be taxed as earned income. Material participation is complicated and beyond the scope of this post.

Rarely Mix

The important thing is that these buckets are rarely allowed to mix.

Passive investments were once abused by higher earners who used them as tax shelters. Now, they’re tracked separately. Passive activity losses (not your PAL 😉) generally don’t reduce earned income.

The same is typically true for investments. Losses normally don’t lower earned income and, therefore, taxes.

Tax Loss Harvesting

However, there’s an exception!

Up to $3,000 in net investment losses can reduce earned income and lower taxes. The important term is net.

If someone sold investments for the year which together had $7,000 of gains, that person would need to sell other investments which realize $10,000 in losses to arrive at the $3,000 net loss.

Investment losses may lower someone’s tax bill… especially if they’re subject to a higher tax bracket.

Tax Gain Harvesting

Another opportunity is tax gain harvesting. This occurs when someone has lower income than they normally would.

Because of their deductions and lower tax bracket, it may make sense to sell investments before year end. They might pay less tax on the sale in 2024 than they would later!

Minimize Lifetime Taxes

Two ways to potentially minimize lifetime taxes are:

lower income in high-income years and
raise income in low-income years.

3. Finalize Year End Charitable Contributions

Among other things, the Tax Cuts and Jobs Act of 2017:

Capped the state and local tax (SALT) deduction at $10,000,
Lowered the deductible mortgage balance from $1,000,000 to $750,000 (existing mortgages were grandfathered), and
Nearly doubled the standard deduction.

Standard Deduction

More people now use the standard deduction.

Good news! That simplified taxes for millions of Americans.

Bad news! That caused fewer people to itemize deductions and effectively reduced the tax benefit of charitable giving.

Itemized Deduction

Nonetheless, millions of Americans still itemize. It may pay to be strategic with charitable giving.

Some techniques to save more tax with donations include to:

bunch - give more one year instead of less in multiple years,
contribute to a Donor Advised Fund - give now and then advise on how the funds will be distributed later, and
donate an appreciated asset - give an investment which has risen in value to charity.

It may not make sense to sell an investment which has risen in value, pay tax on the gain, and then donate what’s left to charity. Charities don’t pay income taxes! Donating an appreciated investment can save taxes, enable a bigger contribution, or both.

T-Mobile employees may also have access to special Giving Tuesday employer matching the Tuesday after Thanksgiving, 12/3/2024.

4. Purchase Holiday Gifts🎁

It’s nearly the most wonderful time of the year!

Buying gifts early can ensure they’re:

still available and
arrive in time.

There will be big sale days in a few weeks:

Black Friday, 11/29/2024
Small Business Saturday, 11/30/2024
Cyber Monday, 12/2/2024

The discounts don’t just have to be for gifts! There are some business items I hope to buy on sale. 🤞

5. Review / Rebalance Investment Portfolio

Finally, now may be a good time to check your portfolio.

The stock market’s done well this year! Investments may have drifted from their target allocation.

ESPP

T-Mobile employees may have recently stocked up (literally) through the Employee Stock Purchase Plan. Do they still want to hold it?

For more, check out:
Is It Worth Holding Employer Stock?
Are Employee Stock Purchase Plans Underrated?

RSU

Restricted Stock Units (RSUs) vest in February. It’s worth considering how much, if any, company stock to hold.

For more, check out:

Emergency / Opportunity Fund

As part of the review, it’s important to consider whether you have enough in an emergency and opportunity fund.

Even the wealthy can slip into a scarcity mindset if they don’t have ready access to funds.

Retirement Account Investment Changes

It may be best to make the investment changes in retirement accounts.

Doing so could avoid realizing gains in taxable brokerage accounts. Selling an investment for a taxable gain could require someone pay taxes either:

through an estimated quarterly payment or
with their tax return.

Fortunately, transactions in retirement accounts aren’t usually taxed.

Asset Location

Where assets are held is often overlooked.

Asset location may be as important as asset allocation. Are assets in the right location?

It may make sense to hold:

more aggressive investments in after-tax accounts and
more conservative investments in pre-tax or taxable accounts.

Hey, thanks for reading my post on potential financial steps for T-Mobile employees in November.

Just a reminder, I share a lot of resources that can help you.

October 2024 Questions

Kevin Estes — Wed, 30 Oct 2024 05:17:21 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to the October Q&A in a moment.

But first - here are some links you may want to save for later.

Charge Market Rent!

92% Prefer Remote or Hybrid

Now, let's get on to the blog! 😀

Q&A Session

T-Mobile employees asked many good questions in a recent Question & Answer session!

Some of those questions were:

Does it make sense to contribute to a 529 now that my kid’s in high school?
I moved for work. Should I sell my old home?
Would a Roth conversion after retirement lower my taxes?
Instead of keeping your 401(k) until you are 59 1/2, should you take some early?
When you take 401(k) distributions before you reach retirement age, is there still a penalty?
How do we make the most out of our rental property?
What are best practices for us renting it or using a property management company?
Do you have best practices for how to treat the extra cash, $1,500 a month?
We have been married for 10 years and have not joined our finances. Is that recommended?
Would I be taxed like crazy if I sell my stock?

Below are some quick thoughts. None of them include any financial, tax, or legal advice.

Does it make sense to contribute to a 529 now that my kid’s in high school?

Maybe!

It could make sense if there’s an income tax deduction. Because there isn’t an income tax in Washington state, there’s no 529 deduction. The tax benefit depends on the state.

Funds in a 529 plan grow tax-deferred. If they’re used for qualified education expenses, the growth is tax-free. Thanks to the Tax Cuts and Jobs Act (TCJA), funds in a 529 can also be used for K-12 education.

Someone might even earn tax-free growth if they contribute when their child is in college! 529 funds can also be used for graduate school.

However, it depends on the situation. The value of a 529 will be assessed as an asset for financial aid. Also, someone may have better uses for those funds.

I moved for work. Should I sell my old home?

It depends. Below are some considerations.

Sell

There are several benefits of selling the home right away!

Relocation Package
If someone relocated for their employer, some of the costs may be reimbursed by the company through a relocation package. Holding onto the home might lose those benefits.

Home Gain Exclusion
Another big benefit of selling is that someone may be able to take advantage of the home sale exclusion.

Someone could avoid paying federal taxes on the gain if they sell their home, up to:

$250,000 for the Single filing status
$500,000 for the Married, Filing Jointly filing status

The primary requirements are to have:

owned and
lived in the home two of the last five years.

These 24 months need not be consecutive, which leads to some additional planning opportunities.

Frees Up Cash Flow
Selling will likely free up a fair bit of cash which can be used for other investments or living expenses. If someone has better other investment opportunities, it may make sense to sell.

Eliminating the mortgage, maintenance, utilities, and other ongoing expenses lowers monthly expenses. Repairs in particular tend to be large and unpredictable. Selling could also cut the transportation costs to check in on the old home.

Keep

The biggest benefit of keeping the previous home would be to turn it into a rental. It’s worth considering.

Takes Time
Managing real estate is a part-time job! Even if someone hires a property manager, they’ll still need to make decisions on major home repairs and renovations.

Low Fixed Interest Rate
Many people who purchased their home a few years ago have a fixed mortgage with a low interest rate. It’s hard to walk away from a 30-year fixed loan at 2-3%!

A low interest rate makes it more likely that the property will cash flow - especially since rents have risen. Regardless of someone’s expenses, it’s important to charge market rent.

Profit Growth
In addition, profits tends to rise with rentals because:

mortgage interest expense falls as the loan is paid off and
rents tend to rise with inflation.

Many people look at the rent they could receive and subtract their mortgage. However, there are many other considerations such as:

occupancy - properties are rarely rented 100% of the time
maintenance - perhaps 1% of the value of the home each year
HOA dues - Home Owner Association fees vary greatly
property taxes - are usually included in the mortgage
utilities - rising costs need to be passed onto the tenant(s)
property management fees - depend on the market

Depreciation may lower taxable income for the property. However, it often doesn’t lower someone’s earned income from their job(s).

If a property is consistently cash flow negative, it can impact the owner’s ability to achieve their financial goals. I sometimes wonder whether a home is an investment.

Owning one (or more) homes seems more like a lifestyle decision. A rental is different.

Would a Roth conversion after retirement lower my taxes?

Maybe.

People often think of taxes as a once a year activity. They consistently try to lower annual taxes.

I like to think about taxes over someone’s lifetime. Someone may be able to lower their lifetime taxes by:

lowering income in high-income years and
raising it in low-income year.

Lower Income in High-Income Years
Many people are already their lowering income in high-income years with contributions to their:

Required Minimum Distributions
If someone saves more than they’ll need in their pre-tax (traditional) retirement accounts, they may have to pay Required Minimum Distributions (RMDs) later in life.

The federal government essentially gets impatient. It:

gave a tax break when the funds were contributed and
let it grow tax-deferred.

The government wants someone to realize that income and pay the taxes during their lifetime so it forces older Americans to withdraw a certain amount from their traditional retirement accounts each year. The percentage someone must withdraw rises with age.

Those distributions can spike income later in life and require someone to pay a higher tax rate.

Roth Conversions
One option to head that off is to roll a traditional account such as a 401(k) or an IRA into a Roth IRA.

Doing so increases taxable income for the year. However, it may not be taxed as much as it would be later with Required Minimum Distributions.

Because Roth accounts are after-tax, the government’s already received income taxes! There generally aren’t RMDs on after-tax retirement accounts.

Doing strategic Roth conversions may lower lifetime taxes and simplify finances at advanced ages.

Cash Flow Negative
One drawback to a Roth conversion is that the funds don’t go to the individual. Quite the opposite!

Someone doing a Roth conversion has to pay the tax out of pocket to convert the funds from traditional to Roth.

Financial Aid and IRMAA
Also, the timing matters. A Roth conversion two years prior to when a child starts college could reduce financial aid.

The same goes for two years before someone goes on Medicare as early as age 65. Higher income could result in someone paying higher premiums for:

Part B and
Part D.

This is called their Income-Related Monthly Adjustment Amount (IRMAA) and complicates the Roth conversion decision.

Instead of keeping your 401(k) until you are 59 1/2, should you take some early?

Probably not.

A Roth conversion is different from a distribution:

A Roth conversion changes it from pre-tax to after-tax.
A distibution withdraws funds from the account.

While there are some unique situations when it may make sense to withdraw funds from a 401(k) before age 59 1/2, it’s important to carefully consider the decision. Withdrawals could be subject both to regular income tax and a penalty. The funds may also lose some creditor protections.

When you take 401(k) distributions before you reach retirement age, is there a penalty?

Yes, usually.

Someone distributing funds before age 59 1/2 must normally pay income taxes plus a 10% penalty.

However, there are many exceptions including:

total and permanent disability,
qualified higher education expenses,
separation from service the year an employee reaches age 55
(age 50 if a public safety employee), and
a series of substantially equal payments.

How do we make the most out of our rental property?

It’s important to treat a rental like a business.

It may make sense to:

place the company in an LLC for additional protection,
use a dedicated checking account to simplify accounting, and
get umbrella insurance for additional personal protection.

Consider All Costs
Before deciding to rent, model the expected revenues and expenses. Include assumptions for:

occupancy,
interest expenses,
property taxes,
maintenance,
Home Owner Association (HOA) fees,
homeowners insurance (including a rental endorsement),
property management fees…

Define Roles and Responsibilities
It’s also important to determine who’s going to do what:

Who will advertise and show the property?
Who’ll select the tenants - and on what basis?
Who will receive the 2am call when a pipe bursts?
Who’s going to call the plumber/electrician/repair person?
Who’s going to buy and take space heaters over to the rental if the furnace fails?

What are best practices for us renting it or using a property management company?

There are basically two options:

manage the logistics yourself or
hire a property manager.

The choice could depend on:

available time - someone with little free time may need to hire
skill - it’s tough to rent without experience
rental location - the further away, the tougher it is to self-manage
rent - higher rents may require a higher level of service
resources - it may be tough to hire a manager with limited cash flow

Do you have best practices for how to treat the extra cash flow, $1,500 a month?

First, I’d double-check that $1,500 a month:

Does it include all expenses?
Is there a haircut for lost rent after a renter moves?
How would replacing the roof or furnace be funded?

Then, consider other major opportunities:

Could higher deductibles lower insurance premiums?
What about paying premiums a year or six months in advance?
Is the emergency/opportunity fund large enough to pay for all deductibles if they hit at once?
Would it cover at least three to six months of living expenses, including the rental?
Is someone receiving the full employer retirement match?
What about contributing to their Health Savings Account?
How about the Employee Stock Purchase Plan?
Would it make sense to contribute to a Spousal IRA?
What about contributing to an after-tax account?

We have been married for 10 years and have not joined our finances. Is that recommended?

Thank you for sharing. That decision is deeply personal.

Many people think of combining finances like a light switch: on or off. However, I view it like a dimmer switch with infinite possibilities.

The most important thing is to do what works for you as a couple!

For more, check out: Combining Finances Is Like a Dimmer Switch.

Would I be taxed like crazy if I sell my stock?

It might be taxed less than you think!

It depends on:

how you came by the stock,
how long you’ve owned it, and
what it’s done since.

Regular Purchase
Let’s say someone paid cash for a stock on the open market.

Good news! It rose in price. The owner realizes the gain by selling.

Short-Term Capital Gains
If the stock was held a year or less before it was sold, the gain will usually be taxed as a short-term capital gain. It would be taxed at their ordinary income marginal tax rate.

Long-Term Capital Gains
If the stock was held more than a year before it was sold, the gain will typically be taxed as a long-term capital gain. That means it will be taxed at the lower capital gains rates of:

0% for those with lower income,
15% for those with moderate income, or
20% for those with higher income.

Net Investment Income Tax (NIIT)
An additional 3.8% tax may apply. This tax helps fund Medicare.

It applies to someone who earns at least:

$200,000 as a Single filer or
$250,000 for Married, Filing Jointly.

This is yet another reason lowering income in high-income years could lower lifetime taxes.

RSUs
When Restricted Stock Units (RSUs) vest, some shares are typically sold to fund federal and state taxes. The remaining shares deposited in someone’s account have already been taxed!

If someone holds onto those shares, it’s like they took money out of their checking account to buy it at the market price when the units vested.

Is that what they would do?

Short-Term
Selling a year or less after the vest would result in:

a short-term gain,
no gain or loss (rare), or
a short-term loss.

Long-Term
Selling over a year after the vest would result in:

a long-term gain,
no gain or loss (rare), or
a long-term loss.

For more, check out: How Are Restricted Stock Units Taxed?

Employee Stock Purchase Plan (ESPP)
Shares purchased through an Employee Stock Purchase Plan (ESPP) have another requirement. In addition to owning the stock for at least a year after purchase, it also has to be held for at least two years after the start of the offering period.

The offering period is the time between when the employee started contributing after-tax dollars to the fund and when the purchase occurred.

T-Mobile’s Employee Stock Purchase Plan (ESPP) periods are six months:

10/1-3/31 and
4/1-9/30.

A T-Mobile employee would need to hold shares purchased for at least a year and a half after purchase to receive long-term capital gains treatment on part of the gain.

Let’s say someone purchased with the ESPP on 9/30/2022. The start of their offering period was 4/1/2022. Therefore, they might receive some long-term capital gains treatment if they sell on or after 4/2/2024.

For more, check out: How Does an ESPP Work?

Hey, thanks for reading my post the October 2024 T-Mobile Question & Answer session.

Just a reminder, I share a lot of resources that can help you.

XYPN Live 2024

Kevin Estes — Wed, 23 Oct 2024 07:01:39 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to XYPN Live 2024 in a moment.

But first - here are some links you may want to save for later.

XYPN Live 2023

Where We Focus vs. What Sinks Us

Now, let's get on to the blog! 😀

XYPN Live Summary

I had the opportunity to attend XY Planning Netowork (XYPN) Live again this year. It was the network’s 10th anniversary and held in Minneapolis!

The event was good again this year and included about 800 attendees.

This article explores:

Reasons to attend
My schedule
Pros and cons of XYPN Live
Conference tips
Rise of the tuck-in

Reasons to Attend

People sometimes ask me why I attend two conferences a year. It’s tough to swing with a family!

For me, attending helps me:

identify blind spots
re-connect in person
meet new people

Below is more on how XYPN Live helped me with each of those.

1. Identify Blind Spots

One of the reasons I joined this industry was that it offers ample opportunity for me to learn for the rest of my life.

No-one can know everything. However, I’m reminded how much I don’t know when I attend a conference like this!

Two of the ways I learn at conferences are:

presentations and
conversations.

**Presentations
**Five of the sessions I attended stood out:

Ross Riskin and Joe Messinger’s advanced education workshop
Cady North, Erica Ryberg, and Inga Timmerman on efficiency
Jason Howell on serving high net worth clients
Ethan Miller and Autumn Knutson on student loan planning
Michael Reynolds on his marketing process

Inga Timmerman, Erica Ryberg, and Cady North (left to right) presented “Running Lean: Stop Overthinking and Focus on What Works”:

Jason Howell presented “How to Prepare for 8 Figure Clients”:

(The room was quite large and few people sat in front.)

Autumn Knutson and Ethan Miller (left to right) presented ”How to *Actually* Do Student Loan Planning”:

(Another large conference room where few people sat in front. It, too, was well attended.)

Michael Reynolds presenting ”How to Build a Weekly ‘Content Marketing Machine’”:

Conversations
I was part of dozens - if not hundreds - of conversations last week.

Some that stood out for me were:

Wilson Liu on creating and sharing resources for career changers
Autumn Knutson on systematically building planning processes
Edwin Choi on building advisor tech as an advisor
Maggie Klokkenga onboarding over 50 clients in seven months
Igor Smolyanskiy on the why behind financial planning
Allen Mueller on determining his next steps
Jamie Clark on U.S. cultural differences by region
Brian Thorp on building an advisor support network
Liz Plot on serving military personnel
Tracy G. and Dedrick C. on pricing planning services
Laura Lynch and Holly Davis on advising for alternative living
Rebecca Conner on industry evolution and registration options
Ari Weisbard on trialing individuals before hiring or partnering
Ohan Kayikchyan on the many advisor business models
Heather Walstad, Rhonda Moore, and Shelley Laakso on managing financials through rapid growth
Lyubomyr Ostapiv on serving Ukrainians
Steven Fox, Julie W., and Andy Moran on the rise of tuck-ins
Kelly Palmer on deliberate growth
Mike Staman on surprising success
Monica Scudieri, Sarah Roller, and Mike Johnson on financial advisor / coach collaboration
Jake Wagner on marketing and Nazrudin
Brennan V. on marketing and cognitive effort
Amber FitzRysler on workload and stage of life
Katy Cook on company travel policies

(Last initial used for those preparing to launch for anonymity.)

2. Reconnect in Person

Another huge benefit of the conference was to reconnect. There’s no shortage of new things I learned this year about and from these wonderful people!

Three groups with whom I reconnected with include:

online only
at other conferences
last year

Online Only
I met over 20 people I’d only ever met online!

Some of them include: Angie Furubotten-Larosse, Jason Hamilton, Scott Kawicki, Michael Powers, Kathryn Kubiak-Rizzone, Monica Scudieri, Eric Johns, Katie Braden, Wilson Liu, Andy Moran, Carl Richards, Nancy Bleeke, Dustin Bell, Joseph Boughan, Shannon Fleener, Sara Young, Kori Lennon, Kelly Palmer, Mike Bennett, Amber FitzRysler, and Brennan V.

At Other Conferences
I had a chance to connect with several people I’d met through other conferences, including: Ohan Kayikchyan, Avanti Shetye, Monica Scudieri, Mike Hunsberger, Brian O’Neill, and Kelly Nilsson.

Last Year
I also reconnected with dozens of people I met last year. Although XYPN Live was bigger this year, it felt smaller!

Some reconnections include: Wilson Liu, Lorri DeFloor, Maggie Klokkenga, Igor Smolyanskiy, Rebecca Conner, and Allen Mueller.

3. Meet New People

It was wonderful to connect with people I’d never met. Some of those included:

advisors,
XYPN team members, and
tech founders.

Advisors
Some advisors I just met include: Autumn Knutson, Sean Gillespie, Marie Schuett, Jonathan Grannick, Laura Lynch, Sylvie Scowcroft, Razvan Mirica, Maren Madsen, Steven Fox, Amy Rosenow, Chad Gammon, Emily Maretsky, Greg Goff, Tracy G., Dedrick C., Mike Turi, Erica Ryberg, Brandon Montoya, Rebecca Yerby, Phillip Durbin, Alan Nelson, Vrishin Subramaniam, Liz Plot, and Becca Craig.

XYPN Team Members
It was great to connect with Heather Walstad, Shelley Laakso, and Rhonda Moore. We swapped corporate financial planning insights and stories! We also shared our favorite locations in Idaho and Montana.

While I’d met Rhonda previously, I was shocked she and Carl Richards hadn’t met! Hilariously, Carl asked Rhonda for embarassing childhood stories about Alan Moore. Of course, Rhonda didn’t spill any beans!

Tech Founders
As always, it was fun to nerd out on new technology. It’s wonderful to meet the founders who’ve developed supporting software!

Some of these founders included:

Alex Bottom, founder of Finology
Nate Hoskin and Nick Meyer, co-founders of N2 Content Marketing
Edwin Choi, co-founder and CEO of Capitect

It was great to learn more about their services, share my perspective, and ask about future enhancements.

My Schedule

I don’t sleep much at conferences. There’s too much to do!

I was out late each night. The two hour difference helped. Thankfully, hotel lobbies are almost always open!

Since most conferences are on the Eastern or Central time zones, 6:30am is a common wake-up time. I can pull that off when breakfast (and coffee) is served at 7am.

I flew to Minneapolis on Monday morning and flew back Friday afternoon. Below was my rough schedule for the week:

XYPN Live Events

One thing that surprised me was how few of the events I attended over the week were organized directly by the XY Planning Network. Those 16 events are highlighted in light blue.

XYPN Live Facilitated Events

Many were certainly facilitated by XYPN Live! Those 23 activities are colored light green.

Several of the breakfasts and lunches were provided by XYPN Live at the hotel. They facilitated networking. Others were meals and activities organized at or near the conference by attendees.

Translation: I attended more informal activities than regularly scheduled events. That’s a feature, not a bug!

XYPN deliberately opened up the calendar to facilitate socialization - and I’m so glad. It made the event feel more like a conference and less like a series of presentations.

Whova - the app used for XYPN Live - facilitated these activities. It seemed relatively user friendly.

Precon

For the first time ever, I attended a pre-conference workshop. It was great!

Fortunately, I completed the Certified College Financial Counselor (CCFC) coursework before the event. I have one remaining step to take before (hopefully) completing the designation.

My goal for the pre-conference workshop was to deepen my knowledge. It certainly did! Another session provided even more tactical insights on student loans.

The attendees were also invited to a lunch afterward. It was great to connect with several advisors. The two events are in darker blue.

Travel

The other activities were travel-specific. Fortunately, they were limited to Monday and Friday. Those are highlighted in orange.

At least as many of the activities were social as travel both days!

Pros and Cons

As with any event, there were many things that worked well and some that were a little clunky.

I co-founded a half marathon and have hosted other events. However, I only have a sense of just how hard it is to run an event like XYPN Live. This more balanced view is in addition to the many other positives of the event.

Pros

I feel there were six huge positives of the event:

ample opportunity to connect
meals provided
open spaces
access to thought leaders
vendor receptions
closing party on the last night

Below is more on each of them.

**1. Ample Opportunity to Connect
**XYPN went out of its way to facilitate conversations.

Wednesday Afternoon Networking
The organizers largely left Wednesday afternoon open to connect with other members from noon to 3pm.

Activities included:

Exhibit Hall 9:45am-5:30pm
Lunch Noon-1pm
Meet-Ups 1-5pm
Speed Networking 1-4:30pm

Several of the other events planned at the time were led by XYPN employees. The implicit message was clear:

Here are some resources. However, this time is reserved for you to connect with other conference attendees.

Supper Clubs
Coordinating dinners was a brilliant idea and well executed!

Special thanks to Kassy Betterley, who organized these meetups. The dinner was nice and I met some wonderful people I might not have otherwise.

There were a couple people who cancelled for our dinner. It sounds like that also happened with other supper clubs. However, there were many other people who joined those groups in the lobby!

BC Brokerage was setting up for their party a while before we needed to leave for the supper club. They encouraged us to stop by for a drink, which we did. It took longer than I’d hoped to leave for dinner.

I felt badly that we were late to the supper club, as it was a decent walk away. The group had ordered drinks but thankfully not dinner.

It was wonderful of XYPN and Kassy to organize these supper clubs! It was a nice touch that one of the receptions was across the hall from the dinner and a couple more were on the walk back to the hotel.

2. Meals Provided
Although dinner ware rarely provided, breakfast and lunch usually were. Simply providing food and tables was enough to start conversations.

Kassy also had sections set up for specific groups to encourage collaboration. Some of the reserved tables were oversubscribed while others were used less. However, the suggestions seemed to help people connect with like-minded advisors.

3. Open Spaces
Hosting at a hotel with plenty of hallway, lobby, and seating areas also helped people mingle.

I invited people to lunch for a combined “supergroup” at a location XYPN reserved for people to meet.

**4. Access to Thought Leaders
**Michael Kitces and I stood in a long line for kabobs together at the Welcome Reception. I met Carl Richards, Kristin Harad, and Katie Braden at that even as well. Nancy Bleeke launched her latest edition of Conversations That Sell in the Exhibit Hall. Dr. Preston Cherry attended a vendor reception…

5. Vendor Receptions
These were awesome this year! That may be the result of many supporting companies growing along with the XYPN membership.

BC Brokerage’s party was excellent and did a good job of separating the dance floor from the bar to allow both dancing and conversing!

Wealthtender’s reception before the closing party was in a nice, intimate setting. The only downside was that many more people attended than RSVP’d. It was still a great event.

**6. Closing Party
**The last official event was interesting. It was a three-floor extravaganza, with food on each floor.

We spilled out into the courtyard behind the first floor. It didn’t rain!

Each of the floors was distinctive. I liked the middle wooden floor best.

Cons

No event is perfect and XYPN incorporates feedback for future years.

Some of the least wonderful parts for me included:

little sleep
no precon breakfast
repeated presentation
limited support attendees
single-sided nametags
next year’s date and location

Below are more of my thoughts.

1. Little Sleep
I’m a West coast night owl. It wasn’t a problem for me to stay up late on the Central time zone.

What was tougher was making it to breakfast at 7am. Most attendees are from the Eastern and Central time zones so the time difference was less of an issue.

However, I wasn’t alone. Few of the conference attendees were at breakfast at 7am. I even heard some grumbling from the hotel staff at about 7:30am:

I’m sure everyone will show up at 10am.

At least one West coast advisor I know took a nap in the middle of the day. Others ducked out of presentations to take a break.

I simply slept less. There are worse things!

2. No Precon Breakfast
It wasn’t a huge deal that we didn’t have breakfast. However, it was tough to start the workshop at 8am the first day. That’s 6am Pacific.

Coffee and/or juice would have been welcome. There weren’t many people in attendance yet so it might have been manageable.

It sounds like it was left up to the precon organizers. It also sounded expensive… to be expected, given the location.

A happy accident was that another swim dad from Seattle was on a trip to visit Target’s headquarters. We grabbed breakfast together!

Having lunch offsite was a nice and welcome touch. It was great to connect with more of the precon attendees.

**3. Repeated Presentation
**The Opening Remarks and 2024 Benchmarking Study sessions repeated content for long stretches. Several of the data points, comments, and jokes were the same.

I’d recommend striking the benchmarking items from the Opening Remarks. It convinced me to skip more of the major presentations in favor of hallway conversations.

4. Limited Support Attendees
There’s good news and bad on this one:

Good: there some new attendees this year.
Bad: it highlighted some potential absences.

I meet two financial coaches, one of whom I’d already met through FinCon. It seems like a wonderful opportunity to have more coaches attend, as they and advisors could be good referral partners. Coaches might even find they have an interest in investments.

Unlike at FinCon, I didn’t meet any reporters. That seems like another opportunity.

There were advisor-facing trust and insurance companies. However, where were the business valuation firms?

Something else I heard from vendors was that their badge type prevented them from attending events like the Welcome Reception. They were surprised.

5. Single-Sided Nametags
My roommate pointed out that the nametags could have been printed on both sides. Mine kept flipping:

Sorry, I’m backward again!

It’s understandable that our emails aren’t on the badge. However, it was a bit tough to exchange contact information in the app. Many of us just connected on LinkedIn or typed out our emails.

6. Next Year’s Date and Location
Both are problematic next year.

Date
An attended pointed out in the Q&A session that next year’s dates conflict with Rosh Hashanah.

Several of the members I met through XYPN Live are Jewish. My public high school had the holiday off.

Unless the date changes, XYPN Live will likely be without many great colleagues.

10/24/2024 update: After this post was published on Wednesday, 10/23/2024, we received an email from XYPN leaders that the dates for 2025 XYPN Live had changed to no longer conflict with Rosh Hashanah! Thank you, Kori Lennon, Vince Hockett, and the rest of the XYPN team for making it right.

Location
The location of Austin, TX is also less than ideal.

XYPN seemed to do a great job with families this year! My child is now a teen. However, I enjoyed seeing several children with their advisor parents. I also appreciated that there was a childcare room just outside the main conference ballroom.

Abortion is no longer federally protected and is against the law in Texas. Many pregnant women attended the conference this year.

Someone who’s pregnant might be risking their lives to attend the conferences in Texas. At least, that’s the perspective some female advisors shared.

Conference Tips

This was my sixth conference as a financial planner. I also attended several in my previous career.

Some things have come in handy for me.

Extended Conference

A conference neither starts with the opening remarks nor ends with the closing party.

Before

Many people reach out beforehand to connect in person
Some people visit nearby family before the conference
Several teams fly in early to add a corporate retreat
Some advisors meet with local clients in person
Other attendees are often on the same flight
Some catch a ride together to the conference
Attendees meet in the hotel check-in line
Others attend a pre-conference workshop together

This was the first year I attended a precon and it was wonderful!

After

Many people fly the next day, which may be necessary
Some people connect with nearby family after the conference if they have the energy!
Still others connect with clients in person, even if it’s just social since they may be tired
Attendees connect in hotel check-out lines as well
People often share rides to the airport
Even more connect at the airport

I had wonderful conversations at the airport both this year and last! There always seems to be at least one conference attendee flying back to Seattle. Another advisor and i both had delayed flights this year and were able to have a nice lunch together.

Conference Hacks

Below are a few things which work for me I thought I’d share. Your mileage may vary.

Get a hotel room nearby - they’re often much less expensive and walking gives you a chance to explore the city
Bring a water bottle and snacks - if you wind up not needing the snacks, you can always give them away!
Never eat alone - it’s not always possible but is ideal
Look for superpowers - where do people you meet really excel?
Prioritize good hallway conversations - that’s especially true if the presentations are recorded!
Limit the number of conversations - there’s a reason school lets out early in the afternoon
Organize fun activities - the closer and simpler, the better
Connect in realtime - introduce people in the moment
Try the hotel lobby - it’s a great place for conversations
Share contact info - connect on LinkedIn, exchange emails, etc.
Follow up on great conversations - find ways to stay connected

Rise of the Tuck-In

This year accelerated a trend I noticed last year.

Many XYPN member are starting to band together to create big firms. That’s especially the case for planners who don’t manage assets.

It’s common for one advisor to invite another to join the company to share systems and expenses. Advisors are starting to fold businesses into one larger entity.

Last Year

At XYPN Live 2023, I met:

Jay Zigmont, who’s creating an enterprise with Childfree Wealth
Eric Simonson, who’s built the advice-only firm Abundo Wealth

Continuation

Even before the conference started this year, Steven Fox shared that he’s launching the Transparent Advisor Network. That’s not to be confused with the Transparent Advisor Movement, of which I’m a part.

In addition, Guy Penn has created Core Planning. It’s another interesting ensemble business model.

At this year’s conference, I was able to learn more about these tuck-ins from non-founder members:

Maggie Klokkenga with Abundo Wealth
Andy Moran with Core Planning

Benefits

There are some big benefits to scale in the advisory space.

Doing so:

Streamlines compliance - especially for SEC registered firms
Divides marketing effort - each advisor might create less content
Enables specialization - address multiple topics in-house
Fosters collaboration - there’s value in learning from each other
Provides socialization - entrepreneurship can be lonely; working with a team can help

Tensions

The biggest tensions I hear these tuck-ins face are:

tech flexibility
marketing and pay
hours and productivity

**1. Tech Flexibility
**Sharing technology is efficient and cost effective.

However, some advisors strongly prefer a specific technology. Limiting the tech stack could restrict the number of users who would join.

It’s a balance between operational efficiency and flexibility.

2. Marketing and Pay
Several of these tuck-ins have many new clients!

Firms that source clients often pay a lower percentage of the revenue advisors generate. If the advisors bring in the clients, the firms often pay a higher percentage of the revenue generated.

They’re simply different models.

3. Hours and Productivity
If the company takes over administrative tasks, it frees advisors up to focus more on serving clients. That’s especially the case if advisors don’t have to spend time attracting clients.

That’s good and bad. While it focuses an advisor, it can remove other elements they may enjoy like content creation.

Many advisors start a firm for the schedule flexibility. Heavy workloads may not support the lifestyle they seek.

Use Cases

I feel tuck-ins work best for advisors who:

dislike the backoffice / support tasks,
enjoy working with clients and coworkers,
are flexible with the technology they use,
have a specialized skill (cash flow, equity compensation, student loan planning…), and
thrive working with many clients.

Some characteristics of an individual who might lead a tuck-in include:

success attracting clients,
strong communication skills,
a desire to build an enterprise,
willingness to develop teammates,
ability to delegate effectively,
flexibility in working with stakeholders, and
the resources to invest in technology.

Hey, thanks for reading my post on the XY Planning Network Live 2024 conference.

Just a reminder, I share a lot of resources that can help you.

I Changed Jobs. Should I Roll Over My 401(k)?

Kevin Estes — Thu, 10 Oct 2024 07:05:53 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to whether to roll over a 401(k) in a moment.

But first - here are some links you may want to save for later.

Transactions in Retirement Accounts Aren't Taxed… Yet

Is Your IRA Safe from Creditors?
Can Your 401(k) or IRA Be Seized If You File for Bankruptcy?
How Safe from Creditors Is Your 401(k) If You Roll It to an IRA?

Now, let's get on to the blog! 😀

Assume Rollover

Today’s topic comes from a recent Q&A session with current and former T-Mobile employees:

Do I keep the 401(k) in the same spot or roll it over?

Great question!

People who change employers often assume they need to roll their company retirement plan to an Individual Retirement Arrangement (IRA) account.

Doing so is encouraged - sometimes aggressively - by financial businesses who have a vested interest in gathering more assets. What these companies earn is often based on how many assets they custody or manage.

However, rolling over the account may not be the right move!

Traditional 401(k)

The employee lowered their taxable income by contributing to their retirement account. Another term for a traditional retirement account is “pre-tax” because the funds haven’t yet been taxed.

Options

Someone who leaves their employer has many options for what to do with their traditional 401(k).

Five of the most common are:

Distribute the 401(k) funds
Roll the 401(k) over indirectly
Roll the 401(k) over directly to an IRA
Roll the 401(k) over directly to another 401(k)
Keep the 401(k)

This article briefly considers the first two and explores the last three options in more depth.

1. Distribute the 401(k) Funds

It’s possible to withdraw the fund from a 401(k) after leaving the company. However, it’s rarely a good idea for a traditional 401(k).

More Tax

The distribution would be taxed as ordinary income.

That may not be a huge deal for a small account balance. However, withdrawing a lot could cause someone to pay a higher tax rate than necessary.

Also, the funds may be moved to a taxable account. The future interest, dividends, and other gains would also be taxed.

10% Penalty

Distributions from a traditional 401(k) before age 59.5 also incur a 10% penalty unless an exception applies.

This additional tax is intended to deter someone from withdrawing the funds early.

Easier to Spend

Moving the funds from a 401(k) to a checking, savings, or taxable brokerage account makes it easier to spend.

Retirement funds are intended to grow for years, if not decades. Removing them could impact someone’s retirement.

Lost Protection

Retirement accounts have creditor protections. Someone can usually keep the balance - even through bankruptcy!

Withdrawing the funds could put them at risk.

Less Financial Aid

Distributing the funds could also increase the cost of other items. College is a good example.

Retirement accounts are generally excluded from the Free Application for Federal Student Aid (FAFSA®). However, taxable accounts are included. A student may receive less financial aid becuase funds are withdrawn from a traditional 401(k).

Tip: Withdrawing all funds from a traditional 401(k) after leaving a company is rarely a good idea.

Nonetheless, distributing funds could be the right move in some fringe situations.

2. Roll the 401(k) Over Indirectly

Another option is to receive the 401(k) funds from the custodian and then decide where to move them later.

Someone typically has up to 60 days to move those funds into another account without having them treated as a taxable distribution.

20% Withholding

The biggest drawback is what the IRS posted:

A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later.

This is an ugly part of the federal tax code.

Example

Let’s say someone has $100,000 in their traditional 401(k).

They request the funds so they can move it to another pre-tax retirement account within 60 days. The check is made out to them - not to the new custodian.

In that situation:

$20,000 (20%) is withheld for taxes.
The remaining $80,000 is sent to the individual.

Even if they deposit the $80,000 into another pre-tax retirement account within 60 days, they would still have taken a $20,000 distribution!

That $20,000 “distribution” would be subject to income tax and possibly the 10% early withdrawal penalty. Setting the money aside for tax causes it to be taxed!

The way to avoid the taxable distribution is to deposit another $20,000 from a separate source like checking, savings, or a taxable brokerage account.

However, using other funds could generate additional fees and taxes. At the very least, the money wouldn’t be available for other uses.

The good news is that if the full $100,000 is contributed within 60 days, the $20,000 withheld for taxes could be refunded after the next tax return. The bad news is that could take quite a while and there’s some uncertainty.

Avoid Indirect Rollovers

A check made out to the individual makes it more likely that some - if not all - of the funds will be a taxable distribution:

60 days isn’t very long to move all that money and
it might be spent.

Tip: Avoid an indirect rollover.

If the custodan makes the check out to the account holder in error, it may be best to:

not cash the check,
contact the custodian to cancel the payment, and
either do a direct rollover or make the check out the new custodian.

3. Roll the 401(k) Directly to an IRA

Now that we’ve explored a couple options which may not make sense, let’s review three which might.

Benefits of Rolling a 401(k) to an IRA

There are many potential benefits to rolling a traditional 401(k) to an Individual Retirement Arangement (IRA).

Some of these include:

more investment choice
lower cost
better interface
higher education expenses
first-time homebuyers
unemployed health insurance

More Investment Choice

Employer 401(k) plans often only have 20-50 investment options.

It’s easier to manage and negotiate lower rates on fewer investments. However, some investment choices are quite restrictive.

IRA accounts often have thousands of investment options. Someone will likely be able to diversify their portfolio.

Lower Cost

Employer 401(k) plans may not have the same size as IRAs. Larger IRA accounts may have lower costs due to economies of scale.

Also, more investment choices could allow someone to select low-cost investments.

Tip: To find the cost of an investment, search online for the ticker and “expense ratio.” The record-keeping and other itemized fees are usually in addition to the expense ratio.

Better Interface

I often hear how painful it is to navigate employer 401(k) plans.

Keep in mind that these plans are relatively small. The accounts and investment options are maintained specifically for the company.

Employees looking to contribute to a company retirement plan often have no alternative. As such, the company and custodian sometimes underinvest in the user interface.

Some of the most unfortunate restrictions I’ve seen include:

not allowing a participant to change their contribution rates,
not sharing the investment tickers or full names - leaving employees to guess what the actual investments are, and
not publishing the expense ratios - requiring employees to either do additional research or guess at the costs.

These can be major pain points for employees.

Though it’s rarely bad enough to cause an employee to quit, they may be more inclined to roll assets out after leaving the company. This is another way Individual Retirement Arrangements (IRAs) benefit from more assets.

Custodians also don’t have captive investors for their IRAs. As such, these companies work hard to improve the user experience and add helpful resources.

10% Penalty Exceptions

An IRA has slightly different exceptions to the 10% penalty for withdrawing before age 59.5.

According to the IRS, some exceptions available to an IRA not available to a 401(k) include:

qualified higher eduction expenses,
qualified first-time homebuyers - up to $10,000, and
health insurance premiums paid while unemployed.

A rollover from a traditional 401(k) to an IRA may make sense if any of these expenses are likely.

Costs of Rolling a 401(k) to an IRA

Some of the drawbacks of rolling a traditional 401(k) over to an IRA include:

switching logistics,
true-up matching,
vesting,
loan,
rule of 55,
delayed RMDs,
employer stock tax,
creditor protection,
pro-rata challenges,
PLESA,
pass through, and
terminal illness help.

Switching Logistics

It takes time to research and select an appropriate IRA custodian for the rollover.

Funds
It then takes time to move funds from the traditional 401(k) to the IRA.

The new custodian will need information like:

existing custodian name,
account number, and
balance as of the last statement.

The new custodian has an interest in moving the assets into the IRA. The employer 401(k) plan has an interest in the assets staying put.

Tip: When rolling over an account, work with the new custodian to “pull” the account from the 401(k) plan.

Like when using a rope, it’s much easier to “pull” than “push” accounts.

Investments
Custodians prefer to use their own investments. The cost of holding or trading other investments could be higher at the new custodian.

It’s even possible the new custodian won’t support the previous investments and may force the account holder to sell them. That’s less likely with an IRA than it is with a 401(k).

Before rolling an account over to an IRA, ask the custodian whether they support the current 401(k) investments. Knowing that they don’t or that the costs would be high could inform the decision.

Tip: It may make sense to sell the investments before rolling them into a new account.

**Leftovers
**The time assets are spent in transit could result in lost income or gains. There’s an opportunity of moving funds.

Also, funds might earn an annoying amount of interest or dividends before they fully transfer. The new custodian might pick up what was there and miss interest or dividends not yet posted. That often results in some small remaining balance in the traditional 401(k).

Tip: Check the old 401(k) at least once after transfer to ensure there isn’t more to move. If so, roll them over as well.

More Accounts
Let’s say someone joins another company with its own 401(k) plan. If they roll their previous 401(k) to an IRA, they may have doubled their retirement accounts.

If the old 401(k) earns interest that posts after the balance transfers, it could triple the number of active accounts!

Having several accounts across multiple custodians can make it tough for a loved one to find, access, and manage the finances should something happen to the employee. Each account might require its own login.

Technology has enabled account aggregation across multiple custodians. However, these tools often only have read-only access. That might allow a loved one to see the balances yet not access the funds.

Also, links tend to grow stale over time and break. They require ongoing maintenance.

Tip: Minimize the number of accounts unless there’s a good reason to keep multiple.

True-Up Matching

Another potential cost of rolling a traditional 401(k) to an IRA is a lost company match.

**What is a True-Up?
**A true-up match is an extra employer contribution made to ensure an employee receives the stated benefit.

**Example
**Let’s say a 45 year old employee earns $100,000 in 2024. They were aggressive and maxed out their contribution of $23,000 by July 30th.

Their employer has a policy of matching:

100% of the first 3% the employee contributes and
50% of the next 2% the employee contributes each paycheck.

The company matches paycheck contributions up to 4% of income. Since contributions were only made for the first half of the year, the employer matched $2,000.

However, the employee contributed $23,000 for the year - well above the $5,000 contribution needed to receive the $4,000 company match!

Many companies check their records after the year ends. In this case, they would realize they underpaid $2,000 and make that true-up match. T-Mobile usually does so in March.

For more, check out:
401(k) true-up
401(k) plan fix-it guide

How to Match?
It could get hairy if the employee rolls their 401(k) account to an IRA before the true-up match posts.

The former employer might:

try to contribute the match to the employer’s old 401(k) regardless,
reach out to the former employee, and/or
give up.

Tip: It may make sense to keep the old 401(k) account until after the true-up match is received.

Vesting

Another concern is lost vesting with a traditional 401(k).

According to the IRS, employee 401(k) contributions are always 100% vested. However, employee matches can have a vesting schedule.

Two options include:

100% cliff vesting after three years of service
(no matches vest until after three years of service)
20% vesting per year after the first year of service
(no matches vest the first year yet are fully matched by the sixth)

If an employee doesn’t stay employed with the company, the employer match could be clawed back out of the account.

There are other vesting schedules. For instance, someone might need to work three out of five years to vest.

In that case, returning to the employer might result in the employee vested that unvested amount. It’s also something a former employee might negotiate if considering a return to the former employer.

Tip: It may make sense to keep the old 401(k) plan until the match clawback occurs.

Loan

A more common example is the loss of a loan.

According to the IRS, someone can usually take out a 401(k) loan up to the lesser of:

50% of their vested balance and
$50,000.

If 50% of the vested balance is less than $10,000, they can borrow up to $10,000.

**Existing Loan
**Not all employer plans require a 401(k) loan to be paid back as soon as an employee leaves.

However, rolling over a traditional 401(k) to an IRA would cause an outstanding loan to be due almost immediately.

If someone is unable or unwilling to pay the outstanding loan balance, it’s treated as a distribution. The loan balance would be subject to both income tax and possibly the 10% early withdrawal penalty.

**No IRA Loans
**It could get worse for those who need the money. A loan cannot be taken out on an IRA.

Someone who took out a 401(k) loan could have limited options to quickly repay it if they roll the account over to an IRA.

Tip: It may make sense to keep a previous employer 401(k) if it has an outstanding loan balance.

Rule of 55

One exception to the 10% penalty for 401(k) distributions is:

Distributions made to you after you separated from service with your employer after attainment of age 55.

If someone leaves their employer after age 55, they can withdraw funds from their 401(k) without having to pay the 10% penalty.

There’s an even better rule for those who served as a qualified public safety employee or firefighter. They can avoid the 10% penalty if they leave after age 50.

These benefits would be lost if the pre-tax 401(k) is rolled over to an IRA.

Delayed RMDs

When someone currently reaches age 73, they must start withdrawing funds from their traditional retirement accounts. The amount they must remove each year is called a Required Minimum Distribution (RMD).

The percentage that must be withdrawn each year increases with age. Essentially, the government gets impatient and wants the deferred tax. RMDs are an attempt to receive the tax during the owner’s lifetime.

If someone’s still working, their 401(k) plan isn’t subject to Required Minimum Distributions - unless they own more than 5% of their employer.

Here’s how the IRS puts it:

Account owners in a workplace retirement plan (for example, 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire, unless they're a 5% owner of the business sponsoring the plan.

This is a little like the lost vesting. If someone plans to return to their previous employer later in life, it may make sense to keep the old 401(k).

However, if someone feels they might work at their new employer past age 73, they might want to instead roll the funds into the new company’s 401(k) plan. It may also make sense to roll other retirement accounts such as a traditional IRA into the new employer 401(k).

Employer Stock Tax

If the traditional 401(k) was matched with employer stock, it may qualify for a special tax treatment called Net Unrealized Appreciation.

Specifically, the gain on the stock after the employer contributed it could qualify for long-term capital gains. It also wouldn’t need to be sold right away.

Lump-Sum
To qualify for Net Unrealized Appreciation, the entire account would need to be distributed as a lump-sum within a single tax year. That includes the employee contributions.

**Limited Options
**Rolling the traditional 401(k) to an IRA could result in two options:

lose the Net Unrealized Appreciation or
distribute the employer stock and pay ordinary income tax based on the stock’s value when it was contributed.

Diversification
Distributing it may not be a bad idea! It could be worth paying tax now to diversify the portfolio. Selling is especially appealing because the gain on the stock after the employer contributed it would be taxed a lower long-term capital gains rate.

Tip: If a traditional 401(k) includes appreciated employer stock, look into Net Unrealized Appreciation and/or consult a professional.

Creditor Protection

A 401(k) has federal protection from creditors. It also includes some spousal rights. According to the IRS:

Depending on the type of benefit distribution provided under your 401(k) plan, the plan may also require the consent of your spouse before making a distribution.

It may take a Qualified Domestic Relations Order (QDRO) to remove funds from a 401(k). That’s not the case for an IRA.

According to a couple sources, the 2024 IRA federal creditor protection limit is $1,512,350. The IRA protections may also depend on state laws.

Overall, a 401(k) appears to be slightly safer from creditors than an IRA. Rolling it over could result in slightly more risk to the IRA.

Pro-Rata Challenges

Another concern is with what’s called the pro-rata rule.

If a 401(k) has both pre-tax and after-tax contributions, it needs to be handled carefully.

According to the IRS:

You can’t just take a distribution of only the after-tax amounts and leave the rest in the plan.

However, someone could roll over the:

pre-tax amounts to a traditional IRA and the
after-tax amounts to a Roth IRA.

Other 10% Penalty Exceptions

A 401(k) plan has exceptions to the 10% penalty an IRA does not.

Some of these include:

the new Pension-Linked Emergency Savings Accounts (PLESAs)
the dividend pass through from an Employee Stock Ownership Plan
distributions after someone is diagnosed with a terminal illness

If these features are important, it may not make sense to roll a traditional 401(k) over to an IRA.

4. Direct Rollover from the 401(k) to Another 401(k)

If the employee joined another company, it may make sense to roll their previous 401(k) to their new company’s 401(k).

Typically, someone can transfer funds into the 401(k) while they’re eligible for the plan and employed by the company.

Benefits of Rolling a 401(k) to Another 401(k)

Two benefits of rolling a 401(k) into another one are:

fewer accounts
more loan flexibility

Fewer Accounts

Rolling a previous employer 401(k) into a new employer 401(k) could cut the number of retirement accounts in half.

Fewer accounts require less ongoing maintenance. Streamlining could also ease the logistical burden on loved ones should something happen to the employee.

More Loan Flexibility

The 401(k) loan maximum is capped at the lesser of:

50% of the vested balance and
$50,000.

Combining accounts into the new employer 401(k) will likely increase the balance available for a loan.

Existing Loan
Doing so would be challenging with an outstanding loan on the previous employer 401(k).

In that case, the options may be to:

keep the old 401(k),
pay off the loan with other funds, or
pay the income taxes and potential 10% early withdrawal penalty.

**One Loan Limit
**Someone may only allowed to take one 401(k) loan at a time. They often need to pay back the loan in full before taking out a new loan.

Taking out a smaller loan could prevent them from borrowing up to $50,000 in total. If someone needs to take out a smaller loan and feels they might need to do so again soon, they could be ahead to take out a larger initial loan.

Sell Investments
A 401(k) loan isn’t like a mortgage. It doesn’t increase leverage.

Some investments are sold to raise the cash for the loan.

Paying Self
A 401(k) chargest interest like a regular loan. However, the interest goes back to account owner - not a bank!

Does Not Lower Other Contributions
In 2024, the most someone younger than 50 years old can contribute to a traditional 401(k) is $23,000. However, the amount repaid on a loan does not count toward the maximum.

Let’s say someone takes out a $50,000 five-year loan. With a 9% interest rate, the payments would total about $12,455 each year.

The employee could still contribute $23,000 with regular contributions. With the loan, their total contributions could be about $35,455.

Tax Inefficient
Paying interest on the loan is tax inefficient.

It’s repaid with after-tax dollars. However, it’s going into a pre-tax account which will later be taxed. Paying it off early could save some lifetime taxes.

Tip: It may make sense to pay off a 401(k) loan once possible to open access to future loans, maximize investment growth, and avoid tax-inefficient interest.

Costs of Rolling a 401(k) to Another 401(k)

Rolling a 401(k) plan to another also has some negatives.

Some of these drawbacks include:

switching logistics,
true-up match,
vesting, and
Net Unrealized Appreciation.

Switching Logistics

Rolling one traditional 401(k) to another has some of the same logistical challenges as rolling a traditional 401(k) to an IRA.

However, it may be more challenging to roll to a 401(k) because of:

limited investment options and
the user interface.

Company Matching

As with rolling the old 401(k) to an IRA, rolling it directly to the new company’s 401(k) could result in a lost:

true-up match if moved before the contribution is made and
vesting if someone were to return to the previous employer.

Net Unrealized Appreciation

Rolling over the entire account could eliminate the benefit of Net Unrealized Appreciation.

If the benefit is lost, the appreciation of employer stock would be taxed at the higher ordinary income tax rates instead of at long-term capital gains rates.

IRA Benefits

Rolling the 401(k) to another one misses out on the benefits of an IRA such as:

more investment choice,
lower cost, and
better interface.

It also misses out on the IRA-specific exceptions to the 10% penalty like:

higher education expenses,
first-time homebuyers, and
health insurance premiums while unemployed.

401(k) Similarities

The new 401(k) could be similar to the old one.

Similar Setups

The plans may have similar:

investment choice,
costs, and
user interfaces.

Of course, those would depend both on the previous and new companies’ 401(k) plans.

The new plan could also:

avoid pro-rata complications,
provide slightly more creditor protections, and
delay Required Minimum Distributions if still working.

Similar 10% Exceptions

The 401(k) plan would have many of the same exceptions to the 10% penalty for early withdrawals.

The exceptions include distributions:

following separation from service after age 55,
to a Pension-Linked Emergency Savings Account (PLESA),
due to Employee Stock Ownership Plan dividend pass through, and
after someone is diagnosed with a terminal illness.

The exceptions may be even more beneficial because of the larger combined account balance.

5. Keep the Existing 401(k)

Employees can often keep the traditional 401(k) with their previous employer. That isn’t likely if the company went out of business.

Benefits of Keeping the Traditional 401(k)

There are many benefits of keeping the existing 401(k) account, including:

no switching costs,
loan flexibility,
true-up match,
vesting,
Net Unrealized Appreciation (NUA),
rule of 55,
creditor protection,
pre-rata avoidance,
ESOP dividend pass through, and
terminal illness help.

No Switching Cost

Inertia is tough to overcome, which is why people often accumulate many accounts. It takes work to streamline!

Not changing accounts can be the easiest path. Even if the interface is challening, someone may have years of familiarity with it.

Loan Flexibility

Keeping the previous 401(k) could increase loan flexibility.

A loan from the old 401(k) may not need to be repaid right away. It could continue to be repaid with regular payments.

In addition, the 401(k) with the new company may become loan eligible. The available loan could grow with the vested balance.

If needed, someone could have two outstanding 401(k) loans - one with each plan.

True-Up Match

If someone is expecting a true-up match, it probably makes sense to keep the old 401(k) account until it posts.

Automatic payments are more likely to go through.

Vesting

Keeping a 401(k) from a previous employer may make sense if:

the former employer has an abnormal vesting schedule and
the account holder may return to work for the company.

Net Unrealized Appreciation

NUA is a really nice feature for highly appreciated employer stock used for 401(k) matching.

Someone may be able to wait until they have less income to distribute the account in a lump-sum and pay tax on the value of the stock the employer contributed.

However, it’s important to consider diversification. Net Unrealized Appreciation has single stock exposure. A falling stock price could hurt.

Tip: It may make sense to take a lump-sum distribution and sell the stock to diversify instead of holding Net Unrealized Appreciation.

Rule of 55

This benefit is an important one if the former employee turned 55 before they left the company. In that case, the account owner could withdraw funds without incurring the 10% penalty for early withdrawal.

The age for qualified public service emplees and firefighters is 50.

Same Other Benefits

Keeping the old 401(k) would maintain many of the other 10% penalty exceptions, especially distributions after someone is diagnosed with a terminal illness.

Keeping it could also:

avoid pro-rata complications,
maintain the Employee Stock Ownership Plan dividend pass through, and
provide strong protection from creditors.

Costs of Keeping the Traditional 401(k)

Some of the drawbacks of keeping the old 401(k) include:

more accounts,
delayed RMDs,
PLESA,
investment choice,
cost,
interface,
higher education expenses,
first-time homebuyers, and
unemployment health insurance.

More Accounts

If someone changes positions, they will likely have access to a new retirement plan. Keeping the old one would increase the number of accounts.

The long-term hassle of maintaining multiple accounts cannot be overlooked. It’s critical to maintain access and keep track of what’s going on with the accounts.

Delayed RMDs

Unless the employee returns to work for the previous employer, they’ll likely be forced to take Required Minimum Distributions (RMDs) from the old 401(k).

If someone plans to continue working into their mid 70s, it may make sense to roll the 401(k) into the new employer retirement plan.

Tip: If someone plans to work until their mid-70s, it may make sense to roll pre-tax accounts into their employer plan.

PLESA

A Pension-Linked Emergency Savings Account (PLESA) enables someone to contribute up to $2,500 to a separate Roth (after-tax) account.

They need not demonstrate an emergency to be able to access the funds. Also, there cannot be any fees or charges on the first four withdrawals from the PLESA in a plan year.

An employee can access their PLESA balance after they leave the employer. However, they would not be able to contribute more.

IRA Benefits

As with rolling the account to another 401(k), the previous employee would miss out on the benefits of an IRA.

Some of those benefits could include:

more investment choice,
lower costs, and
a better interface.

They would also miss the IRA-specific exceptions to the 10% penalty like:

qualified higher education expenses,
qualified first-time homebuyers - up to $10,000, and
health insurance premiums while unemployed.

If these are important, it may make sense to consider rolling the balance over to an IRA instead of keeping it in the 401(k).

Hey, thanks for reading my post on whether to roll over a 401(k) after leaving a job.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for T-Mobile Employees in October

Kevin Estes — Tue, 01 Oct 2024 07:03:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to a potential steps for October in a moment.

But first - here are some links you may want to save for later.

How Does an ESPP Work?
Are Employee Stock Purchase Plans Underrated?
Own Stock or Contribute to ESPP?

Now, let's get on to the blog! 😀

It’s Fall!

The days are getting shorter. Pumpkin spice lattes are flowing. High schools are playing football. Fall has come to the Pacific Northwest. 🍁

However, we still have a quarter of the year left. Finish strong!

Potential Steps for T-Mobile Employees This Month

Financial steps T-Mobile employees might take in October include:

Evaluate stock purchased at a discount
Book holiday plans
Complete open enrollment
Update beneficiaries and estate plan
Plan year end health expenses

1. Evaluate Stock Purchased at a Discount

T-Mobile’s Employee Stock Purchase Plan (ESPP) offering period just ended 9/30/2024. For participating employees, shares of TMUS should arrive in Fidelity accounts over the next few days.

It’s worth considering what to do with those shares. 🤔

How the Employee Stock Purchase Plan Works

T-Mobile’s ESPP takes 15% off the lower of:

the beginning and
end of each six-month offering period.

The 4/1 to 9/30 period just ended. Those close prices were:

$162.67 on 4/1
$206.36 on 9/30

Since the lower of the two is $162.67, the purchase price was 15% off about $162.67 - around $138.27. 👏

Impact of Selling Right Away

If someone was willing and able to sell right away for $206.36, they’d realize a $68 gain. That’s nearly an 49% return for six months! 🎉

Any realized gains would be taxed as ordinary income at the employee’s marginal tax rate. Of course, an employee may not want - or be able - to sell right away.

Fewer Shares Than in April

ESPP contributions are limited to the lower of 15% of qualifying compensation or $25,000 each year. That’s a federal rule so please don’t complain to your supervisor, HR business partner, or CFO about it! 😉 The same goes for the 15% discount.

Anyone who’s contributed the full 15% and earned at least $166,667 from 10/1/2023 to 9/30/2024 (including bonus) hit the $25,000 cap.

Also, the previous offering period included the annual bonus back in February. Don’t be surprised if fewer shares are deposited into your account than in April.

For more, check out:

New RSU Vest

As of February 2024, new T-Mobile Restricted Stock Units grants vest every six months, which is good news. Many employees just had some stock vest! Those shares might fund an emergency and opportunity account.

For more, check out:
Is It Worth Holding Employer Stock?
What to Do With RSUs?
How Are RSUs Taxed?

2. Book Holiday Plans ❄

Now is a wonderful time to book holiday flights and lodging:

Vacation rentals tend to book.
Flights prices start to rise.
Calendars get full.

It’s not just the calendars of friends and family. You need to consider your coworkers’ as well!

Scheduling your Paid Time Off (PTO) early is like calling dibs on days off. 🎀

Speaking of PTO, remember that full time employees can normally only roll over a couple weeks (80 hours) into the new year. However, that shrunk to as little as one week (40 hours) once during my tenure.

Avoid the drama. 🎭 Schedule your holidays now.

3. Complete Open Enrollment

T-Mobile’s benefits open enrollment is just around the corner!

Now’s a good time to plan for 2024:

Will your family have large medical expenses that might be better served by a lower deductible healthcare plan? 🏥
Is your youngest child turning 13, ending dependent care Flexible Spending Account (FSA) reimbursements?
Do you need more, less, or about the amount of life and disability insurance?

You can start planning for open enrollment even before T-Mobile’s 2024 Benefits Guide is released.

For more, check out:

How Disability Insurance Works!
Pros and Cons of a Health Savings Account

4. Update Beneficiaries and Estate Plan

Could there be a better time to check your beneficiaries than around Halloween? 🎃

Doing so is critical because account titling and beneficiary designations almost always take priority over a last will & testament!

Is Your Estate Plan Up to Date?

Has anything changed since the last time you updated your estate plan?

Welcomed a new family member? 👶🐕
Lost a close family member or friend?
Relocated to a new state?
Bought a property?
Grown your net worth?

Each of these can have major implications should something happen to you.

Will You Owe Estate Taxes?

Although the federal exclusion for federal taxes is $13.61 million, some states tax much lower thresholds.

Seven states’ exemption or exclusion is below $5 million:

5. Plan End of Year Health Expenses

Now’s a great time to plan medical expenses for the remainder of the year.

If your family’s already incurred many healthcare costs this year, you may have already met your:

deductible or
out of pocket maximum.

Your costs for additional tests and procedures may be limited.

Unfortunately, other people also recognize now’s a good time for medical treatment financially.

My wife scheduled skin cancer surgeries for years. Appointments get scarce at the end of the year. In addition to the increase in demand, there’s also a decrease in supply as healthcare professionals take time off for the holidays. 🏂

Hey, thanks for reading my post on what to do with $100k.

Just a reminder, I share a lot of resources that can help you.

Risk Capacity Matters More Than Risk Tolerance

Kevin Estes — Wed, 25 Sep 2024 05:06:16 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to a special long-term capital gains tax rate in a moment.

But first - here are some links you may want to save for later.

Transactions in Retirement Accounts Aren't Taxed… Yet

Now, let's get on to the blog! 😀

Risk Capacity and Risk Tolerance

Someone’s ability to take risk depends on their financial circumstances. That’s their risk capacity.

Risk Capacity

Examples of individuals who may have more risk capacity include those who are:

married,
higher income,
higher net worth,
more frugal,
employed (not self-employed or unemployed),
younger,
more educated,
more likely to receive an inheritance,
less likely to need funds soon, and
in good health.

Risk Tolerance

Risk tolerance is more fluid.

It depends on factors which don’t tie to risk capacity like:

gender - higher for men
knowledge - higher for those with a better understanding of finance
race - higher for white, non-Hispanic

Inspiration

I’ve never learned as much from the introduction of a paper as I did from reading that of Gender Differences in Financial Risk Tolerance by Patti J. Fisher and Rui Yao, published in the Journal of Economic Psychology in August 2017.

Below are some of their referenes to other studies as well as some of my thoughts. The quotes comes from their introduction of their paper unless otherwise noted.

Risk Tolerance Defined

Financial risk tolerance is the level of discomfort that an individual is willing to accept while risking current wealth for future growth (Gibson, Michayluk, & Van de Venter, 2013).

I feel this is extremely well said.

It relates to another quote I heard:

Risk and Wealth Creation

Studies suggest taking prudent risks may create wealth.

… investors with higher levels of risk tolerance tend to invest in assets with greater levels of risk, such as stocks, to obtain greater returns in the long term (Yao, Hanna, & Lindamood, 2004) and build greater wealth (Neelakantan, 2010).
Thus, investors with low levels of risk tolerance may have greater difficulty reaching their financial goals and building adequate retirement wealth because they are unlikely to invest in stocks (Yao et al., 2004).

I agree that those unwilling to take risks may have a tougher time:

earning solid returns,
building wealth, and
reaching their financial goals.

A similar quote comes from Warren Buffett:

[

Gender Risk Tolerance

Studies suggest women on average have a lower risk tolerance.

... researchers have found generally that women have lower financial risk tolerance and invest financial resources more conservatively than do men (Bajtelsmit et al., 1996, Embrey and Fox, 1997, Faff et al., 2008, Grable et al., 2009, Hallahan et al., 2004, Hinz et al., 1997, Neelakantan, 2010).
… financial advisors may not fully understand the financial risk tolerance of women, underestimating women’s risk tolerance (Roszkowski & Grable, 2005).
Ho, Milevsky, and Robinson (1994) stated that women should hold riskier portfolios than men because of their longer life expectancies…
Among common stock investors, Barber and Odean (2001) found that men are overconfident and trade more frequently than women, thereby reducing their returns relative to those of women.

These all resonate with my experience.

Risk Tolerance Impacts Gender Wealth Inequality

"Variations in risk preferences between men and women may lead to differences in portfolio allocations that result in wealth inequality (Yao, Sharpe, & Wang, 2011)."
"Financial advisers also have reported that women hold portfolios that are more conservative and yield lower returns (Wang, 1994)."
"Using data from the Health and Retirement Study (HRS), which focuses on older Americans, Neelakantan (2010) showed that gender differences in risk tolerance accounted for approximately 10% of the gender difference in accumulated wealth."

There has - rightfully - been considerable focus on the gender pay gap.

I hadn’t considered how differences in investments could further gender wealth inequality.

Divorce

A potential area of study could be the division of assets in heterosexual divorces.

My hunch is that women have been more likely to receive the home. With an equal division of assets, that means men would likely receive more of the securities. It’s also important to account for the roughly 6% home selling commission to ensure the split is equitable.

I even wonder whether a home is even an investment.

If so, homes seem to have underperformed other investments after incorporating all expenses. The division of assets could create a financial headwind for women.

Knowledge is Key

Cupples et al. (2013) found that women exhibit a risk-averse profile, with education serving as a mediator and reducing the gender difference in risk tolerance.

I consider informing all clients an important part of the job. The difference between risk tolerance and risk capacity is often education.

Gender Summary

Men don’t live as long yet have a higher risk tolerance. Women live longer yet have a lower risk tolerance. These may be dangerously misaligned.

Male’s impact on:

Risk tolerance +
Risk capacity -

Female’s impact on:

Risk tolerance -
Risk capacity +

Marriage

Studies suggest marriage may impact risk tolerance differently for men and women.

"Yao and Hanna (2005) found that risk tolerance was highest among married men, followed by unmarried men, unmarried women, and finally, married women.
"Yao et al. (2011) found a negative relationship between being an unmarried female and risk tolerance."

Adding an adult generally increases risk capacity. On average, married filing jointly households earn 2-3x other filing types.

Also, couples save some expenses by doing tasks that would otherwise be outsourced.

Higher income and lower expenses improve cash flow and savings. Saving, in turn, creates wealth. All three improve risk capacity.

Marriage Risk Tolerance

A higher risk tolerance for both adults in a couple would make sense. However, the order of risk tolerance for the first study above was:

married men
unmarried men
unmarried women
married women

It’s possible that men may become even more risk tolerant after marriage, pushing women to move in the opposite direction as a counterbalance. The couples’ plans to have or adopt children may also factor into their risk tolerances.

Marriage Summary

While marriage likely improves risk capacity, its impact on risk tolerance has been inconsistent.

Marriage’s impact on:

Risk tolerance ?
Risk capacity +

Financial Knowledge

Knowledge is power. However, financial knowledge may increase risk tolerance without impacting risk capacity.

More Than Money

Financial or investment knowledge has been shown to be related positively to financial risk tolerance (Fan and Xiao, 2006, Gibson et al., 2013, Grable, 2000, Grable and Joo, 2000, Grable and Joo, 2004, Hallahan et al., 2004, Yao et al., 2004).
Sachse, Jungermann, and Belting (2012) found that financial literacy is important in predicting investment risk perceptions.

Intergenerational wealth transfers are a hot topic. However, knowledge may be an overlooked cause of the persistence of wealth inequality.

A parent with deep expertise in areas like law, medicine, or management may pass some of those valuable skills onto their children. This gives the next generation a head start in their careers.

The transfer of financial knowledge may be even more profound. Finance isn’t occupation-specific. Everyone has to handle their finances or rue the consequences!

Many people I know who appreciate the importance of personal finance were taught by family members. Passing along financial knowledge through stories and examples may be one of the greatest gifts for future generations.

Experiential Learning

Researchers have shown that women are generally less financially knowledgeable than are men, which affects their portfolio choices (Lusardi & Mitchell, 2007).
Dwyer et al. (2002) found that the effect of gender on risk taking in mutual fund investment decisions was reduced significantly when the individual’s financial knowledge was controlled.
Using data from the Rand American Life Panel, Fonseca, Mullen, Zamarro, and Zissimopoulos (2010) found that the gender gap in financial literacy results from the role of household marital specialization and division of labor among couples.

This gender gap is part of why I strongly prefer to meet with both members of a committed relationship.

Everyone needs to understand and own their finances! Doing so could be especially important when something happens to one spouse.

Financial Knowledge Summary

Just because someone has more familiarity with investing doesn’t mean they have a higher risk capacity. Their situation is the same regardless of their comfort level!

Financial knowledge’s impact on:

Risk tolerance +
Risk capacity ?

Income

Studies suggest risk tolerance is higher with more income.

Higher financial risk tolerance has been reported among individuals with higher income and wealth (Chaulk et al., 2003, Finke and Huston, 2003, Gibson et al., 2013, Grable, 2000, Hallahan et al., 2004, Hawley and Fujii, 1993, Yao et al., 2004).
Sung and Hanna (1996) found a positive relationship between non-investment income and risk tolerance, while Hochguertel (2003) found that income uncertainty was associated with reduced financial risk-taking.

Income Summary

Someone with consistently high income has more risk capacity. It follows that they would also have a higher risk tolerance.

Income’s impact on:

Risk tolerance +
Risk capacity +

Wealth

Studies suggest risk tolerance may depend more on liquid assets than on total wealth.

Liquid Assets

Sung and Hanna (1996) also demonstrated a positive relationship between risk tolerance and liquid assets in excess of 3 or 6 months of income.

This is part of why it’s crucial to have an emergency/opportunity fund! People make suboptimal decisions when they feel broke.

Those with significant wealth who keep too little in cash may unwittingly slip into a scarcity mindset.

Mixed Wealth Results

Higher financial risk tolerance has been reported among individuals with higher income and wealth (Chaulk et al., 2003, Finke and Huston, 2003, Gibson et al., 2013, Grable, 2000, Hallahan et al., 2004, Hawley and Fujii, 1993, Yao et al., 2004).
In contrast, Gibson et al. (2013) did not find a significant relationship between wealth and financial risk tolerance, and Hawley and Fujii (1993) found a negative relationship between wealth and risk tolerance.

All of these results could be accurate!

On average, more wealth increases someone’s risk capacity. That increased capacity could lift risk tolerance.

However, those with more wealth have less need to take risk. If you’ve won the game, why keep betting it all?

Also, Prospect Theory suggests that losses are more than twice as psychologically powerful as gains. Doubling net worth could more than quadruple the pain of complete loss!

This is another potential disconnect between risk tolerance and risk capacity.

Wealth Summary

More wealth will almost certainly increase risk capacity. While liquid assets are associated with higher risk tolerance, the relationship between total wealth and risk tolerance is less clear.

Wealth’s impact on:

Risk tolerance ?
Risk capacity +

Expenses

Studies have hinted that higher expenses may lower risk tolerances.

Financial liabilities often affect risk taking. Leibowitz, 1987,
Leibowitz and Henriksson, 1988, and Sharpe and Tint (1990) described a foundation for investors to account for liabilities when making portfolio allocation decisions, and Grable and Joo (1999) found a significantly positive relationship between financial risk tolerance and level of financial solvency.
Chaulk et al. (2003) and Hallahan et al. (2004) found a negative relationship between financial risk tolerance and the number of dependents in the household.

I feel these studies on liabilities and the number of dependents are proxies for a broader determinant of risk tolerance: expenses.

Another advisor I know manages wealth for the heirs of a household brand name. It’s his family’s wealth!

He mostly uses U.S. Government bonds to fund their living expenses. The rest of the funds he invests in broadly diversified equities. Family members who spend more are, on average, invested less aggressively.

I feel that’s prudent. A study may find that higher living expenses as a percentage of income are associated with lower risk tolerance.

Expenses Summary

All else equal, higher expenses lower both risk tolerance and capacity.

Expenses’ impact on:

Risk tolerance -
Risk capacity -

Working with a Financial Advisor

Studies suggest that working with a financial advisor has mixed impacts on risk tolerance. That may be a feature, not a bug!

Mixed Results

Gibson et al. (2013) found a positive relationship between using a financial advisor and risk tolerance, and Bernasek and Shwiff (2001) reported that individuals tended to increase the level of risk in their retirement savings after consulting with a financial advisor.
However, Van de Venter and Michayluk (2007) found no statistically significant effect of consulting with a financial advisor on financial risk tolerance.

Once again, these can all be true!

Some clients are too bold with their investments. Others are too timid. A good financial advisor helps clients optimize decisions regardless of their starting point.

My hunch is that a study of financial advisors based on client age may yield interesting conclusions:

Younger accumulators might see an increase in their risk tolerance.
Older retirees might see their risk tolerances fall.

Both could be appropriate for these invidiuals’ risk capacities.

Fiduciary

I’d like to think that working with a financial advisor would increase risk capacity.

Adding an educated and objective perspective hopefully lead to better financial decisions! However, it depends on the cost.

A fiduciary who’s required to do the right thing for clients at all times almost by definition must deliver more value than the fees we charge. Unfortunately, not all advisors act as fiduciaries.

Financial Advisor Summary

The impact on risk tolerance of working with a financial advisor should depend on the client’s situation.

A client’s risk capacity hopefully rises after hiring a financial professional. However, that may not always be the case.

Working with a financial advisor’s impact on:

Risk tolerance ?
Risk capacity ?

Self-Employment

Studies suggest there may be a relationship between self-employment and risk tolerance. However, it’s important to consider causality.

Mixed Self-Employment Results

Self-employment has been found to affect risk tolerance, with Sung and Hanna (1996) identifying a positive relationship between self-employment and higher risk tolerance.
However, Halek and Eisenhauer (2001) concluded that self-employment decreased risk tolerance.
Brown, Dietrich, Ortiz-Nuñez, and Taylor (2011) stated that there is a causal relationship between attitudes toward risk and the probability of future self-employment.
Yao, Gutter, and Hanna (2005) found employment status to be significant in explaining financial risk tolerance.

Here’s my take as an entrepreneurial financial planner:

Someone with a higher risk tolerance is more likely to launch a business.
Once they start their business, cash flow become less consistent.
This inconsistency lowers their risk capacity.

Including the time and money an entrepreneur dedicates to their business, their portfolio could become more aggressive. However, the investments outside their business may need to be de-risked.

Self-Employment Summary

This sequence may help explain the inconsistent relationship between entrepreneurship and risk tolerance.

Self-employment’s impact on:

Risk tolerance ?
Risk capacity -

Age

Someone’s current age may play an important role in determining how near-term aging impacts impacts their risk tolerance.

Mixed Results

The general consensus is that older adults are less risk tolerant than younger adults, and there is moderate support for this idea in the literature (Gibson et al., 2013, Grable, 2000, Grable, 2008, Hawley and Fujii, 1993, McInish, 1982, Morin and Suarez, 1983, Palsson, 1996, Wallach and Kogan, 1961, Yao et al., 2004, Yao et al., 2011).
Other research provides evidence of a positive relationship between age and risk tolerance or fails to detect any relationship between the two (Grable, 2000, Hanna et al., 1998, Wang and Hanna, 1997).
Hallahan et al. (2004) and Faff, Hallahan, and McKenzie (2009) demonstrated a positive relationship between age and risk tolerance, and a negative relationship between age-squared and risk tolerance. These results indicate that risk tolerance first increases with age and then decreases.

The last study aligns with my experience.

Younger people don't yet have decades of investing experience! They're understandably cautious despite their sky-high risk capacity. That's especially true if they don't come from affluent backgrounds, where they might have learned about the power of compound interest.

As they invest and - hopefully! - see growth, they may get more comfortable with volatility.

Those just starting to contribute regularly will likely see their account balances grow even if they experience investment losses! Company matching and discounted stock purchases may provide additional psychological benefits.

However, risk capacity falls with age. The focus shifts to capital preservation as someone approaches and enters retirement.

Age Summary

It’s likely risk tolerance rises and then falls with age. However, risk capacity declines as years pass.

Age’s impact on:

Risk tolerance ?
Risk capacity -

Education

Studies suggest a direct relationship between risk tolerance and level of education. However, it may not be for the reasons previously outlined.

Positive Relationship

Education also has received moderate support in the literature as a factor related to risk tolerance, with higher levels of education associated with greater risk tolerance (Chang et al., 2004, Chaulk et al., 2003, Grable, 2000, Grable et al., 2009, Hawley and Fujii, 1993, Sung and Hanna, 1996, Yao et al., 2011).
Individuals with a bachelor’s degree or higher were found to be more risk tolerant than others, with the lowest educated individuals (high school diploma or less) having the lowest risk tolerance (Grable, 2008, Halek and Eisenhauer, 2001).
Education is thought to increase a person’s capacity to evaluate risks inherent to the investment process and therefore provides them with a higher financial risk tolerance (Hallahan et al., 2004).

The level of college education also relates to risk tolerance, with

postgraduate higher than college graduate and
college graduate higher than some college education (Sahm, 2014).

Education the Cause?

Attributing higher risk tolerance to improved mental faculties seems like a stretch.

That’s more plausible for degrees in related fields like Economics, Business, and Finance. However, that could be less likely in disciplines like English Literature, Foreign Language, and Anthropology.

Higher Income and Consistency

The primary driver may be higher and more consistent income. According to the U.S Bureau of Labor Statistics, those with higher levels of education generally earn more.

More education is also associated with lower levels of unemployment.

Both factors provide greater financial stability to more educated individuals.

Family Affluence

People who complete college degrees tend to come from more affluent families (Braga et al, 2017 and Pfeffer, 2018).

Also, college graduates who come from higher income families tend to:

enroll in graduate school more often,
do so at a younger age, and
graduate at a higher rate (Baum and Steele, 2017).

A more recent study shared similar results (Oh and Kim, 2020):

Their results hinge on three educational sorting mechanisms involving advanced degree holders who come from high-SES (socioeconomic status) families:
1. They obtain expensive and financially rewarding degrees.
2. They major in lucrative fields of study such as law and medicine in graduate school.
3. They complete their education at a younger age.

Education Summary

Higher levels of education are directly related to risk tolerance. However, the relationship may have more to do with higher income, lower unemployment, and a selection bias favoring affluent students than with improved cognition.

Education’s impact on:

Risk tolerance +
Risk capacity +

Race

White, non-Hispanic individuals have typically had a higher risk tolerance.

Race Impacts

Racial and ethnic background also have been found to be important in explaining risk tolerance (Weber & Hsee, 1998).
Hawley and Fujii (1993) found that whites were more risk tolerant than were other racial/ethnic groups.
Yao et al. (2005) found that, compared with their white counterparts, black and Hispanic respondents were more likely to take substantial financial risk (versus high, some, or no risk), but significantly less likely to take some financial risk (versus no risk).
Barsky, Juster, Kimball, and Shapiro (1997) showed that blacks have higher mean risk tolerance levels than do white respondents, while all studies based on the Survey of Consumer Finances (SCF) dataset showed that black respondents were less willing than white respondents to take investment risk (Hanna & Lindamood, 2008).

A slightly more recent study found black respondents were less risk tolerant (Sahm, 2012).

Risk is tricky. Taking some has historically led to growth. Taking too much can lead to losses.

Wealth Inequality

It’s impossible to discuss race and finance without addressing the racial wealth divide.

Data from 2022 suggest:

Black households were nearly three times as likely as white, non-Hispanic households to have a zero or negative net worth.
White, non-Hispanic households were nearly four times as likely as black households to be millionaires (Sullivan, Hays, and Bennett, 2024).

Unfortunately, race-based financial study results may also pick up some secondary effects of family affluence.

Race Summary

The balance of evidence suggests white, non-Hispanic individuals have a higher risk tolerance. However, that may be due to differing levels of family wealth.

Two individuals with identical financial circumstances may have similar risk capacities regardless of race.

White, non-Hispanic’s impact on:

Risk tolerance +
Risk capacity ?

Black’s impact on:

Risk tolerance -
Risk capacity ?

Inheritance

Studies suggest those who expect to receive an inheritance have a higher risk tolerance.

Safety and Knowledge

Previous research has shown that inheritance expectations positively affect investors’ tolerance for risk. Embrey and Fox (1997) and Gutter and Fontes (2006) concluded that investors who expect to receive an inheritance were more likely to invest in stocks.
Harness, Finke, and Chatterjee (2009) found that expecting an inheritance appeared to contribute to having a higher proportion of net worth in investment assets.

It makes sense that expecting an inheritance would increase risk tolerance.

A future windfall increases risk capacity. Future inheritance can serve as a safety net which allows heirs to take more risk.
Family members who intend to pass on assets may have educated the next generation. It doesn’t make sense to work, save, and invest diligently for a lifetime only for heirs to blow it!
Wealthy family members may have created or expanded their wealth during heirs’ lifetimes. Real-time accounts can impart powerful lessons.

Inheritance Summary

A future inheritance can further wealth inequality both directly and by allowing heirs to take more risks.

Inheritance’s impact on:

Risk tolerance +
Risk capacity +

Time Horizon

Studies suggest that the longer someone has before they need to use the money, the higher their risk tolerance.

Years to Recover

Butler and Domian (1991) indicated that investment horizon plays a vital role in asset allocation, as “time diversification” reduces the risks for investors with a long horizon.
Zhong and Xiao (1995) and Hariharan, Chapman, and Domian (2000) found that investors with a longer financial planning horizon invested more in stocks and bonds.

Investments can underperform for years. However, they’ve trended upward. If someone doesn’t need the funds for quite some time, they may be able to handle more risk.

Longevity

Higher income individuals tend to live longer.

Chetty et al, 2016 found:

The gap in life expectancy between the richest 1% and poorest 1% of individuals was:
14.6 years (95% CI, 14.4 to 14.8 years) for men and
10.1 years (9.9 to 10.3 years) for women.

Not only does someone expected to live a long time have a higher risk capacity but they may also have a higher risk necessity. Higher returns may be required to support heavy expenses many years from now.

Time Horizon Summary

Longer time horizons give variable investments more time to grow. Investing more aggressively may not only be possible but also required.

Impacts on:

Risk tolerance +
Risk capacity +

Health

Studies have shown that poorer health tends to be associated with lower risk tolerance.

Fewer Chances with Poor Health

Most studies have shown that investors with poor health favor less risky assets (Coile and Milligan, 2009, Edwards, 2008, Fan and Zhao, 2009, Love and Smith, 2010, Rosen and Wu, 2004).
Poor health also has been found to have a negative effect on the shares of stock holdings in retirement portfolios (Yogo, 2009).
Gandelman and Hernandez-Murillo (2013) found that health satisfaction is important in explaining relative risk aversion.

Poor health lowers risk capacity for many reasons, including:

Income may fall as someone steps away from the workforce.
Healthcare costs rise.
Money may be needed sooner to pay for a variety of expenses.

Shorter, less healthy lives for the poor and longer, healthier lives for the rich expand wealth inequality.

Health Summary

It’s prudent for someone with worse health to be more financially cautious.

Good health’s impact on:

Risk tolerance +
Risk capacity +

Conclusion

Risk tolerance depends on many factors, which often align with risk capacity.

However, several factors do not link back to risk capacity and may even run counter to it! These misalignments require additional diligence.

Some practical applications for financial planners include:

Ensure all clients - especially women and minorities - receive the information they need to better align their risk tolerance and risk capacity.
Work with both members in a committed couple and highlight their financial synergies.
Take appropriate risks despite wealth accumulation to achieve lifetime and bequest goals.
Limit other investment risks as someone prepares to launch a new business.
Help both younger and older clients rightsize their risks, which may require opposite approaches depending on clients’ stage in life.

Potential Research

Research on risk tolerance is constantly evolving. Some possible opportunities may include whether risk tolerance depends on:

asset allocation following a divorce,
client age when working with a financial advisor,
anticipated defined benefit pension income,
future Social Security benefits,
living expenses as a percentage of income,
home equity, and
LGBTQIA+ identification.

Hey, thanks for reading my post on risk capacity and risk tolerance.

Just a reminder, I share a lot of resources that can help you.

Save More Tax on Donations

Kevin Estes — Tue, 17 Sep 2024 22:36:36 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to saving more tax on donations in a moment.

But first - here are some links you may want to save for later.

No Tax on Investment Gains?

Now, let's get on to the blog! 😀

More Ways to Save

Millions of people give to charity, which is wonderful!

However, they often give cash each week, month, or year. That method can cost more!

It’s often better to:

donate appreciated assets,
bunch donations, or
contribute to a Donor Advised Fund.

1. Give Appreciated Assets

People often own assets which have risen in value.

However, they may be selling them to:

diversify investments,
fund living expenses, or
give to charity.

Short-Term Capital Gains

If the investments were held a year or less, they’re usually taxed at marginal tax rates. Those can be as high as 37% for federal taxes!

That’s rarely the case.

According to 2021 data from the Internal Revenue Service (IRS):

70% of tax filers paid a marginal rate of 12% or less for federal taxes
only 3% of Americans were taxed a marginal rate of 32% or higher

Long-Term Capital Gains

If investments are held longer than a year, they’re usually taxed at lower long-term capital gains rates.

According to the same data for long-term capital gains:

about a quarter of lower-income filers paid no tax
over two-thirds of taxpayers were taxed at 15%
about 3% of higher-income filers paid 20%

The summary statistics exclude:

depreciation recapture (rate of 25%)
collectibles (rate of 28%)
Net Investment Income Tax (NIIT additional rate of 3.8%)

Don’t Sell to Give, Just Give

Nonprofits don’t pay income taxes!

Selling an asset which has risen in value to give cash to a charity hurts. The taxpayer would likely pay tax the nonprofit wouldn’t!

A donor could instead give the appreciated asset directly to charity.

Doing so might help the:

charity to receive a larger donation,
donor to avoid the taxes, or
both!

There are limitations on how much donations can be deducted.

Appreciated Stock Example

Assume Joe and Maria are a married couple and file a joint tax return. A stock they bought many years ago has tripled in price.

They’ve been selling the stock to help with living expenses. Their income puts them in the 15% long-term capital gains (LTCG) tax bracket. In addition, their investment income is subject to the 3.8% Net Investment Income Tax (NIIT).

Joe and Maria give $500 a month to a qualified charitable organization.

By donating the appreciated stock instead of giving cash, the couple could lower their tax bill. They would avoid long-term capital gains of $4,000, two-thirds of the $6,000 they give each year.

At their 18.8% combined rate (15% LTCG + 3.8% NIIT), they would save $752 a year in federal taxes.

Standard vs. Itemized Deduction

Another important consideration is how a donor deducts.

The IRS says it well:

A deduction is an amount you subtract from your income when you file so you don’t pay tax on it.
By lowering your income, deductions lower your tax.

Standard Deduction

Most taxpayers use the standard deduction. This is a deduction the federal govenment simply gives taxpayers.

The concept is that people have some expenses the government wouldn’t feel comfortable taxing. These are bare necessities like food, clothing, housing, healthcare, etc.

Some income avoids income tax - even for higher earners!

It also simplifies taxes. Instead of forcing everyone to track and report these expenses, the IRS offers standard deductions based on filing type.

For 2024, the standard deductions are:

Single or Married Filing Jointly - $14,600
Married Filing Jointly or Qualifying Surviving Spouse - $29,200
Head of Household - $21,900

Itemized Deductions

Instead, a taxpayer might get a bigger benefit by itemizing deductions.

Some common deductions include:

Home mortgage interest and points, usually up to $750,000 of debt
State and local taxes paid, up to $10,000
Medical and dental expenses over 7.5% of adjusted gross income
Casualty and theft losses
Gifts to charity

Qualifying expenses need to be included on Schedule A (Form 1040 or 1040-SR). These deductions also require supporting documentation.

Only if the sum of all itemized deductions exceed the standard deduction will itemizing lower taxes.

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act of 2017 (TCJA) changed the landscape. It:

doubled the standard deduction,
capped State and Local Taxes (SALT) at $10,000,
limited home mortgage to the first $750,000 of debt, down from $1,000,000…

The TCJA changes cut the percent of returns with itemized deductions in third:

from over 30% in 2017
to under 10% by 2021

This means fewer Americans would get a full tax break on their charitable donations. Donors have to first bring their itemized deductions up to their standard deduction.

2024 Example

Let’s return to Joe and Maria. Since they’re married and file a joint tax return, their standard deduction is $29,200 for 2024.

They have the following itemized deductions:

$10,000 for state and local income taxes
$15,000 for home mortgage interest
$6,000 in charitable donations ($500 a month)

Without the charitable giving, Joe and Maria would have been better off with the standard deduction. Their itemized deductions would’ve been $25,000 compared with the $29,200 standard deduction.

With the donations, their itemized deductions come to $31,000. That’s $1,800 more than their $29,200 standard deduction.

The first $4,200 of their $6,000 donations have no impact on their taxes! Only the remaining $1,800 lower their tax bill.

Let’s assume the couple:

is in the 24% federal tax bracket for ordinary income and
lives in a state without income tax

The extra $1,800 deduction will likely save them $432 in federal taxes ($1,800 * 24%).

2025 Example

Saving only $432 in federal taxes with a $6,000 donation isn’t ideal. However, it could get worse next year.

The standard deduction will likely rise with inflation. Let’s assume it rises to $30,000 for married couples, filing jointly.

Also, slightly more of Joe and Maria’s home mortgage payments go to principal instead of interest over time. Their deductible interest might fall $200 from 2024 to 2025 due to this amortization.

They continue to give $500 a month to charity.

Their itemized deductions would be $30,800, only $800 more than their standard deduction of $30,000. Of the $6,000 in donations for 2025, only $800 would lower their taxable income.

That $800 at their 24% marginal tax rate might only save them $192 ($800 * 24%).

By 2026, the tax benefit of the donations might disappear altogether.

2. Bunch Donations

A strategy called donation bunching could help.

Instead of giving every year, someone would give more one year and nothing the next. Doing so may have more tax savings with the same amount of donations.

Bunching Example

Although Joe and Maria give $6,000 a year, they receive little tax benefit. They may only receive a $624 in tax savings over the two years:

$432 in 2024
$192 in 2025

Giving $12,000 one year and nothing the next could save taxes.

Assume they give $12,000 in 2024. Their itemized deductions of $37,000 would be $7,800 more than their standard deduction of $29,200.

At the 24% tax bracket, their savings would be $1,872 ($7,800 * 24%).

Even without any 2025 benefit, their tax savings could triple across 2024 and 2025!

3. Contribute to a Donor Advised Fund

A third strategy is to contribute to a Donor Advised Fund (DAF).

Advise on Distributions

According to the IRS, with a Donor Advised Fund:

A nonprofit sponsoring organization maintains and operates separate accounts
That organization has legal control over funds once a donor makes a contribution
However, the donor (or their representative) retains advisory privileges

A donor can contribution and later advise where the money goes.

Important! Not all nonprofit organizations are eligible to receive money from a Donor Advised Fund. It’s worth checking with the sponsoring organization before contributing to their DAF.

Receive an Immediate Deduction

The grantor receives an immediate tax deduction. Technically, the funds went to a nonprofit!

Some custodians make giving to their affiliate Donor Advised Fund easy.

Distribute Later

Funds donated to a Donor Advised Fund don’t have to be distributed right away.

How long a donor has to advise on distributions depends on each DAF’s policy. If someone waits too long, the sponsoring organization may give to a charity it chooses.

Simplify Giving

A donor can advise the DAF follow a giving schedule. This can eliminate the manual task of giving to a nonprofit each week, month, or year.

Invest for Growth

Another interesting feature of Donor Advised Funds is that the donations may be invested for future growth.

That means someone can donate now, receive the tax deduction, and distribute more to charity later due to investment growth.

Process Non-Cash Donations

A Donor Advised Fund can also accept non-cash items.

Some smaller charities can have a tough time processing non-cash donations. Donating these assets to a DAF can facilitate giving.

Appreciated stock is a good use case.

Example

Consider Joe and Maria’s giving.

**Prepay
**Instead of contributing cash once a month, they could contribute a larger amount to a Donor Advised Fund. They could then advise the DAF give $500 a month to the charity Joe and Maria choose. It’s like prepaying donations!

However, the funds may grow after they’re donated.

Endow
Someone could essentially endow their donations. Contribuing roughly 25 times their annual giving might fund those donations indefinitely.

How long the funds last would depend on:

the giving strategy and
investment returns.

For Joe and Maria to support their $6,000 a year contributions, they might donate $150,000 once ($6,000 * 25). They’d need not think about it for decades, if ever.

The charity doesn’t really care how it gets its money. A DAF may be simpler for both the donor and the nonprofit.

Do All Three

Combining strategies can be even more powerful!

Example

Let’s say Joe and Maria:

gave $12,000 at the beginning of 2024 to a Donor Advised Fund
donated highly appreciated stock instead of cash
advised the DAF give $500 a month to the couple’s favorite charity

In 2024, Joe and Maria would have:

avoided $752 in taxes,
received $1,440 more in tax savings, and
saved time by having the DAF handle the logistics.

Their donations may also grow. Without another contribution and with a 7% investment return, the Donor Advised Fund might have nearly $1,000 left over at the end of 2025.

Hey, thanks for reading my post on how to save more tax on donations.

Just a reminder, I share a lot of resources that can help you.

Transactions in Retirement Accounts Aren’t Taxed… Yet

Kevin Estes — Wed, 11 Sep 2024 05:10:26 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to retirement plan transactions a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Recent Conversations

When something keeps coming up in conversations, I prioritize it for content!

Today’s topic comes from recent conversations with very intelligent, educated, and successful people. They just aren’t sure how investments within retirement plans are taxed.

Three Investment Accounts

There are many account types - perhaps too many!

Three of the most popular are:

taxable brokerage
traditional (pre-tax) retirement
Roth (after-tax) retirement

1. Taxable Brokerage

When people open an investment account, it’s often a taxable brokerage. These accounts are held at custodians like Fidelity, Vanguard, Schwab, and the like.

Shares of company stock received through Restricted Stock Units (RSUs) and Employee Stock Purchase Plans (ESPPs) are usually deposited into taxable brokerage accounts. If you participate in one or bothof these programs, you probably have at least one taxable brokerage account!

Benefits

Taxable brokerage accounts have many benefits.

Flexible
Above all, they’re flexible! These accounts can own many investment: stocks, bonds, mutual funds, Electronically Traded Funds (ETFs), Certificates of Deposit (CDs)…

They also have few restrictions. Unlike with retirement accounts, withdrawals are rarely taxed or penalized. Money can usually be moved to checking within a couple business days.

In contrast, retirement accounts often incur a 10% penalty if someone withdraws funds before age 59.5. There are (some) ways around that penalty beyond the scope of this article.

A taxable brokerage account may also be somewhere to keep investments which could be quickly sold and used to:

take a vacation,
buy a car, or
fund a career transition.

Solid Interest
Traditional brokerage accounts often receive decent interest rates on uninvested funds. Many custodians default cash into a money market mutual fund.

That interest plus the ease of moving money can make a traditional brokerage account a good place to keep an emergency fund.

Downsides

Taxable brokerage accounts also have drawbacks.

No Employer Match
Contributions almost never get an employee match. Retirement plans often do.

Even RSUs and ESPPs aren’t matches!

Restricted Stock Units are basically stock bonuses. Employers use shares of stock to encourage employees to stay with the company and add value. RSUs are compensation when they vest.
Employee Stock Purchase Plans are a way to buy company stock at a discount. Contributions are after-tax. Participants receive less in their checking accounts. The discount is compensation.

Taxed
Another drawback is it’s taxed.

For a taxable brokerage account, transactions have ongoing tax impacts. With a taxable brokerage account, someone will have to pay taxes after they:

receive interest,
are paid a dividend, or
sell an asset for a gain.

Interest and gains on investments held a year or less are taxed at the owner’s marginal tax bracket.

Taxes on investments are usually due with that year’s tax return. People who owe a lot when filing may need to pay earlier with estimated quarterly taxes.

The IRS wants its money!

NIIT
If the owner earns enough income, they may also be subject to a 3.8% Net Investment Income Tax (NIIT). That tax helps fund Medicare.

This extra 3.8% tax kicks in above income of:

$250,000 for married filing jointly or qualifying survivor spouse
$125,000 for married filing separately
$200,000 for single or head of household

It’s based on modified adjusted gross income - an IRS mouthful.

It can’t just be modified.
It has to be adjusted as well?

The important thing to know is that it includes almost all income someone receives in the year: from a job, rental, investments, etc.

Silver Lining

Fortunately, it’s not all doom and gloom! The U.S. Government encourages people to invest to strengthen the economy.

It taxes long-term investments at a lower rate. That rate is 15% for most people, though lower earners pay nothing and higher earners pay 20%.

Those taxes are generally lower than the ordinary marginal income tax rates, which could be as high as 37%.

To get the long-term capital gains tax treatment, investments typically have to be held for over a year before they’re sold. Certain “qualified” dividends are also taxed at these lower rates.

2. Traditional (Pre-Tax) Retirement

Pre-tax retirement accounts work differently.

The U.S. Government allows someone to avoid income tax when they contribute to an account like a 401(k), 403(b), 457(b), or IRA. There are limits on how much contributions can reduce taxable income.

Partnership

The federal government essentially partners with taxpayers.

It lets them:

avoid income tax on the front-end,
defer tax on investment income, and then
pay income tax when the funds are withdrawn.

The government hopes investors make good investments! That’s one reason there are more investment limitations for these accounts than with a traditional brokerage account.

Taxed Later

Some taxpayers think:

Great!
If I don’t take the money out, I’ll never pay taxes!

That’s challenging.

Living Expenses
Retirees access funds to afford their lifestyles. When they do, it’s taxed as income.

Required Minimum Distributions (RMDs)
Some people have enough other income and assets that they don’t need to draw from their retirement accounts.

However, Uncle Sam gets impatient. Owners of a certain age must take withdrawals from their pre-tax retirement accounts.

These Required Minimum Distributions (RMDs) are based on age. The older the owner is, the more they must withdraw.

The federal government wants people to take the funds out of their pre-tax retirement accounts before they die.

Inherited Tax Bill
However, people live to different ages!

If they pass relatively young, heirs will inherit the pre-tax retirement accounts. Heirs will then be forced to withdraw funds and pay income taxes.

They inherit the tax bill along with the account!

Transactions Not Taxed

The U.S. Government figures it will eventually earn income taxes on pre-tax retirement accounts. It might just take a long time!

**Taxed Like Ordinary Income
**Remember that 15% tax rate most people pay with a taxable account?

Retirement accounts don’t really get that.

Almost all money distributed from a pre-tax retirement account is taxed at ordinary income rates.

Yes. There are ways to limit the bill.

However, those who save a lot into their pre-tax retirement accounts over a long and successful career may wind up paying more in taxes than if their investments had been in a taxable brokerage account.

Not Sweating the Small Stuff
Since the federal government is going to tax withdrawals, there’s no need to report every transaction within the account. Those transactions would burden both taxpayers and the IRS!

In the rare instance the IRS would need to see the transactions in a pre-tax retirement account, the taxpayer’s custodian should be able to provide the detail.

Rarely Tax Consequences
There are rarely any tax consequences of buying or selling investments held in a traditional retirement account.

One exception is an employee who receives employer stock instead of cash from the employer match. There are some other fringe cases.

That’s good news for most people! We can buy and sell investments in a traditional (pre-tax) retirement account without incurring taxes.

A pre-tax retirement account is often a great place to make investment changes to rebalance someone’s overall portfolio.

3. Roth (After-Tax) Retirement

Roth and other after-tax retirement accounts work differently.

Tax Seed, Not Harvest

Contributions to these accounts are after-tax. The money was subjected to income tax before it went into the account.

It may never be taxed again if certain conditions are met!

Roth and after-tax accounts generally:

are taxed on the front-end,
grow tax-free, and
can be withdrawn tax-free.

Think of it like an apple tree.

A traditional (pre-tax) retirement account avoids tax on the seed and is taxed on the harvest.
A Roth (after-tax) account pays tax on the seed but not on the harvest.

Still Not Sweating the Small Stuff

The U.S. Government probably already received all the tax it will. It doesn’t care much about the transactions in these accounts!

As with a traditional retirement account, it would be a waste of time for taxpayers to report and the IRS to review them.

That makes Roth and after-tax retirement accounts another good place to rebalance investments within a portfolio.

More good news: the federal government doesn’t force Required Minimum Distributions (RMDs) on either older Americans or their heirs.

What the IRS does care about is withdrawals. It checks them to ensure they follow the rules and won’t be taxed or penalized.

Depends on Account Type

It may help to think of account types as different containers.

Taxes depend more on the container than what’s inside!

Taxable Brokerage - taxed on transactions throughout and receives a tax break on long-term capital gains
Traditional (Pre-Tax) Retirement - avoids tax on the front-end, grows tax-deferred, and taxed as ordinary income when withdrawn
Roth (After-Tax) Retirement - taxed on the front end, grows tax-free, and usually isn’t taxed when withdrawn

Taxes Matter

How much someone pays over their lifetime is a big deal!

Which accounts are used and how funds are invested could determine whether or not someone achieves their goals.

Two important considerations are:

How to Minimize Lifetime Taxes
Whether to Contribute to Pre-Tax or After-Tax retirement accounts

Minimize Lifetime Taxes

One strategy that may help reduce lifetime taxes is to:

lower taxable income in high income years and
increase taxable income in low income year.

Contribute to Pre-Tax or After-Tax?

Whether to contribute to a traditional (pre-tax) or Roth (after-tax) retirement account depends on many factors, incuding:

company matching
current income
spending
estate plans
net worth
desire to avoid taxes
future income
spending age
future tax rates
lifespans

Hey, thanks for reading my post on how transactions in retirement aren’t taxed yet.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for T-Mobile Employees in September

Kevin Estes — Wed, 04 Sep 2024 00:25:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for September in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

How is it September already?!

The good news? We still have a third of the year left!

Potential Steps for T-Mobile Employees this Month

Five steps T-Mobile employees might take in September include:

Select Employee Stock Purchase Plan (ESPP) contribution %
Book Thanksgiving plans
Start benefits and insurance review
Replenish emergency fund
Schedule remaining Paid Time Off (PTO)

Select ESPP Contribution %

Participating in the Employee Stock Purchase Plan (ESPP) may not be right for everyone. Nonetheless, it’s worth considering.

The primary benefit is a 15% discount off the lower of the price at the beginning and end of six months.

Let’s say a stock’s price is $200.

If the stock stays the same over six months, it would be purchased at $170 and have a built-in $30 gain.
If the stock price rises to $220, it would be stil purchased at $170 and have a larger built-in $50 gain.
If the stock price falls to $180, it would be purchased at $153 and have a smaller built-in $27 gain.

Disadvantages

Some disadvantages of participating in an Employee Stock Purchase Plan include:

reduces cash flow
locks up money — usually until purchase
increases taxes, especially if the shares are sold right after purchase

“What If I’m Laid Off?”

Unfortunately, there have been layoffs at T-Mobile. There’s bad news / good news with the ESPP.

Bad news: a participant no longer employed on the purchase date misses the opportunity to buy at a discount.
Good news: the participant will instead get the cash back. It’s almost like a small - yet growing! - emergency fund.

For more, check out:
How Does an ESPP Work?
Are ESPPs Underrated?
Own Stock or Contribute to ESPP?

Book Thanksgiving Plans

It’s important to plan ahead for Thanksgiving travel:

Hotels and short-term rentals fill up, especially at popular locations.
Last-minute flights are normally more expensive.
People get busy.

Avoid the drama. Book now.

Start Benefits and Insurance Review

Open enrollment is coming soon! Now’s a good time to check on your benefits.

Are you expecting any major expenses?

This year: If you’ve already met your health insurance deductible, try to move healthcare expenses up into 2024.
Next year: You may need to increase your coverage to pay for higher upcoming expenses.

Do you have “use it or lose it” funds?

FSA = Flexible Spending Account. Funds need to be used in 2024. (with a possible $640 carryover to 2025)
HRA = Healthcare Reimbursement Arrangement. Funds also need to be used in 2024. (also with some carryover)
HSA = Health Savings Account. Funds are NOT “use it or lose it” and don’t to be spent this year.

If you currently have a large FSA or HRA balance, would it make sense to reduce your contribution with open enrollment?

For more, check out:
Pros and Cons of a Health Savings Account
How Disability Insurance Works!

Replenish Emergency Fund

Huzzah for all you accomplished this summer!

Those activities may have depleted your emergency fund. It could be time to top off cash reserves heading into the holiday season.

Restricted Stock Units

Recently issued T-Mobile RSUs are now vesting every six months, which is good news. Many employees just had some stock vest! Those shares might fund an emergency and opportunity account.

For more, check out:
Is It Worth Holding Employer Stock?
What to Do With RSUs?
How Are RSUs Taxed?

Social Security Maximum

Reaching the Social Security income maximum of $168,600 for 2024 might also help! About 6% of covered workers earn more than the Social Security taxable income each year.

Schedule Remaining PTO

“Use it or lose it” doesn’t just apply to spending and reimbursement accounts.

Paid Time Off (PTO) is there for a reason. Use it!

T-Mobile employees can usually roll over up to two weeks (80 hours). However, that limit has fluctuated throughout the years:

as low as 40 hours
as high as 120 hours (COVID-19, merger)

Play it safe and plan to carry over no more than 40-80 hours.

Scheduling PTO early also helps avoid scheduling conflicts with teammates. Call dibs!

Hey, thanks for reading my post on potential financial steps for T-Mobile employees in September.

Just a reminder, I share a lot of resources that can help you.

We Rode in a Self-Driving Vehicle

Kevin Estes — Wed, 28 Aug 2024 15:30:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to riding in a self-driving car in a moment.

But first - here are some links you may want to save for later.

Buying a Car

Now, let's get on to the blog! 😀

Hundreds of Rides Shared

We’ve been a one-car family for years.

It’s been less expensive for me to call a ride whenver I need instead of having to pay for gas, maintenance, insurance, registration, parking, tires, depreciation…

Credit

Before the pandemic, T-Mobile had real parking challenges at the Bellevue headquarters.

To help free up parking spaces, the company offered a $10 credit for a ride sharing service to or from the office. Because I lived nearby, the discount often covered the cost of the ride!

I’ve taken hundreds of Lyft and Uber rides. With Lyft alone, I’ve taken 221 rides over the course of nearly seven years.

My cost? Less than $2,000 total.

Convenient

I shop both Lyft and Uber when I need a ride. If they’re a similar wait, I choose whichever’s cheapest. After all - many drivers work for both.

It’s like having a private chauffeur! The rides are off the charts convenient. I can check email, plan my day, listen to a podcast…

It also gives me a chance to check out the service:

What do I like?
What might I change?

Meet Drivers

Above all, I get to connect with drivers. I love our conversations! I almost always leave with a new perspective.

People often share their backgrounds. They often talk about their passsions - family, hobbies, careers, and more. I learn so much!

Family Vacation

Our family recently vacationed in California. We camped in Yosemite for a few days before heading to San Francisco.

We stayed near Fisherman’s Wharf in the city, so we had little need to drive. However, we wanted to visit the Japanese Tea Garden.

At breakfast away from our hotel, we learned the garden had free admission if we arrived by 10am. We didn’t have time to finish breakfast, head back to the hotel, get our car, and drive to the park.

We’d seen self-driving cars several times during our stay and were intrigued. The company was Waymo (pronounced “way-mo”). Our daughter was especially intrigued.

A hotel worker mentioned he’d ridden one. However, it was the day companies were impacted by the CrowdStrike outage. After his mom’s coaxing, he didn’t take a Waymo for the return trip!

Signup and Pickup

I was curious how much it cost. If it was a similar price, we might try it.

Signup

I downloaded the Waymo One app during breakfast.

The cost to go from Lombard Street to the Japanese Tea Garden was $24.05. It was about $8 more than a Lyft/Uber.

We decided the experience was worth the risk and cost.

Wait

We found a spot with plenty of room and called the Waymo.

The wait was a bit longer than expected and probably longer than a ride-share would have been. However, there aren’t as many Waymo vehicles!

Appearance

We saw the vehicle coming toward us from down the street and confirmed the license plate. It was a white SUV with a blue light and moving pieces on top.

As is often the case, this new technology made me think of old technology. The top reminded me of an old police car light. It also had a rotating element that looked like a rapidly moving slide show.

There appeared to be cameras on each of the four corners. The front windshield and side windows were tinted. The back windows were especially dark.

Unlock

The SUV drove in front of where we were standing on the curb. As it pulled up, I wondered how I’d know whether the car was unlocked.

However, the designers had thought of that! The Waymo One app required me to unlock the car with the app.

That makes sense! It wouldn’t want someone else to jump into the car and get a free ride on my dime. I chuckled that it made me think of train hopping hobos I’d seen in old black and white movies.

When I clicked “Unlock Doors” on the app, the handles extended.

Ride

The three of us climbed into our seats.

None of us sat in the driver’s seat. However, I took the front passenger seat just in case.

Interior

It was a clean Jaguar SUV with a black leather interior and display monitors in both the front and back.

Intro

The Waymo App had me to confirm we were ready to go. Good! I wouldn’t want to leave anyone or anything behind. The ride logistics could have been tougher with luggage.

I confirmed and the vehicle started to drive.

An introduction and safety video played. Not touching the steering wheel or pedals seemed reasonable. Doing so might break the driving mechanisms!

I was thankful no-one had to sit in the driver’s seat. Fortunately, we’re a family of three.

It also made sense we were being filmed. Safety is probably the company’s biggest concern. However, messes or outright destruction could occur without supervision.

I began to wonder:

How often is the interior cleaned?
Does Waymo need to inspect the vehicle often?
How frequently is it recharged?

I also wondered whether the company was recording for real-time reactions.

The video mentioned the microphone wasn’t on unless we called customer service, so we could sing as loudly as we wanted. That’s nice.

We had options. At the very least, we could change the music and temperature. I didn’t dare adjust my seat.

Start

The self-driving car signaled left and drove into the street. It struck me as ironic that The Love Bug was filmed in San Francisco.

The Waymo took us to the bottom of the winding section of Lombard Street. A tourist gawked at us. I raised my hands as if to say “Look! No hands!”

I don’t think she saw me.

In Transit

The vehicle handled the hill well. However, it was odd to see the steering wheel move without someone there!

I felt it in my stomach. However, my wife - who often gets motion sickness when riding in the back of a car - felt fine.

The Waymo did great with traffic. Stops, starts, and turns were smooth.

Lane changes were careful… perhaps too careful. The vehicle used its blinkers early and often. Once, it signaled and didn’t change lanes!

Extra Care

When a pedestrian was entering a car from the road in front of us, the Waymo slowed. It couldn’t tell the person had their back to us and was ducking into the car.

Nonetheless, I was glad. I’d rather an abundance of caution.

A similar situation occurred on a three-lane road. A police vehicle was pulled over on the right ahead with its lights flashing. The vehicle moved to the far left lane despite the traffic.

Almost Human

The Waymo didn’t drive like a robot. It drove like a person!

In fact, it drove like some of the best drivers I’ve had.

If I were tasked with programming autonomous driving, I’d study the highest rated ride-share drivers. Waymo seems to have trained its model on good human drivers.

The vehicle handled conflicting “rules” well. When the pedestrian was too close, it slowed down and slid into another lane. Although not strictly legal, it’s what a human would do.

Another distinctly human move was when it turned right onto a three-lane road and needed to turn left soon. There were no cars in the vicinity so it pulled into the middle lane instead of the far right lane.

It felt anything but robotic.

Different Drive

Nonetheless, it wasn’t a regular ride. It obeyed the speed limit at all times. However, it went as soon as traffic lights turned green.

Self-driving could change traffic patterns:

Human delays - and aggressive horn blasts - may be limited
Traffic might drive the speed limit more often as self-driving vehicles serve as pace cars
Fewer vehicles looking for places to park might reduce overall congestion…

Finish

The vehicle pulled up to a sensible spot by the Japanese Tea Garden.

We climbed out and reversed the entry process:

I confirmed we’d completed our ride,
the door handles retracted, and
the Waymo drove away.

We liked the experience and rated it five stars.

Ride Back

After visiting the garden, we took a traditional ride-share back to our hotel for comparison. It was great in different ways!

The driver was originally from Afghanistan and shared part of his incredible life story. He even drove us down the windy section of Lombard Street filled with (other) tourists.

However, he also took us on the higway, exceeded the speed limit, and changed lanes quickly. Our Gen-Z daughter felt safer in the Waymo.

Design

Improvements in self-driving technology could allow auto manufacturers to overhaul vehicle design.

Remove the Wheel and Pedals

Autonomous driving has been bolted onto a human driving design. The driver’s seat restricts passenger seating. The steering wheel and pedals might be removed.

Multi-passenger vehicles could be laid out more like living rooms. Imagine having a family dinner and then playing a board game on the way back from a ski resort!

Commuters

There’s a lot of wasted space in a standard passenger vehicle. Eliminating the driver could allow more dramatic changes.

A commuter needs something like a desk: somewhere to work comfortably, set up a laptop, and have phone conversations as the vehicle works its way through traffic.

Smaller vehicles could solve this need. While four wheels would be helpful for stability, the vehicle might not be much bigger than a motorcycle.

Smaller vehicles would be more fuel efficient, improve parking, and greatly improve traffic. Staggered driving like with motorcycles could become the norm.

Applications

It’s hard not to get excited about this technology!

Theme Parks

The Waymo trip felt like an amusement park ride.

Given how much people walk at theme parks, it’s a bit surprising the technology wasn’t invented and tested there on a smaller scale first.

Amusement parks will probably develop pedestrian-friendly vehicles to improve the guest experience. They could even charge a premium!

Airports

The technology could then spread to airports. Autonomous vehicles might replace the people movers and golf carts.

Golf Courses

Actual golf carts could come next.

Unlike on roadways or in airports, the focus would be on following golf balls. Of course, it’d still be helpful to dodge vehicle and foot traffic!

Gone would be the need for “stay on path” signs. Vehicles would stay well away from greens. Fewer carts might wind up in the water.

Child Transportation

The biggest societal impact could be transporting children.

Many families struggle to get kids where they need to go! Parents often have to leave the workforce to shuttle children around.

Yes, there are school and city buses. However, school bus routes are often long and city buses aren’t always the best environment for minors.

The rise of alternative education has made transit all the more challenging. Many students under 18 attend a private school, choice school, or community college. They may not have bus options.

Before and after school is an even bigger issue. Martial arts, club sports, and city-wide orchestras all but require an adult chauffeur.

Teens struggle to get to work and where they volunteer. Parents often have to drive them until the teen gets their driver license. Once they’re licensed, the family may not have the means to buy another car.

The biggest issue with teen ride-sharing isn’t the technology - it’s the drivers! It takes a lot of trust (or vetting) to let a stranger drive your kid around a city.

Self-driving vehicles could help millions of parents return to work.

Road Trips

Long ride-share trips are currently expensive because they require a human to drive there and back.

Self-driving vehicles don’t.

Also, a network of self-driving cars could largely eliminate the need for a vehicle to drive back! Vehicles could drive to another city and then continue to give rides there. Costs could plummet.

Package Delivery

Driverless delivery trucks could also become a reality. The biggest challenge may be getting people to pick up packages from the truck!

As an intermediate step, a delivery person could reallocate time from driving to getting packages ready. They could have the package in hand when the vehicle stops, deliver it, and return to the vehicle.

Long-Haul Trucking

Semi-trucks also have human limitations.

A team of drivers is paid a premium because they can drive around the clock. Self-driving vehicles could expedite delivery.

They could also drive late at night and early in the morning when most people sleep. That setup could reduce traffic - especially in cities.

Tour Buses

Sightseeing tours are a bit like long-haul trucking.

Self-driving buses could drive all night and stop once they reach an important destination. The same technology could drive band tours.

Moving

Combining self-driving trucks and pods might simplify moving.

Imagine if someone only needed to order a pod with an app, fill it up, and then tell it where to go. A self-driving truck would do the rest!

Laundry

We currently have to:

load laundry into a washer
move it from the washer to the dryer and
fold it once it’s dry.

Laundry is especially time-consuming for a family.

It would seem more efficient to:

put dirty laundry in a tracked bag
load it onto a self-driving laundry vehicle
have the vehicle take it to a laundry facility
deliver it to a human who uses many machines to wash, dry, and fold the laundry
load the clean clothes back onto the laundry vehicle
have the vehicle drive it back to the owner’s home, and
notify the owner to pick up their clean and folded laundry.

Emergency Vehicles

Imagine if emergency vehicles could drive themselves.

First responders might spend their time in transit researching the situation and preparing equipment. Other first responders already in the area may be able to assist.

Regular self-driving vehicles could pull over before humans hear the sirens or see the lights. Those autonomous vehicles might also signal to drivers an emergency vehicle is approaching to further clear the way.

Human Impact

These changes might have a massize impact on jobs.

Bank teller positions were eliminated as ATMs spread. Drivers could be forced to find other work. More human touchpoints may be lost.

However, people adapt and grow. Drivers might transition to even more rewarding and fulfilling roles.

Purchase

When we told my mom the self-driving vehicle story, she asked:

Would you buy one?

My answer is a resounding YES - even with the current design limitations! I’d even pay more.

The technology seems good enough to get me and my family around town safely. It’d free up a ton of our time and be quite the novelty.

The biggest challenge may be how to insure it.

Like Investing

These transportation advancements follow a trend which has already happened in investing.

1. Stock Picking

Initially, stock brokers recommended investments and executed trades. The primary function of a broker/dealer was to facilitate trades. It took work to match buyers and sellers.

The process was manual - like driving a car.

2. Mutual Funds

Improvements in technology led to the development of mutual funds. Investment managers marketed a bundle of investements. Of course, it still took time to research and buy what went into the funds. Investors benefitted from diversification without having to vet each component.

The process saved a lot of time for investors and some time for investment managers - like taking a ride-share.

3. Index Funds

The next technological wave led to index funds. Now, investments can simply follow an index. Fund managers essentially automated how much of each investment to own.

Index funds offer similar time savings as mutual funds for investors and nearly eliminate the effort of fund managers - similar to riding a self-driving vehicle.

How it Changed

Each step took a leap of faith by investors. They first outsourced investment selection to a mutual fund manger. Then they delegated those decisions to an index. Each step reduced manual effort and, therefore, cost.

However, investors and riders have options!

Investors choose what to own based on their situation, goals, and preferences.
Riders start with where they are, choose where they want to go, and schedule the ride.

Soon, neither may take much human intervention.

Hey, thanks for reading my post on riding in a self-driving vehicle.

Just a reminder, I share a lot of resources that can help you.

Is Insurance an Investment?

Kevin Estes — Wed, 14 Aug 2024 15:30:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to insurance in a moment.

But first - here are some links you may want to save for later.

According to Progressive:

Now, let's get on to the blog! 😀

Healthy Debate

There’s some debate on whether insurance is an investment.

It helps to consider:

the definition of an investment,
how insurance benefits are taxed,
the way accounting treats insurance premiums,
how premiums are used by insurance companies, and
the results of a recent poll.

1. Investment Definition

Investopedia says:

An investment is an asset or item acquired to generate income or gain appreciation.

That’s not how insurance works! Pure insurance protects against loss.

Indemnity

Insurance pays for what someone loses. This concept of indemnity is at the heart of insurance.

If an insurance company paid more than what’s lost, bad things could happen.

Consider a warehouse. If the building was insured for more than it’s worth, the owner might hire someone to destroy it! Think: arson.

Yes, it’s illegal.

However, the incentives are bad. The situation creates a moral hazard.

Limited Payouts

Insurance companies work hard to prevent such situations:

Deductibles often require someone to pay out of pocket before insurance pays anything.
Exclusions keep insurers from paying for some types of losses such as negligence.
Long-term disability insurance typically pays 60-80% of income.

Insurance often pays less than what’s lost.

2. Tax Treatment

It’s in the government’s interest to define income broadly.

According to the U.S. Treasury, about 94% of federal revenue came from income taxes in 2023:

49% individual income taxes
36% Social Security and Medicare
9% corporate income taxes

The rest came from:

excise taxes, 2%
customs duties, 2%
estate and gift taxes, 1%
miscellaneous income, 1%

However, insurance benefits usually aren’t taxed.

Payouts are typically either:

due to bad luck or
a return of premiums paid.

Since insurance payouts generally don’t make someone better off than they were before the loss, the government rarely treats benefits as income.

Claims Paid

If someone pays the insurance premiums, benefits often aren’t taxed.

Disability insurance usually works that way:

Benefits aren’t taxed if the employee paid the premiums.
Benefits are taxed if the employer paid the premiums.

Also, most lump sum life insurance payouts are tax-free to beneficiaries.

Return of Premiums

For policies that build a cash value, the federal government typically lets someone take out what they contributed tax-free. Limits apply.

3. Accounting Treatment

The U.S. uses accounting standards called Generally Accepted Accounting Principles (GAAP).

Insurance seldom pays out. Otherwise, an insurer would either:

charge a lot more or
drop the insurance coverage!

Because payouts are unlikely, GAAP treats insurance premiums as expenses - not as investments.

4. Use of Premiums

Essentially everyone wants insurance companies to receive more premiums than they pay in claims:

Companies - pay claims, employees, and shareholders
Policyholders - avoid bad things happening
Regulators - ensure the company can pay its claims

Commissions

Insurance agents are paid a commission when they sell a policy.

According to Insurance Business America, whole and universal life insurance often pay:

… at least 100% of the premiums the policyholder pays in the first year…

The same source suggests payouts for term insurance are lower at 30% to 80% of the annual premiums.

Closer to Investments

There are insurance products which offer something like investment returns. Take Indexed Universal Life (IUL).

IUL policies allow you to grow your cash value by putting a portion toward an index account like the S&P 500 or NASDAQ.

Cap and Floor

Indexed Universal Life policies may have a:

cap of 8-12% and a
floor of 0%.

If the stock index rises 25%, the balance might only grow 10% because of the cap.

However, if the stock index falls 25%, the balance wouldn’t fall because of the 0% floor.

Let’s consider the S&P 500® with a:

10% cap and
0% floor.

There’s more volatility with the index than with a cap and floor.

According to Morningstar, the range of annual returns from 2014 to 2023 was:

-19.50% to +31.61% for the S&P 500® and
0% to 10% for the example floor and cap.

The index hit the:

cap seven of the ten years (70%)
floor two of the ten year (20%)

The value of $10,000 invested over the decade might have grown to:

$30,520 with the S&P 500® index
$19,666 with the 10% cap and 0% floor

These results exclude fees. Past performance does not guarantee future results. Also, this example isn’t a recommendation to either buy or sell the S&P 500®.

Participation Rate

A similar setup is participation rate.

Let’s say the participation rate is 70% and the index rises 10%. The account balance would grow 7% (70% of 10%).

The floor would likely still be 0%.

Follow the Money

Insurance companies must receive more in premiums than they pay in claims.

The premiums, caps, and fees cover:

insurance agent commissions,
marketing and operating expenses,
years when the index falls, and
profits or dividends.

5. Recent Poll

91% of people who voted on a LinkedIn poll I ran didn’t consider insurance an investment.

The poll ran from 7/26-8/2/2024 and received 65 votes.

People who commented on the post considered insurance:

a transfer of risk,
protection against lost income,
an estate planning tool,
future security, and
an expense.

Insurance is probably a bit of all of them!

Usually Not an Investment

Insurance isn’t generally considered an investment.

It normally:

doesn’t generate income or appreciation,
isn’t taxed by the IRS as income,
is considered an expense by U.S. accounting standards,
funds the commissions, expenses, and profits of insurers, and
wasn’t considered an investment in a recent poll.

For more, check out:

Hey, thanks for reading my post on whether insurance is an investment.

Just a reminder, I share a lot of resources that can help you.

What Financial Steps Might T-Mobile Employees Take in August?

Kevin Estes — Wed, 31 Jul 2024 15:30:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for August in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

I hope you’re enjoying the summer Olympics!

August Financial Steps

Potential steps T-Mobile employees may take in August include:

Shop for Back to School
Take summer vacation
Review investments
Submit dependent care reimbursements
Check financial independence plan

1. Shop for Back to School

For families with students, it can help to get a jump on Back to School.

Consider purchasing items on the school supply list as soon as they come out. It’s possible THE LIST has already been posted so be sure to check. Items can sell out quickly.

Buy new school clothes early. No-one wants to find out on the first day of school that a garment’s the wrong size!

Getting them early can prevent tears regardless of whether a family uses:

online shopping,
curbside pickup, or
store visits.

2. Take Summer Vacation

There may still be time to take that last vacation!

If possible, take a break. A few days away or even a staycation can help everyone recharge.

For those of us on the West coast, taking vacation now could avoid fire season.

For more, check out:
Schedule Your PTO ASAP
Vacation + Disaster = Adventure

3. Review Investments

T-Mobile added a nice feature in February 2024. Instead of new stock grants vesting once a year, they now vest every six months.

That means employees have Restricted Stock Units vesting in August!

Now is a good time to plan what to do with those shares.

For more, check out:

Hold Employer Stock?

4. Submit Dependent Care Reimbursements

Camps are expensive!

When our daughter was little, a lot of our dependent care expenses came in the summer.

If you’re enrolled in the Dependent Care Flexible Savings Account (FSA), now might be a good time to submit for reimbursements.

Digital receipts can simplify the process.

5. Check Financial Independence Plan

Hasn’t summer been wonderful?

Has it helped you clarify your vision of the future?

Now might be a good time to revisit your long-term plans and forecasts!

For years, my family used a simple forecast for net worth and spending. Check out the complimentary financial independence course if you’re looking for a place to start.

For more, check out:

Hey, thanks for reading my post on potential financial steps a T-Mobile employee can take in August.

Just a reminder, I share a lot of resources that can help you.

Turn $200,000 into $13 Million?

Kevin Estes — Wed, 24 Jul 2024 15:30:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to the secret ingredient to growth in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

How to Build Wealth

Many people want to get rich now.

That leads them to:

invest in risky opportunities
launch business after business
buy lottery tickets

That’s not (usually) how wealth is built.

Want to know the secret?

Time.

Average Billionaire is 66

According to Forbes:

The average billionaire is 66.
Every billionaire under 30 inherited his or her fortune.

Young heirs lower the average. Self-made billionaires are even older.

“Rule” of 72

The “rule” of 72 is a quick way to estimate about how long it takes an investment to double.

Simply divide 72 by the annual growth percentage as a whole number:

4% annual growth doubles in about 18 years (72 / 4)
6% annual growth doubles in about 12 years (72 / 6)
8% annual growth doubles in about 9 years (72 / 8)
12% annual growth doubles in about 6 years (72 / 12)

“Rule” of 72 Error

However, the “rule” of 72 is more like a guideline. It’s imprecise and most accurate at 6-9% annual growth rates.

For more check out: Are You Less Behind Than You Think?

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Growth Example

Let’s assume someone who’s 30 years old has saved and invested diligently. They have a Roth IRA worth $200,000.

That’s helpful because they might not need to:

pay taxes or
take Required Minimum Distributions.

They’re also fortunate in that they:

don’t need this money,
earn a 7.2% annual return, and
live to 90 years old.

Napkin Math

Using the “Rule” of 72, their funds would double about every decade:

$200,000 at age 30
$400,000 at age 40
$800,000 at age 50
$1.6 million at age 60
$3.2 million at age 70
$6.4 million at age 80
$12.8 million at age 90

More Precise

Due to the “rule” of 72’s error, the actual values could be a little higher:

After Inflation

Inflation could erode the purchasing power. As long the growth rate is bigger than inflation, the real value will grow well above $200,000.

Let’s assume inflation will be 2.54% a year.

With 7.2% nominal annual growth and 2.54% inflation, the real annual return would be about 4.55% (1.072 / 1.0254 - 1).

In today’s dollars, it would grow to:

That’s almost $3 million in today’s dollars. It’s nearly 15 times the $200,000 today!

Power of Compounding

Warren Buffett’s long-time business partner Charlie Munger said:

The first rule of compounding is to never interrupt it unnecessarily.

Starting early gives investments longer to grow.

Let’s review a made-up example.

Nick

Nick saved $10,000 a year from age 22 until age 31 (10 years).
He hasn’t withdrawn funds
His investments earned a 7% annual return

Nate

Nate saved $10,000 a year from age 32 until age 67 (36 years)
He also hasn’t withdrawn funds
His investments also earned a 7% annual return

Who Has More

Nick contributed $100,000 ($10,000 a year for 10 years).

Nate contributed $360,000 ($10,000 a year for 36 years).

However, Nick has more at age 67!

Nick: $1,688,870
Nate: $1,593,374

Despite contributing nearly four times as much and only starting a decade later, Nate has less than Nick.

Here’s a graph of how their portfolios might have grown over time:

When’s the best time to plan a tree? 30 years ago.

The second best? Today.

Hey, thanks for reading my post on the key ingredient to potentially turn $200,000 into $13 million.

Just a reminder, I share a lot of resources that can help you.

What Are Large, Mid, and Small-Cap?

Kevin Estes — Wed, 17 Jul 2024 15:30:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to large-cap, mid-cap, and small-cap stocks in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Capitalization

“Cap” is short for capitalization. Market capitalization is essentially what a publicly traded company is worth.

According to the Financial Industry Regulatory Authority (FINRA):

Market capitalization, or market cap, is one measurement of a company’s size. It’s the total value of a company’s outstanding shares of stock…
To calculate market cap, you take the total number of a company’s shares outstanding and multiply that figure by the company’s current share price.
For example, if a company has 5 million shares outstanding and its current stock price is $20, it has a market capitalization of $100 million.

Market capitalization = shares outstanding * stock price

$100 million = 5 million shares * $20 per share

Large, Mid, and Small-Cap in Theory vs. Practice

According to FINRA, the definitions of large, mid, and small-cap are

large-cap: market value of $10 billion or more
mid-cap: market value between $2 billion and $10 billion
small-cap: market value of less than $2 billion

However, what matters to investors is the size of companies in large-cap, mid-cap, and small-cap funds. Those categories aren’t as clear.

Large-Cap

A couple practical sources for the large-cap stocks are:

Largest Vanguard Large-Cap

The largest holdings for the Vanguard Large-Cap Exchange-Traded Fund (ETF) are:

Largest Fidelity Large Cap

The largest holdings of the Fidelity® Large Cap Stock Fund are similar but notably different:

Comparison of the Largest Vanguard and Fidelity Large-Cap

Half of the 10 largest holdings are the same for the two large-cap funds:

Microsoft Corp.
Apple Inc.
NVIDIA Corp.
Meta Platforms Inc.
Alphabet Inc.

The others are different.

Smaller Vanguard Large-Cap

The smallest Vanguard Large-Cap ETF companies are about 1/1,000th to 1/100th the size of the largest:

Mid-Cap

Two practical sources for mid-cap stocks are:

Although they’re huge, fewer mid-cap companies are household names.

Largest Vanguard Mid-Cap

The largest Vanguard Mid-Cap Index Fund holdings have market capitalizations several times the $10 billion upper FINRA limit:

Largest Fidelity Mid-Cap

The largest Fidelity® Mid Cap Index Fund holdings are closer in size to the largest Vanguard Mid-Cap holdings than the $10 billion upper FINRA limit:

Comparison of the Largest Vanguard and Fidelity Mid-Cap

Four of the top 10 holdings are the same for the two mid-cap funds:

Amphenol Corp.
TransDigm Group Inc.
Constellation Energy Corp.
Cintas Corp.

The rest are different.

Smallest Vanguard Mid-Cap

Many of the smallest Vanguard Mid-Cap Index holdings are much bigger than FINRA’s mid-cap range of $2 to $10 billion:

Small-Cap

The largest companies held in Vanguard and Fidelity small-cap funds are several times larger than FINRA's $10B upper limit for mid-cap stocks.

Largest Vanguard Small-Cap

The largest holdings in the Vanguard Small-Cap Index Fund are:

Largest Fidelity Small-Cap

The largest holdings in the Fidelity® Small Cap Index Fund are:

Comparison of the Largest Vanguard and Fidelity Small-Cap

Only one company is in the top 10 holdings for both small-cap funds:
MicroStrategy Inc.

The others are different.

Smaller Vanguard Small-Cap

Even some of the smallest holdings in the Vanguard Small-Cap Index Fund are larger than the $2 billion small-cap limit:

Broad Ranges

Neither Vanguard nor Fidelity follows the FINRA definitions of

large-cap: market value of $10 billion or more
mid-cap: market value between $2 billion and $10 billion
small-cap: market value of less than $2 billion

Unlike FINRA’s definition, the Vanguard:

upper limits for mid-cap and small-cap are several times larger and
its ranges overlap.

Household Names

It may be helpful to consider household names in each group. The following are examples from the Vanguard funds:

Sources

The list of companies held in Vanguard and Fidelity funds come from the following.

Large Cap

Mid-Cap:

Small-Cap:

The market capitalization information for this article come the MarketWatch Investing stock pages for each company such as: Microsoft Corp.

Hey, thanks for reading my post on what large, mid, and small-cap stocks are.

Just a reminder, I share a lot of resources that can help you.

How to Use Credit Reports to Improve Credit Scores

Kevin Estes — Wed, 10 Jul 2024 15:30:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for July in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

What Are Credit Scores?

According to the Consumer Financial Protection Bureau:

A credit score is a prediction of your credit behavior, such as how likely you are to pay a loan back, based on information on your credit reports.
Companies use credit scores to make decisions on whether to offer you a mortgage, credit card, auto loan, and other credit products, as well as for tenant screening and insurance.
They are also used to determine the interest rate and credit limit you receive.
Most credit scores range from 300-850.

Credit Scores Matter!

Credit is tricky:

Those who need it have trouble getting it.
Those who can get it often don’t need it.

Six Credit Categories

The Consumer Financial Protection Bureau (CFPB) categorizes credit as:

Superprime (800 plus)
Prime plus (720 to 799)
Prime (660 to 719)
Near-prime (620 to 659)
Subprime (580 to 619)
Deep subprime (579 or less)

The data in this article are for what the CFPB calls “general purpose” credit cards:

… those that transact over a network accepted by a wide variety of merchants…”

Those are not retailer-specific, or charge, cards.

Cost of Debt

The average total cost of credit card debt for superprime borrowers was about a third that of deep subprime borrowers in 2023:

12% for superprime
36% for deep subprime

About two-thirds of that expense was interest. The remaining third came from fees.

The annual effective interest rates by credit tier was:

Superprime 9%
Prime plus 15%
Prime 18%
Near-prime 20%
Subprime 22%
Deep subprime 23%

Borrowers with a prime credit rating are less likely to pay:

late fees,
debt suspension fees,
returned payment fees, etc.

Credit Approval

The approval rate for superprime borrowers was about five times that of subprime and deep subprime borrowers:

Superprime 86%
Prime plus 79%
Prime 63%
Near-prime 41%
Subprime and deep subprime 17%

Superprime borrowers also received a credit limit about 12 times that of deep subprime borrowers.

Unfortunately, subprime and deep subprime borrowers are also:

more likely to forfeit their credit card rewards and
less likely to receive credit on disputed charges.

How Are Credit Scores Calculated?

Also according to the Consumer Financial Protection Bureau:

Companies use a mathematical formula - called a scoring model - to create your credit score from the information in your credit report.

One of the most popular is the FICO® Score.

(FICO stands for the Fair isaac Corporation.)

Credit Score Factors

The consumer division of the company, myFICO, states the credit score is based on:

payment history (35%)
amount owed (30%)
length of credit history (15%)
new credit (10%)
credit mix (10%)

Payment History (35%)

The biggest drive of the credit score is payment history. Often, the best predictor of future behavior is past behavior.

In its educational video, myFICO highlights missed payments. If missed:

How often?
How recently?
How late were they?

Major Items

Of bigger concern are items like:

debts turned over to a collection agency,
foreclosures, and
bankruptcy.

These are more serious and significantly lower credit scores.

The impact depends on the recency, frequency, and severity.

Bankruptcies remain on a credit report for 7-10 years, depending on the type. Collections stay on the credit report for seven years.

For more, check out Payment History on myFICO.

Correct Payment History

There’s not much that can be done about accurate payment history. However, there may be either missing or false information.

Dispute Inaccuracies

Since derogatory items have the biggest impact, start there. Check them for accuracy. There’s always a chance of human error!

If needed, reach out to the reporting financial institution directly for more information.

Dispute any inaccurate information with all three of the major credit bureaus:

Attack Fraud

There can be outright fraud on an account. Reviewing a credit report can help catch it!

In the case of fraud, the first step is to contact the financial institution. It may also make sense to freeze credit to avoid further misuse. Then, dispute the charges. It can take several disputes over years to fully clear fraud from credit reports.

Resolve Issues

Autopay may have fallen off for a credit card. An authorized user or co-signer may be using credit inappropriately.

Correcting issues as soon as possible can prevent further headache.

Amount Owed (30%)

Having an account balance near a credit limit is concerning to lenders.

Growing interest charges make debt difficult to pay down. There’s also less financial flexibility.

Utilization

Utilization is the percentage of credit used:

outstanding balance / credit limit

It matters both for each account and overall. Lower is generally better.

Snapshot

Unlike payment history, the amount owed on each account is a snapshot.

A large recent purchase or a payment which hasn’t cleared could lower credit scores.

For more, check out Amount of Debt on myFICO.

Lower Utilization

The amount owed matters less than the utilization. Someone with a large balance and a huge credit limit may have a good credit score.

Balance Accounts

Also, 10 accounts with 10% utilization each is perceived as less risky than one account with 100% utilization.

Consider:

spending a little more on unused credit cards and
paying down larger balance

Doing so helps:

spread utilization across multiple cards
ensure each card remains open!

Credit companies primarily make money from:

interest,
fees, and
merchant transactions.

If someone pays off their credit card each month, the company’s unlikely to receive any interest or fees. Howedver, they could still receive the merchant transaction revenue.

Credit that isn’t used is unprofitable for the lender. They’ll cancel the credit, which:

reduces the overall credit limit,
raises the utilization, and
lowers someone’s credit score.

Pay Down Balances

Another opportunity is to pay down balances. This is especially important before financing a major purchase like an appliance, vehicle, or home.

The snapshot could work to someone’s advantage. Making payments in the short-term can help improve a credit scores and lending terms.

However, it’s important to start several months in advance. It takes time for changes to reflect on credit reports.

Raise Credit Limits

A third way to lower utilization is to increase credit limits.

Update Income
Income trends up until at least middle age. However, financial institutions don’t know unless consumers tell them!

Update income information after big raises or promotions. Include all applicable income for everyone in the household if that’s allowed.

Income can come from many source - not just base salaries and wages!

commissions and bonuses,
rent and royalties,
Social Security and pensions,
investment income, etc.

Anything included on a tax return might count.

Reporting higher income may automatically raise credit limits.

Request Credit LImit Increases
A more direct way to increase a credit limit is to ask.

Many companies offer the option to “request a credit limit increase” when logged into the account. It’s possible doing so will be approved with a soft inquiry.

If not, it may make sense to strategically request a credit limit increase with a hard inquiry. If possible, only do one or two hard inquires a year - including new credit applications.

There are downsides - including:

more credit is tempting to use,
higher credit limits come with more fraud risk, and
hard inquiries may temporarily lower credit scores.

Length of Credit History (15%)

Someone with a long history of responsible credit is less risk than someone without established credit.

Age of Account

According to myFICO, this factor is based on the:

oldest,
newest, and
average account age.

Context

Length of credit history provides context for the other credit data.

Let’s say two people missed a payment:

one has been responsible with their credit for 20 years
the other just got credit last month

The missed payment is much more concerning for the unproven creditor.

For more, check out Length of Credit History on myFICO.

Lengthen Credit History

It may seem like little can be done for the credit history timeline. However, there are some ways to lengthen it.

Keep Older Accounts

It often makes sense to keep the oldest credit card accounts active. Use them at least once a month - even if they’re immediately paid off.

Keeping older accounts grows both the:

age of the oldest account and
average account age.

Doing so may be even more important as someone pays off:

car loans,
student loans, and
mortgages.

An installment loan like these may be someone’s oldest account. Paying it off if cause for celebration!

Bizarrely, paying it off could lower someone’s credit score.

Close Newer Accounts

Another option is to close the most recently opened account. Doing so can be especially helpful if the card offered a temporary low introductory rate or cash bonus.

Eliminating the newest debt raises both the:

age of the newest account and
average account age.

However, doing so also:

lowers the overall credit limit,
increases utilization, and
could lower credit scores.

Pay Regular Installments

Car loans, student loans, and mortgages could last years or even decades.

Installment loans are often some of the lowest interest debt someone has. That’s especially the case for those who took out fixed, long-term loans a few years ago.

In addition, they’re often:

the largest debt balances someone has and
tax deductible.

Keeping them may:

minimize interest expense and
grow the average account age.

New Credit (10%)

Reasons somoene might apply for credit several times in a short timespan include:

rate shopping,
a need for more credit, or
denied applications.

The last two are especially concerning for creditors.

Hard Inquiry

When a borrower applies for credit, the creditor checks their credit. That check is reported as a hard inquiry on their credit report.

According to myFICO, a hard inquiry:

typically lowers your credit score and remains on your credit report for two years.

Unfortunately, this practice causes opposing cycles:

those approved may receive the credit limit they need and stop applying - which raises their credit scores
those denied need to continue to apply - which lowers their credit scores

Soft Inquiry

According to myFICO:

Rate shopping is accomodated for, and promotional, insurance and employment inquiries don’t count against you.

Credit checks not caused by applying for new credit are called soft inquiries.

Limit New Credit Applications

Instead of applying for new credit, it may make sense to leverage techniques already mentioned.

Keep Existing Accounts

Even if an older account is less than ideal, it may make sense to use it regularly. Using it could help keep it open.

Raise Credit Limits

As mentioned above, two ways to increase credit limits are to:

update income information with raises and promotions
request credit limit increases if they don’t result in a hard inquiry

Be Selective

A third option is to occasionally apply for new credit. Reviewing credit annually could remind someone to take out new credit sparingly.

A credit inquiry or two a year is unlikely to significantly effect credit scores. The credit limit increase and financial flexibility might be more beneficial than the slight dip.

Credit Mix (10%)

According to myFICO:

Creditors assess the risk of lending money through a variety of factors, one of them being your ability to successfully manage different types of credit.

Installment Accounts

An installment account usually requires a fixed payment each month until the balace is completely paid.

Examples include:

mortgage
auto loan
student loan

Revolving Accounts

A revolving account has more flexibility on how much is paid each month.

Examples include:

credit card
retailer card
gas station card
Home Equity Line of Credit (HELOC)

Improve Credit Mix

A credit report can highlight how to improve the mix:

if it’s all revolving debt, it may make sense to next apply for installment debt
the opposite might be true if it’s currently all installment debt

Own vs. Rent

Getting an installment loan is a potential benefit of owning a home or car instead of renting or leasing.

Some services work to include good payment history for recurring expenses like rent and utilities. However, those payments often are not not automatically included on a credit report.

Credit Cards

Credit cards:

are more widely accepted than either retailer or gas station cards,
tend to offer more cash back or points than debit cards, and
provide slightly higher fraud protection than other payment forms.

If there’s fraud on the account, the money spent is the financial institution’s. For many other payment types, the money spent is the account owner’s.

HELOC

A Home Equity Line Of Credit (HELOC) can be helpful for those who:

are planning a major remodel,
have paid off their mortgage, or
are retiring soon.

There may be tax benefits if all the funds withdrawn are used to improve a home. A HELOC is also a quick way to tap into home equity for living expenses.

Have Both

The key is to ensure someone has both types of credit accounts:

revolving
installment

How to Get a Free Credit Report

Each American can get a free credit report from the three major credit bureaus at least once a year.

Check out AnnualCreditReport.com for more detail.

Hey, thanks for reading my post on how to use credit reports to improve credit score.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for T-Mobile Employees in July

Kevin Estes — Mon, 01 Jul 2024 15:30:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for July in a moment.

But first - here are some links you may want to save for later.

Transactions in Retirement Accounts Aren't Taxed… Yet

Now, let's get on to the blog! 😀

Summer!

There’s a heat wave across America. The 4th of July is in just a few days. It’s definitely summer!

Potential Steps for T-Mobile Employees This Month

Financial steps T-Mobile employees might take in July include:

Check credit reports
Review / rebalance investment portfolio
Take summer vacation, attend camps
Submit dependent care reimbursements

1. Check Credit Reports

Summer expenses may be heavy and span multiple states. Fraud risk may rise while the chance of catching it falls.

Now’s a good time to check credit reports to

validate the information is correct,
check for fraud, and
maintain financial flexibility.

2. Review / Rebalance Investment Portfolio

Investments drift over time. That can be especially true after:

bonuses,
Restricted Stock Unit (RSU) vesting,
Employee Stock Purchase Plan (ESPP) buys, and
big market swings.

Employer Stock

Holding employer stock can be challenging. An investment can have more risk with a similar expected return.

Employer stock can be tied to other finances like:

income,
health insurance, and
home value.

For more, check out: Is It Worth Holding Employer Stock?

3. Take Summer Vacation, Attend Camps

Rest is a critical and often overlooked part of work.

Summer Vacation

Fall was the busiest season when I worked in management consulting and corporate finance. That was in part because it was end of year planning season.

It was also because many great ideas came:

when people were on vacation or
after they returned to work refreshed.

Schedule Your PTO ASAP!

Summer Camp

Camp offers wonderful growth opportunities. Children get to:

break out of their routines,
connect with peers,
develop new skills, and
learn from different adults.

Our daughter attended camp for years on an island near Seattle.

When we were waiting at pickup, another parent mentioned:

The first year our daughter went to this camp, she was in tears coming off the boat.
My thoughts immediately went to worst case scenarios.
When I finally got to her, she cried: ‘I don’t want to leave!’

4. Submit Dependent Care Reimbursements

Daycare expenses can be heaviest in the summer. Submitting receipts quickly may help fund a summer vacation.

Also, it’s good to know early if there’s a problem. That gives everyone more time to resolve it - well before year end!

A dependent care Flexible Spending Account (FSA) generally cannot be used for:

overnight camps
13+ year old children

There are some exceptions.

Hey, thanks for reading my post on potential financial steps T-Mobile employees can take in July.

Just a reminder, I share a lot of resources that can help you.

Contribute to Pre-Tax or After-Tax?

Kevin Estes — Wed, 26 Jun 2024 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to pre-tax and after-tax retirement plan contributions in a moment.

But first - here are some links you may want to save for later.

Transactions in Retirement Accounts Aren't Taxed... Yet

Now, let's get on to the blog! 😀

Plan Options

Many people struggle with whether to contribute to a pre-tax or after-tax plan. Both is also an option!

Pre-tax and after-tax options may exist for plans like:

401(k)
403(b)
457(b)
Individual Retirement Arrangement (IRA)

The pre-tax version may be called “traditional” whereas the after-tax version is often a Roth plan.

This article explores some important factors which may influence whether to contribute to pre-tax, after-tax, or both.

Pre-Tax and After-Tax Defined

The primary difference between a pre-tax and after-tax account is:

pre-tax = pay taxes later
after-tax = pay taxes now

Pre-tax accounts are also called “tax-deferred.”

Consider a fruit tree metaphor:

a pre-tax account avoids tax on the seed but not the fruit
an after-tax account is taxed on the seed but not the fruit

Important Factors

Many things influence the decision to contribute to a pre-tax or after-tax account.

Pre-tax contributions may be better for:

company matching
high current income
high spending
charitable giving

After-tax contributions may be better for:

high net worth
minimizing lifetime taxes
maximizing contributions
high future income
spending before age 59.5
high future tax rates
longer lifespans

Matching

Given the same cash flow, someone may be able to leverage the tax savings to contribute more.

Saving more could:

increase the company match and
maximize the Saver’s Credit.

Company Match

It’s more likely a pre-tax contribution will be matched by the employer.

Some employers don’t match after-tax contributions! In that case, it likely makes sense to contribute to a traditional (pre-tax) account.

Saver’s Tax Credit

The Saver’s Credit (also known as the Retirement Savings Contributions Credit) is available to those who earn up to the following in 2024:

$76,500 married, filing jointly
$57,375 head of household
$38,250 single

Current Income

It often makes sense for higher earners to make deductible contributions to pre-tax accounts. That’s because they can avoid a high tax rate now.

The tax impact depends on many factors like:

filing status,
other deductions/credits,
Alternative Minimum Tax,
Net Investment Income Tax, etc.

It can also depend on contribution and income limits.

Contribution Limits

Workplace retirement plans offer higher contribution limits and fewer deduction restrictions than Individual Retirement Arrangements (IRAs).

Employer Plan Contribution Limits
Contributions to a pre-tax 401(k), 403(b), 457(b), and the federal government’s Thrift Savings Plan lower taxable income.

The 2024 contribution limits are:

$23,000
plus a $7,500 catch-up for those at least 50 year old

IRA Contribution Limits
Individual Retirement Arrangements have lower contribution limits.

The 2024 contribution limits are:

$7,000
plus a $1,000 catch-up for those at least 50 years old

Income Limits

Higher earners may not be able to either:

deduct pre-tax IRA contributions or
contribute to a Roth IRA.

_IRA Deduction Income Limits
_Whether a pre-tax contribution can lower taxable income depends on:

filing status,
income, and
whether the worker is covered by a workplace retirement plan.

At least some of the pre-tax contribution is deductible up to income of:

$87,000 single
$143,000 married, filing jointly if covered by an employer plan
$240,000 married, filing jointly if not covered by an employer plan

Roth IRA Income Limits

A high earner may not be able to contribute directly to a Roth IRA.

At least some Roth IRA contributions can be made up to:

$161,000 for single and head of household filers
$240,000 for married couples filing jointly

Spousal IRA
A spouse with little or no income may be able to contribute to their own pre-tax (traditional) or after-tax (Roth) IRA.

Their spouse would need to earn enough to cover all of their contributions. The income limits for pre-tax deductions and Roth contributions above also apply to a spousal IRA.

For more, check out:
Are You Ignoring the Spousal IRA?

Spending Level

Tax savings can enable someone to contribute more pre-tax than after-tax. Larger contributions grow account balances more quickly.

A larger nest egg early on may better support more expensive lifestyles.

Healthcare Expenses

Healthcare is one of the most variable expenses in America.

Major Medical
Two of the few benefits of major expenses are that they’re:

generally deductible above 7.5% of Adjusted Gross Income and
an exception to the 10% early withdrawal penalty.

That means there may be few tax impacts from using a pre-tax account to fund major healthcare expenses.

Someone who expects major medical expenses may be ahead to contribute to a pre-tax account. The available balance may grow larger without many tax consequences.

Health Savings Account
The sad irony of Health Savings Accounts (HSAs) is that those most likely to need them are least likely to have them.

Health Savings Accounts require someone to be on a qualifying High Deductible Health Plan (HDHP). People with significant ongoing healthcare expenses are more likely to reach their deductibles, which makes it less likely they’ll choose a HDHP.

However, someone already on a qualifying plan could receive a unique triple-tax advantage with Health Savings Account contributions:

avoid tax on the front-end,
grow tax-free, and
avoid tax if withdrawn for qualifying healthcare expenses.

Those contributions might avoid tax altogether!

It may make sense to prioritize HSA contributions over either pre-tax or after-tax contributions.

Also, someone with a significant Health Savings Account balance may be in a better position to contribute to an after-tax plan.

For more, check out:
Pros and Cons of a Health Savings Account

_Long-Term Care
_The cost of long-term care is high. Someone with a family history of dementia may risk years of heavy expenses late in life.

Having long-term care insurance lowers the risk of major expenses. Someone with long-term care insurance may be able to prioritize after-tax contributions.

Beneficiary

How someone plans to leave assets also influences whether to make pre-tax or after-tax contributions.

Charities

Nonprofits don’t pay income taxes. As such, they don’t care whether assets are pre-tax or after-tax.

If someone plans to leave their assets to charity, it may make sense to prioritize pre-tax contributions.

_RMDs
_Required Minimum Distributions can shrink pre-tax accounts because:

an amount is required to be withdrawn each year and
the account holder often has to pay tax on the income.

QCDs
Fortunately, there’s a solution: Qualified Charitable Distributions (QCDs). These are essentially Required Minimum Distributions the owner gives directly to charity.

The federal tax code allow Qualified Charitable Distributions to satisfy the Required Minimum Distributions without the account holder reporting or paying tax on that income. However, there are limits.

People

Although a charity might not care whether the assets are pre-tax or after-tax, an heir would!

That’s because the recipient has to report withdrawals as income. An heir essentially pays the tax the deceased didn’t!

Worse, the recipient may:

be in their peak earning years and
only have 10 years to withdraw the funds from the account.

Net Worth

Someone’s net worth could influence whether they contribute to a pre-tax or after-tax account.

Pre-Tax for Lower Net Worth

All else equal, a lower net worth is more likely to be spent during someone’s life.

Making pre-tax contributions can result in larger account balances early. That provides additional flexibility - especially if the expense is deductible such as a major medical expense.

After-Tax for Higher Net Worth

A higher net worth may enable someone to delay spending it until late in life - if ever.

That could:

give money longer to grow tax-free,
avoid Required Minimum Distributions, and
keep heirs from having to pay income tax on an inheritance.

Tax Aversion

If someone is opposed to paying taxes, it may make sense to make after-tax contributions.

Someone who lives sufficiently long will likely pay less in tax with an after-tax contribution. That’s because the seed is taxed, not the fruit.

Example

Let’s assume:

an employee is 40 years old
contributes annually for 20 years until age 60
pays a 24% marginal federal tax rate every year
lives in a state without income tax
earns an annual return of 7% on investments
starts Required Minimum Distributions at age 75
only uses the distributions to pay taxes
invests the rest in investments without taxable income (buy and hold growth stocks, municipal bonds, etc.)
lives to 100

The employee has the choice of two contributions:

Scenario 1: $10,000 annual pre-tax contributions
Scenario 2: $7,600 annual after-tax contributions

The contributions are equivalent at the 24% tax rate.

Scenario 1: Pre-Tax Contributions

The employee receives an income tax deduction for their contributions. Their $10,000 contributions are invested at the start of each year and grow 7% annually.

By age 75, the employee’s portfolio grows to about $1.3 million.

However, they must take Required Minimum Distributions (RMDs) based on the Uniform Lifetime Table. The withdrawals count as taxable income and are taxed 24%.

The owner only use some of the money to pay taxes and invest the rest in investments which don’t earn income. These investments also earn 7% a year.

Over time, the pre-tax account shrinks and the brokerage account grows:

Age 80: $1.14 million pre-tax, $508,000 brokerage
Age 90: $553,000 pre-tax, $2.20 million brokerage
Age 100: $48,000 pre-tax, $5.07 million brokerage

The Required Minimum Distributions cause them to pay about $568,000 in federal taxes between age 75 and 100.

Scenario 2: After-Tax Contributions

With after-tax contributions, the employee receives no deduction for their contributions. The $7,600 they add each year grows 7% annually.

By the time they turn 75, the portfolio has grown to about $1 million.

However, they don’t have to take Required Minimum Distributions! Growth continues to compound.

The after-tax account grows with time.

Age 80: $1.41 million
Age 90: $2.78 million
Age 100: $5.46 million

They pay only $50,400 in federal taxes ($2,400 * 21 years) because they were taxed on the seed.

Tax Comparison

The pre-tax contributions (Scenario 1) would cost more than 10 times as much in federal lifetime taxes as the after-tax contributions (Scenario 2):

$568,000 for pre-tax contribution RMDs (fruit)
$50,400 for after-tax contributions (seed)

Total Portfolio Comparison

The total portfolio value is initially higher for the pre-tax contributions (Scenario 1) than the after-tax contributions (Scenario 2). They later flip.

Age 70: $944,000 pre-tax, $718,000 after-tax
Age 80: $1.65 million pre-tax, $1.41 million after-tax
Age 90: $2.76 million pre-tax, $2.78 million after-tax
Age 100: $5.12 million pre-tax, $5.46 million after-tax

After-Tax Comparison

At the end of age 74, the portfolios are identical on an after-tax basis:

$1.24 million pre-tax
$941,000 after-tax

$1.24 million less 24% in taxes equals the $941,000 after-tax (rounded).

The taxes on the Required Minimum Distributions causes the pre-tax contributions (Scenario 1) to fall behind on an after-tax basis.

Age 80: $1.38 million pre-tax, $1.41 million after-tax
Age 90: $2.62 million pre-tax, $2.78 million after-tax
Age 100: $5.11 million pre-tax, $5.46 million after-tax

Contribution Limits

The contribution limits are the same and linked for:

traditional (pre-tax) and
Roth (after-tax) contributions.

However, that may still result in larger effective contributions for Roth accounts.

There’s another after-tax option with much higher contribution limits.

Same for Traditional and Roth

How much can be contributed to an IRA, 401(k), 403(b), and 457(b) is usually the same for:

traditional (pre-tax) and
Roth (after-tax).

At the same limit, maxing the after-tax contribution has a bigger impact than maxing the pre-tax contribution. It’s like also contributing the taxes paid!

Combined for Traditional and Roth

The contribution limits of traditional and Roth are combined.

How much an 49 year old employee can contribute to a Roth 401(k) in 2024 is $23,000 less what they contribute to a traditional 401(k).

After-Tax

Some employers offer an after-tax plan which isn’t Roth. These plans have much higher limits and can be a way for employees who’ve maxed out their other options to save even more.

For 2024, the defined contribution limit is $69,000. That cap includes all contributions from both employer and employee.

Example

Jen contributes $23,000 to her 401(k)
Her company matches $10,000
Jen could contribute $36,000 to her After-Tax (not Roth) account

Future Income

The amount and consistency of income may also impact the decision to contribute to pre-tax or after-tax.

Income sources include:

deferred compensation
part-time, contract, or spousal income
Social Security or pension benefits
business profits
rental or royalty income
inheritance of a pre-tax retirement account…

After-Tax for High Future Income

Those expecting consistently high income may be ahead to make after-tax contributions.

In the future, their income will likely exceed their standard deduction and lower tax brackets. Taxable retirement income would likely be taxed at a high rate.

After-tax contributions could help them avoid even higher taxes.

Pre-Tax for Low Future Income

The opposite is true for lower future income.

If someone expects to earn very little sometime in the future, they might make pre-tax contributions to delay income until their tax rate falls.

Early Retirement
Lower income is especially common for early retirees who might have years or even decades between when:

they stop earning income and
start earning pension and/or Social Security benefits.

Launching a Business
Starting a new business can be like planting a garden:

the first year, it sleeps
the second year, it creeps
the third year, it leaps

The early years may offer opportunities to realize income by converting funds from pre-tax to after-tax. A Roth conversion is one example.

Pre-Tax for Variable Income
Some people choose to have inconsistent income. They work more when they need money and less when they don’t.

Also, some jobs, careers, and even industries have highly variable compensation.

Pre-tax contributions are well suited for inconsistent income.

They can:

lower income in high income years
raise income in low income years
quickly grow balances which may need to be used early in life

Spending Timeline

A 10% penalty usually applies if someone withdraws pre-tax retirement funds before age 59.5.

Pre-Tax Exceptions

Fortunately, there are exceptions to the penalty.

Depending on the account type, exceptions include:

birth or adoption,
education expenses,
separation from service after age 55,
substantially equal payments,
medical expenses,
disaster recovery,
disability,
divorce,
death…

However, not all of them are fun!

After-Tax

Contributions to an after-tax account can be withdrawn tax and penalty free. However, conversions and growth may be subject to income tax.

There are good reasons someone may need to withdraw funds before age 59.5:

paying down high-interest debt,
starting a business,
buying real estate, etc.

After-tax contributions provide more flexibility if the money’s needed early in life.

Future Tax Rates

Whether to make pre-tax or after-tax contributions could depend more on state than federal taxes.

Federal

Federal income taxes are primarily based on income and filing status.

I don’t attempt to predict future federal taxes, especially given the potential sunset of the Tax Cuts and Jobs Act.

Today’s federal tax system is likely as good a starting place as any. It’s progressive and has a high estate tax exclusion.

State

However, taxes vary from state to state.

Also, people move. Think of all the people who move to Florida in their later years - including my father!

Income Tax
If someone plans to move from a lower to a higher income tax state, it may make sense for them to contribute to an after-tax account now.

The opposite may be true if they plan to move to a state without income tax.

Estate Tax
Some states have exclusions much lower than the federal level.

Here in the Pacific Northwest:

Washington’s estate tax starts at $2.193 million
Oregon’s estate tax starts at just $1 million

The size of the estate generally doesn’t depend on whether it’s pre-tax or after-tax. After-tax contributions may lower estate taxes.

Lifespan

Pre-tax and after-tax accounts are treated very differently later in life.

Pre-Tax RMDs

An account holder considers a pre-tax account an asset. The U.S. government views it as untaxed income.

Uncle Sam wants his money! Required Minimum Distributions (RMDs) are how the federal government collects income taxes before end of life.

Each year, an account holder is required to withdraw a percentage of a pre-tax account based on their age. The percentage grows each year and is based on average life expectancies.

The age someone is required to start taking Required Minimum Distributions is changing:

it’s currently 73 years old
however, it’s scheduled to rise to age 75 as part of the SECURE Act

No After-Tax RMDs

There are usually no Required Minimum Distributions (RMDs) for after-tax accounts. The federal government already taxed the seed and has no claim on the fruit.

Not having Required Minimum Distributions simplifies someone’s finances late in life. Simplicity can be especially important if someone suffers a health setback or cognitive decline.

After-Tax Longevity

Living longer extends the time funds can compound. Someone may enjoy decades of tax-free growth!

Marriage can also extend the timeline. A spouse who inherits a pre-tax retirement account can normally treat it as their own.

The IRS recognizes that reality and has a separate table to use for RMDs:

… if the sole beneficiary of your IRA is your spouse and your spouse is more than 10 years younger than you…

This longevity impact tends to favor after-tax contributions.

However, marriage also increases the standard deduction and raises the income tax brackets. That may result in paying lower rates on earned income, which makes pre-tax contributions more attractive.

As such, marriage has a mixed impact on the decision to make pre-tax or after-tax contributions.

Tax Diversification

For better or for worse, the future’s uncertain. It may make sense to keep a mix of pre-tax and after-tax accounts as a tax hedge.

Hey, thanks for reading my post on whether to contribute to a pre-tax or after-tax retirement account.

Just a reminder, I share a lot of resources that can help you.

Imagine Summer Without These!

Kevin Estes — Wed, 19 Jun 2024 15:30:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to fun summer inventions in a moment.

But first - here are some links you may want to save for later.

Money and Freedom on MLK Day

According to The Black History Channel:

Now, let's get on to the blog! 😀

Summer Fun

Imagine hot days without:

scoops of ice cream,
potato chips,
golf tees,
refrigeration,
Super Soakers,
lemonade,
cakes, whipped cream, and meringues.

They share another fun connection!

Scoops of Ice Cream

The ice cream scoop was patented in 1897:

According to HISTORY:

While working as a porter at the Markell Brothers drugstore in Pittsburgh, Alfred Cralle noticed his fellow employees struggling to scoop ice cream cones for customers.
Cralle decided to design a contraption to scoop ice cream easily with one hand.
His invention, which he called the "ice-cream mold and disher," received a federal patent on February 2, 1897.
He was the first Black man in the city of Pittsburgh to receive his own patent.

Potato Chips

The Smithsonian reports the first potato chips were made in 1853:

The potato chip was invented in Saratoga Lake, NY. Its inventor was George Speck—the son of an African American father and Native American mother. Later he professionally adopted the last name Crum.
He was a gifted, although surly, cook working as the chef of the Moon Lake Lodge Resort in 1853. One dish on the menu was French-fried potatoes, which are prepared by cutting potatoes lengthwise and lightly frying them.
According to legend, one day a customer repeatedly sent his French-fried potatoes back to the kitchen complaining that they were too thick and soft. Crum’s solution was to thinly slice the potatoes and fry them in grease till brown.
The customer loved the crisps and soon other guests began asking for them as well. Soon Crum's "Saratoga Chips" became one of lodge's most popular treats.

Golf Tees

According to the United States Golf Association, the wooden golf tee was invented in 1899:

Prior to the invention of the wooden tee at the turn of the 19th century, golfers made tees out of sand. Courses would supply each hole with a box of wet sand from which the golfer would fashion a raised mound using either his hands or a cone-shaped mold.
In 1899, Boston dentist Dr. George Grant, frustrated with this tedious and messy process, invented a wooden golf tee.
Dr. Grant was born to escaped slaves in 1846, eventually finding work as an assistant at a dentist’s office. This position allowed him to gain the experience necessary to attend and eventually become the second African American to graduate from Harvard Dental School.
Later, he served as the first African-American professor at Harvard. Following his professorship, Dr. Grant opened a successful dental practice and became widely respected for his work repairing cleft palates.
But his recreational passion was golf, which he played in a meadow near his home in Arlington, Mass.
Even though the patent for his tee, issued on Dec. 12, 1899, was the first in the country, Dr. Grant never capitalized on his invention.

Refrigeration

In Thomas' day, food was kept cool by packing blocks of ice in an ice box and hoping for the best. But Thomas invented an apparatus that utilized metal cooling coils.
The coils became super-cold, thereby cooling the items inside to "less than room temperature" and keeping them fresher longer.
It was also used to keep dead bodies cool.

As fascinating as that was, the Times Union reported that Dr. Thomas Elkins also:

traveled extensively in Africa and brought back shells and minerals,
opened his own apothecary and dentistry practice in Albany.
played a pivotal role in Underground Railroad efforts in Albany before the Civil War.
served as a medical examiner to the 54th and 55th Massachusetts Volunteer Infantry units for African-American soldiers, who were depicted in the movie "Glory.”

Super Soaker®

According to HISTORY:

On May 27, 1986, the U.S. Patent Office grants a patent to African American inventor Lonnie Johnson for his toy design simply titled ”Squirt Gun.”
Johnson’s concept for the Super Soaker began by accident in his own basement bathroom in 1982. At the time, he was employed as a nuclear engineer at the Jet Propulsion Laboratory in Pasadena, California, working on the Galileo mission to Jupiter.
While brainstorming a heat pump that would use pressurized water vapor instead of environmentally hazardous freon, Johnson hooked up a nozzle to his bathroom sink. It accidentally sprang a leak, shooting water across the bathroom in a strong stream.
A lightbulb went off: This design could make one heck of a powerful water gun.
Years later, while working on the Air Force’s B-52 stealth bomber by day, Johnson tinkered in his free time on a wide range of projects, including this one.
After selling more than 250 million units and earning well over $1 billion dollars, the Super Soaker was inducted into the National Toy Hall of Fame in 2015.
Johnson currently holds more than 130 U.S. patents and is the author of several publications related to the field of spacecraft power systems.

Lemonade

According to the Museum of Food and Drink (MOFAD):

In 1896, White received a patent for improvements to the lemon squeezer, which allowed the user to swiftly extract juice from the fruit.

It would be much more difficult to make lemonade and many adult beverages without it!

Cakes, Whipped Cream, and Meringues

According to the Museum of Food and Drink (MOFAD), Willis Johnson invented the eggbeater in 1884:

Johnson invented and patented an eggbeater that made blending batter for baked recipes easier. The machine, which transformed processes for bakers, pastry chefs, and confectioners, was a predecessor to the electric mixer.

Johnson’s invention is really just the icing on the cake of these other great summer-themed inventions.

Happy Juneteenth!

As you may have guessed, each item on the list was invented or substantially improved by an African American!

However, this list is just the tip of the iceberg. Here’s a broader list of 101 inventions - some of which had an even bigger impact!

Hey, thanks for reading my Juneteenth post on summer-related African American inventions.

Just a reminder, I share a lot of resources that can help you.

How Might the T-Mobile / UScellular Merger Un-Fold?

Kevin Estes — Wed, 12 Jun 2024 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to the T-Mobile / Uscellular merger in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Proposed Merger

On May 28th, T-Mobile announced it had “agreed to acquire substantially all of UScellular’s wireless operations.”

This article considers how the merger may play out.

Disclaimer

I haven’t worked at T-Mobile for over two years and am not affiliated with the company.

Although some current and former T-Mobile employees are clients, they did not provide any of the information used in this article.

Similarly, I’m connected with thousands of T-Mobile employees on social media. However, I didn’t reach out to any of them about this merger.

I have no material insider information about T-Mobile or this merger. The public sources I used are referenced below.

Chicago Ties

Although I live near near T-Mobile’s headquarters in Washington state, I grew up in Illinois. Besides a brief stint in Texas, I lived in the Land of Lincoln from age two until 18.

My brother and I graduated from New Trier High School in Winnetka, IL. He and his family recently sold their home in Barrington. Our mom still lives on the North Shore.

Merger Masters

T-Mobile is good at mergers. Just ask them!

The integrations of MetroPCS in 2013 and Sprint in 2020 have been noted as two of the most successful merger combinations in wireless history

MetroPCS
T-Mobile announced the merger with MetroPCS in October 2012. It closed in May 2013 and was expected to achieve $6 to $7 billion in synergies.

Sprint
The T-Mobile / Sprint merger was announced in April 2018 and closed in April 2020.

The U.S. Department of Justice (DOJ) required some divestitures and the U.S. Federal Communication Commission (FCC) added several conditions before approving the transaction.

The estimated synergies of the merger in 2022 came to $6 billion:

$2.5 billion in selling, general, and administrative (SG&A) expense reductions
$2.2 billion in cost of services expense reductions, and
$1.3 billion in avoided network build costs.

Mint/Ultra
T-Mobile announced it was merging with Mint and Ultra Mobile in March 2023. The merger with Ryan Reynold’s company closed earlier this year in May 2024.

Potential Timeline for UScellular Merger

T-Mobile expects the merger to occur in “mid-2025.”

Based solely on that estimate and historical merger dates, I’d expect the merger to complete on May 1st, 2025. That timeline assumes no significant regulatory delays.

Larger Buying Smaller

Size matters with mergers. T-Mobile is 15-20x the size of UScellular.

Number of employees:

T-Mobile 67,000 as of December 31, 2024
UScellular 4,300 as of March 31, 2024

2023 revenues:

T-Mobile $79 billion
UScellular $4 billion

Deal Terms

The terms of the deal may influence how the merger plays out.

It’s important to know that both T-Mobile and UScellular are majority owned by other companies.

DT Owns 51% of T-Mobile

As of April 19, 2024, Deutsche Telekom AG (DT) owned 50.4% of the outstanding T-Mobile US, Inc. (TMUS) common stock.

On Monday, Deutsche Telekom acquired another 0.6% of T-Mobile (TMUS) shares using options from SoftBank - Sprint’s former owner.

TDS Owns 83% of UScellular

As of March 31, 2024, Telephone and Data Systems, Inc. (TDS) owned 83% of UScellular.

Cash and Debt, Not Stock

T-Mobile’s previous mergers leveraged stock:

MetroPCS was a reverse stock merger
Sprint was a regular stock merger
Mint/Ultra was 39% cash and 61% stock

The UScellular proposed merger isn’t being funded with stock:

T-Mobile will pay approximately $4.4 billion for the assets being acquired from UScellular in the transaction in a combination of cash and up to $2.0 billion of debt to be assumed by T-Mobile through an exchange offer to be made to certain UScellular debtholders prior to closing.

T-Mobile is buying UScellular’s business and spectrum - not its towers.

Consider a family that owns a restaurant, including the building.

It’s like T-Mobile is buying the restaurant but not the building. UScellular will keep the towers and rent them to T-Mobile.

Assuming Debt

T-Mobile’s credit rating is higher than UScellular’s. Its unsecured debt is investment grade. UScellular’s is not.

However, UScellular got long-term debt when interest rates were low.

How long?
50 years!

In 2020, UScellular marketed $1.5 billion of debt:

April 17: $500 million due 2069 at 6.25%
September 9: $500 million due 2070 at 5.5%
December 22: $500 million due 2070 at 5.5%

In the first quarter of 2024, UScellular had about $3 billion of long-term debt. As of the end of 2023, $2.2 billion of it was due after 2028 at a weighted average of 6.2%.

Exchanging the debt may be win-win:

debtholders get a higher quality borrower since T-Mobile’s credit rating is higher than UScellular’s
T-Mobile gets very long-term debt at what may be below market interest rates

If the debtholders don’t exchange it, T-Mobile would need to pay UScellular more cash.

Use the Playbook

T-Mobile mentioned it will use its “tried-and-true playbook” for the merger.

Its tactics may include:

Expand roaming
Combine networks
Consolidate stores
Rebrand
Streamline back-office

1. Expand Roaming

The first step will likely be for T-Mobile to expand roaming for UScellular customers.

T-Mobile did so for Sprint customers within days of merging.

it did so on the first day of the merger for Mint/Ultra customers.

Expanded coverage was the first operational item mentioned in the merger press release:

Upon closing, T-Mobile’s leading 5G network will expand to provide millions of UScellular customers, particularly those in underserved rural areas, a superior connectivity experience, moving from a roaming experience outside of the UScellular coverage area to full nationwide access on the country’s largest and fastest 5G network.

2. Combine Networks

T-Mobile’s network team has previously worked to:

prioritize which spectrum and towers to keep
migrate customers to the T-Mobile network
retire the former network after customers migrate
redeploy the spectrum

Prioritize Spectrum and Towers

As of March 31, 2024, UScellular owned 4,382 towers.

T-Mobile does not appear to be buying those. Instead, it will lease space on 2,100+ towers, which will continue to be owned by UScellular.

It looks like T-Mobile selected the spectrum and towers it would like to keep before coming to terms with UScellular.

Migrate Customers

T-Mobile seems to have the same gameplan even though UScellular will continue to own the towers.

T-Mobile mentioned: (underlines added)

enhanced performance throughout UScellular's footprint from the addition of acquired UScellular spectrum to T-Mobile's network.

and

both companies' spectrum and assets will provide UScellular customers a superior connected experience on T-Mobile's industry-leading 5G network

T-Mobile may move customers off the UScellular network with the carrots of:

unlimited T-Mobile plans
no switching costs
streaming
free international data roaming
savings
55+ plans
award-winning customer service
better, more accessible in-person support

Retire Network

Based on past mergers, it might take a couple years to retire the UScellular network.

With the MetroPCS merger, T-Mobile was able to:

seamlessly bring 70% of Metro subscribers over within 15 months and complete the full migration within 26 months.

Following the Sprint merger in April 2020:

As of June 30, 2022, Sprint's LTE network has been retired
As of March 31, 2022, Sprint's older 3G (CDMA) network has been retired

However, the UScellular merger announcement included a nuance:

T-Mobile has agreed to acquire substantially all of UScellular's wireless operations. (emphasis added)

That means it’s not acquiring 100% of UScellular’s wireless operations, which could add some complexity.

Redeploy Spectrum

T-Mobile has proven its ability to re-farm spectrum from acquisitions.

As with the Sprint merger, T-Mobile will look to further develop its 5G network with three levels of spectrum:

Low band - travels far yet has slower speeds (marathoner)
Mid band - mid-range and speed (mid-distance runner)
High band - extraordinary speeds for short distances (sprinter)

3. Consolidate Stores

Optimizing stores may be T-Mobile’s next focus.

The combined company probably doesn’t need both a T-Mobile and UScellular store nearby.

Closing one will likely save on rent and other site-specific costs. Employees may relocate to other stores.

4. Rebrand

Five and a half years after the MetroPCS merger, T-Mobile rebranded it to “Metro by T-Mobile” in September 2018.

However, Metro was a growth story for the company’s prepaid business. T-Mobile expanded the brand from:

15 markets in 2013
to 77 by 2019

Four months after the completion of the Sprint merger, the company rebranded the Sprint stores to T-Mobile in August 2020.

Rebranding UScellular would leverage T-Mobile’s national marketing, including its Super Bowl ads. The timeline may be more like Sprint’s merger than Metro’s.

5. Streamline Back-Office

Unifying operations will likely unlock further synergies.

The company likely won’t need two:

benefit packages,
sets of executives,
billing systems, etc.

Benefits

It’s unlikely T-Mobile will overhaul its benefits package after the merger with UScellular.

Its benefits could look a lot like what they do today.

With a successful May Day merger, T-Mobile will probably extend benefits to UScellular employees by open enrollment in fall 2025.

Employees

Initial Growth
T-Mobile’s employees grew:

from 53,000 at the end of 2019
to 75,000 by the end of 2020, following the Sprint merger.

The count held steady at 75,000 until the end of 2021.

Reductions in Force
Employee count then fell from:

from 75,000 at the end of 2021
to 71,000 by the end of 2022
and then 67,000 by the end of 2023.

T-Mobile announced 5,000 layoffs on August 24, 2023.

According to Mike Sievert, the positions eliminated were:

primarily in corporate and back-office, and some technology roles
primarily duplicative to other roles

Take-Aways
Some notable callouts include:

T-Mobile still has 14,000 more employees after the Sprint merger than it did before (67,000 in 2023 vs. 53,000 in 2019)
Reductions started in 2022 - roughly two years after merging
Layoffs occurred in late 2023 - three and a half years post-merger
Roles in “corporate”, “back-office”, and “technology” were more prone to layoffs

Billing

There may need to be two billing systems as long as there are customers on UScellular rate plans.

Movement from UScellular to T-Mobile rate plans could follow the network migration. Not acquiring all of UScellular’s operations may impact the transition.

Culture

Peter Drucker once said:

Culture eats strategy for breakfast.

Fortunately, T-Mobile and UScellular may be a better cultural fit than many realize.

Recent Proof

T-Mobile is headquartered near Seattle. UScellular is headquartered near Chicago. That might seem like a liberal / conservative mismatch.

However, T-Mobile successfully merged with Sprint… which was headquartered near Kansas City. KC is even more conservative than Chicago.

Also, Sprint was larger than UScellular. Fewer people may translate to less work.

The Sprint merger proved T-Mobile’s culture is flexible enough to incorporate other perspectives. Also, many of the employees who worked at Sprint are still with the New T-Mobile.

Executives

Several of T-Mobile’s senior leaders hail from American’s heartland.

Deeanne King, John Saw, and Néstor Cano joined the company with the Sprint merger. Callie Field and Jon Freier are originally from Texas.

Employees

T-Mobile already has a sizable presence in Chicago. One of my immediate teammates lived just outside the Windy City.

Seattle has grown primarily by people relocating from other parts of the country. It felt like nearly every team in T-Mobile’s Bellevue office had at least one of us who grew up in the greater Chicagoland.

Hey, thanks for reading my post on how the T-Mobile and UScellular merger may play out for UScellular employees.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for T-Mobile Employees in June

Kevin Estes — Mon, 03 Jun 2024 15:30:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for June in a moment.

But first - here are some links you may want to save for later.

Do You Even Need a Budget?

Now, let's get on to the blog! 😀

Is It Summer Yet?

The days are getting longer and warmer. It’s nearly stopped snowing in Montana!

Technically, summer is a few weeks away. However, some schools are already out for the year!

Potential Steps for T-Mobile Employees This Month

Financial steps T-Mobile employees might take in June include:

Enjoy end of school year
Replenish emergency fund
Prepare for summer vacation and camps
Submit dependent care reimbursements

1. Enjoy End of School Year

Final exams, papers, and projects are either complete or nearly there.

Remember how the last day of school felt?

It’s also “moving up” season. Treat the graduates you know well!

Next year’s schedules are being finalized. Now is a good time to schedule late summer physicals for student athletes.

2. Replenish Emergency Fund

Millions of Americans take advantage of the long summer days.

Local spending rises for:

Gear - camping, bicycle tune-ups, sprinklers
Water fun - swimming, fishing, boating
Hosting - barbecues, drinks, fireworks

The time and money spent landscaping rises. Nice weather allows for home improvement projects.

Now’s a good time to check emergency / opportunity fund balances. Having three to six months’ of expenses can help fund emergencies and lifelong memories!

For more, check out: Is Your Cash Starving?

Don’t forget: wealth is what you don’t see. Rich is Flashy.

3. Prepare for Summer Vacation and Camps

It’s nearly peak season for vacations.

Summer Vacations

Trips often require:

Travel - flights and/or road trips
Lodging - hotels, Airbnb, VRBO
Meals - dining away from home

If you haven’t scheduled your summer (and fall) vacations yet, considering doing so ASAP.

Remember: Vacation + Disaster = Adventure

Summer Camps

It’s also time to get ready for camp! There are:

forms to complete,
medicines to replace (if expired),
transportation details to iron out…

Many camps let parents fund small accounts for their children. Campers allowed to spend a set amount learn math, forecasting, and prioritization skills!

It’s nice for parents to reconnect when children are away at camp. Schedule date nights!

4. Submit Dependent Care Reimbursements

Dependent care expenses can by heavy in the summer.

Submitting receipts quickly may:

improve cash flow,
help with Back to School, and
ensure funds are received by year end.

Knowing early if there’s a problem gives more time to resolve it!

A dependent care Flexible Spending Account (FSA) generally cannot be used for an overnight camp. The goal of the program is to enable people with dependents to work regular hours.

Hey, thanks for reading my post on potential financial steps for T-Mobile employees in June.

Just a reminder, I share a lot of resources that can help you.

How Americans Spend

Kevin Estes — Wed, 29 May 2024 15:30:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to how Americans spend in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Source

This article leverages data from the 2022 Consumer Expenditure Surveys Age of Reference Person report published by the U.S Bureau of Labor Statistics available here.

Control Over Spending

Americans generally have control over their spending.

The top seven spending categories accounted for 90% of all expenses:

Housing 33%
Transportation 17%
Food 13%
Pensions and Social Security 11%
Healthcare 8%
Entertainment 5%
Clothing 3%

Lifestyle decisions like homes and vehicles accounted for about half of total expenses:

Healthcare cost may be more predictable than many assume since insurance makes up the majority of household healthcare expenses.

Even contributions to pensions and Social Security can be influenced by how much each person earns.

Spent Nearly $73,000

In 2022, American households spent about $72,967.

The biggest categories were:

$24,298 for Housing
$12,295 for Transportation
$9,343 for Food
$8,223 for Pensions and Social Security
$5,850 for Healthcare
$3,458 for Entertainment
$1,945 for Clothing (“Apparel and services” in the report)
$7,555 for Other

Other includes: cash contributions, education, personal care products and services, alcoholic beverages, life and other personal insurance, tobacco products and smoking supplies, reading, and miscellaneous.

Household Spending by Age

Household expenses peaked at 45-54 years old.

Based on the reference person in the study, spending by age was:

Under 25, $46,359
25 to 34, $67,883
35 to 44, $86,049
45 to 54, $91,074
55 to 64, $78,079
65 to 74, $60,844
75+, $53,481

Spent Most at Age 45-54

Age 45 to 54 is a time of transition.

The number of children under 18 in the household fell:

from 1.4 for those 35-44
to 0.7 for those 45-54

Education expenses more than doubled as children attended college:

from $1,237 for those 35-44
to $2,661 for those 45-54

The number of earners (1.8) and vehicles (2.2) peaked at age 45-54.

Nearly three quarters (73%) of homeowners still had a mortgage.

Expenses may have been heaviest because parents were still footing the bill for their teenage and young adult children:

education expenses
health, dental, and auto insurance
automobiles…

Category Spending by Age

Four of the five biggest categories peaked in middle age.

Category Peaks

Spending peaked at age 45-54 years old for:

Transportation
Food
Pensions and Social Security

Housing peaked a little earlier at age 35-44, likely because new homeowners paid more interest on their high mortgage balances.

Healthcare expenses continued to rise with age.

Deeper Dive

The next sections dive into expenses for the top seven (7) categories:

Housing
Transportation
Food
Pensions and Social Security
Healthcare
Entertainment
Clothing

1. Housing

The average cost of housing ramped up quickly and fell more gradually with age.

Housing expenses were higher later in life than early on:

$16,837 for those under 25
$19,317 for those 75+

It’s likely that owning a paid off home is more expensive than either:

renting an apartment or
living with parents.

Housing Expense

The cost of housing seemed to depend on the number of people in the household.

However, the cost per person grew with age:

from about $8,000 for those under 25
to about $12,000 for those 75+

Buying a Home

Housing expense rose quickly with age, as younger American households purchased homes.

18% of those under 25 owned a home
(which may be inflated by those still living with their parents)
62% of those age 35-44 owned at least one home

Mortgage Repayment

These young homeowners had big mortgage balances and high interest expense.

Principal repayment is not an expense. It’s more like moving money:

from one pocket (checking)
to another (home equity).

It took most homeowners until age 65-74 to pay off their homes.

2. Transportation

Transportation expenses grew until age 45-54 and then fell quickly thereafter.

These expenses were lower later in life than they were early on:

$9,583 for those under 25
$6,209 for those 75+

Transportation Expense

The number of vehicles influenced the cost.

However, the average cost per vehicle fell with age:

from $7,986 for those under 25
to $4,139 for those 75+

Vehicle Expense

Most vehicle expenses were for:

vehicle purchases and
fuel/oil.

The costs moved in near lock-step - rising until age 35-44 and falling thereafter. The decrease was much larger after age 65, likely due to driving fewer miles.

3. Food

Food expenses grew steadily until age 45-54 and then declined.

The expense lagged the number of people in the household a bit - possibly because children eat less than adults.

Food at Home and Away

The amount spent on food at home and away tended to rise and fall together.

However, the home percentage of food expense rose with age:

from 57% for those under 25
to 69% for those 75+

This increase may be due to the:

lifelong develop of cooking skills,
fewer public social activities, and
decreased mobility.

It may also have been the result of:

eating less when dining out,
ordering less expensive dishes, and
receiving senior citizen discounts.

4. Pensions and Social Security

The often non-optional cost of contributing to a pension and/or Social Security is the fourth largest expense.

These cost ranged from 10% to 12% of wages and salaries for all age groups except 75+. These costs stop once someone stops working.

5. Healthcare

Healthcare was the only major expense category that rose consistently with age.

Healthcare Expenses

Expenses rose with age, though perhaps not as much as many fear.

There appear to be diminishing costs to healthcare with advanced age. That may be the result of government programs like:

Affordable Care Act (ACA) health plans,
Medicare, and
Medicaid

Health Insurance

Perhaps the best news is that health insurance accounted for the majority of healthcare expenses. Insurance stayed in a tight range of 61% to 71% of total healthcare costs across all age groups.

Since insurance costs are largely predictable, there may be more certainty with healthcare costs than many believe.

6. Entertainment

The annual cost of entertainment varied by age.

It more than doubled:

from $2,075 for those under 25
to $4,481 for those 45-54

It then fell nearly 60%:

to $1,943 for those 75+

Entertainment Expense

The annual cost of entertainment depended on the number of adults (age 18 and over) in the household.

Entertainment cost per household was about:

$2,000 per adult for age 25-74
$1,000 per adult for those under 25 and 75+

Entertainment Type

Spend by age depended on the type of entertainment.

_Fees and Admissions
_Fees and Admissions peaked at about $1,300 a year for those 35-54 years old.

It dropped to:

$714 for those 55-64
$613 for those 65-74
$414 for those 75+

After all, there aren’t many 75 year-olds going clubbing. More power to those who are!

_Audio/Visual
_However, Audio/Visual spending peaked at age 55-64 and remained relatively high through end of life.

Even if someone can’t get out as much as they once did, they still value quality entertainment!

7. Clothing

The last of the big expense categories was clothing. It’s listed as “Apparel and services” in the data source.

Clothing Expense

The annual clothing expense seemed to depend on the number of people in the household.

As with Entertainment, the annual expense was lower for the youngest and oldest Americans. The clothing expense per person was:

$700 to $900 a year for those aged 25 through 74
$500 to $600 a year for those under 25 and 75+

Those under 25 years old may:

wear less expensive clothing or
have some of their clothes provided by parents.

Those 75+ may:

already own the clothes they need,
go easier on their clothing, or
prioritize comfort over style.

2-3% of Wages/Salaries

Those aged 64 and younger spend 2-3% of their wages and salaries on clothing:

3% for those 34 years old and younger
2% for those 35-64

The spend may have been slightly higher for younger workers as they built out their professional wardrobes.

Application

Each household’s situation and priorities are unique. However, the information above may be helpful a few ways.

Agency

One use may be to help people realize they have control - or at least influence - over their expenses.

About half of household expenses are for homes and vehicles. Those expenses are lifestyle decisions - as are:

food away from home and
entertainment.

Forecasts

People in their 30’s, 40’s, and 50’s may see their expenses and feel retirement is out of reach.

They might assume they’ll spend what they do today plus:

inflation and
ever-growing healthcare expenses.

While the cost of healthcare did rise with age, it has been tempered by options like:

Affordable Care Act (ACA) health plans and
Medicare.

All other major expenses fell with age.

Older Americans spend less on:

Housing - as their mortgages are paid down
Transportation - as they drive fewer miles
Food - as they eat less, go out less, and get senior discounts
Pensions/Social Security - as they stop working
Entertainment - as they attend fewer events
Clothing - as they no longer need to dress to impress

Guidelines

Finally, someone looking for potential guidelines might consider the following 2022 household averages:

Housing - $8,000 to $12,000 per person, rising with age
Transportation - $4,000 to $8,000 per vehicle
Food - $3,000 to $4,000 per person
Pensions/Social Security - 10-12% of wages/salaries
Health Insurance - $2,000 to $5,000 per household, rising with age
Entertainment - $2,000 to $4,000 per household, depending on age
Clothing - 2% to 3% of wages/salaries

Hey, thanks for reading my post on how Americans spend.

Just a reminder, I share a lot of resources that can help you.

How to Minimize Lifetime Taxes

Kevin Estes — Wed, 22 May 2024 15:30:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll consider how to minimize lifetime taxes in a moment.

But first - here are some links you may want to save for later.

Retirement Transactions Aren't Taxed… Yet

Sammy Says! 13 Things the U.S. Tax Code Encourages

Now, let's get on to the blog! 😀

Progressive Income Tax

Taxes are complex. However, the simple version is:

The more you make, the more they take.

The federal marginal income tax rates range from 0% to 37%:

Source: IRS provides tax inflation adjustments for tax year 2024

However, it’s possible to Judo throw this model.

Only Applies to Some

Taxpayers don’t pay their highest rate on all of their income!

They pay the lower tax bracket rates first.

Example:
Let’s pretend a married couple files a 2024 joint tax return with:

earned income of $250,000,
the standard deduction, and
has no other income, deductions, or credits.

They would pay a federal total of $39,077 in income tax:

0% of the first $29,200 up to the standard deduction, or $0
10% of the next $23,200 ($52,400 - $29,200), or $2,320
12% of the next $71,100 ($123,500 - $52,400), or $8,532
22% of the next $106,750 ($230,250 - $123,500), or $23,485
24% of the next $19,750 ($206,550 - $230,250), or $4,740

That would be an effective rate of 15.6% ($39,077 / $250,000).

Had all of their income been taxed at their highest 24% tax bracket, they would have paid $60,000!

Minimize Lifetime Taxes

Many people - including tax preparers - focus on reducing taxes for the previous year.

Some take steps to reduce their tax bill for this year.

Very few proactively minimize their lifetime taxes.

It’s even possible that minimizing one year’s taxes could increase lifetime taxes!

Potential Lifetime Taxes

Here’s a made up example of someone’s lifetime taxes.

Let’s say they’re:

49 years old,
will work until age 57, and
may live to 90.

Without any adjustments, their future taxes might look like:

Smoothing Taxes Can Save

Federal taxes are based on income - not wealth!

It may be possible to lower lifetime income taxes tens or even hundreds of thousands of dollars by:

lowering income in high-tax years and
raising income in low-tax years.

Minimize Current Taxes

Potential ways to lower current taxes include:

contribute to pre-tax plans
hold income investments in tax-advantaged accounts
benefit from long-term capital gains
make after-tax contributions

1. Contribute to Pre-Tax Plans

Funding traditional accounts can lower taxable income and current taxes.

_Retirement
_Pre-tax contributions to workplace retirement accounts like a 401(k), 403(b), and 457(b). The maximum contribution for these accounts is $23,000 for 2024.

There’s also a catch-up for those 50 and older of $7,500 for the 401(k) and 403(b). The 457(b) catch-up works a little differently.

There are other accounts such as an Individual Retirement Arrangement (IRA). Whether contributions are deductible depends on income limits.

Also, don’t forget about spousal IRAs! They’re a way for non-working spouses to save for their retirement and reduce the family’s taxes.

For more, check out: Ignoring the Spousal IRA?

_Health Savings Accounts (HSAs)
_Another option is to contribute to a Health Savings Account (HSA).

Contributions are triple tax advantaged in that they:

lower tax on the front end,
grow tax free, and
pay medical expenses tax free.

Health Savings Accounts are not “use it or lose it.” They’re portable and can move with an employee if they leave the company.

HSAs can also be invested. They often require a relatively small balance - such as $2,000 - be kept in cash. The rest can be invested.

An individual or family can only contribute to a Health Savings Account if they’re on a qualifying High Deductible Health Plan.

It’s important to not let the tax tail wag the healthcare dog! A high deductible plan needs to be right for an individual or family.

For more, check out: Pros and Cons of a Health Savings Account

_Flexible Spending Accounts (FSAs)
_The middle term is different and important!

Unlike a Health Savings Account, a Flexible Spending Account is generally “use it or lose it.” Most of the funds must be spent by year end.

Two common options are:

Dependent Care FSA
Healthcare FSA

If someone has high confidence they’ll have qualifying expenses, these programs may save on taxes. However, restrictions apply and funds may be forfeited after a change in employment.

2. Hold Income Investments in Tax-Advantaged Accounts

Many investments earn very little income. For instance, growth stocks rarely pay dividends.

It may make sense to keep taxable bonds in tax-advantaged accounts. However, it does not make sense to hold tax-free municipal bonds in traditional or Roth retirement accounts.

3. Benefit from Long-Term Capital Gains

The gain on some investments may be taxed at the lower long-term capital gain rates:

The rate depends on income and the capital gain tax brackets published by the IRS. 15% is common.

Investments generally need to be held for over a year before they’re sold to receive the long-term capital gain tax treatment. Those held less than a year are taxed at ordinary income tax rates.

Dividends can also receive the long-term capital gain treatment. To qualify, the stock typically needs to have been held for over a year.

Whether to hold long-term investments in a tax-advantaged or taxable brokerage account depends on the taxpayer’s situation, needs, and goals. Higher income investors may be subject to an extra 3.8% Net Investment Income Tax.

4. Make After-Tax Contributions

Some company plans now offer after-tax retirement accounts. These are different than Roth accounts!

After-tax accounts allow individuals to fund more than the regular limit.

it’s especially helpful for higher earners looking to save after maximizing pre-tax contributions to:

retirement accounts
Health Savings Account

According to the IRS, the 2024 contribution limits are:

$23,000 for employee deferrals to pre-tax 401(k), 403(b), and 457(b)
$69,000 in total defined benefits

The company match also counts toward the $69,000 limit.

**Example:
**Jen is a 45 year-old who earns a $200,000 salary and a $50,000 annual bonus. Congratulations!

Jen maxes her pre-tax 401(k) contributions at $23,000. Her employer also matches $10,000 (4% of $250,000).

That leaves her $36,000 to contribute to her after-tax account:

$69,000 total defined benefits limit
less $23,000 employee contribution
less $10,000 company match

These funds are taxed on the front end. If certain conditions are met, they may never be taxed again!

Contributions could lower taxes both in-year and for future years.

The biggest downsides are:

after-tax plans are still uncommon
the funds are less accessible than a traditional brokerage account

After-tax contributions can often be rolled into a Roth IRA. The income limits do not apply. This process is called a Mega Roth or Mega Backdoor Roth.

Don’t worry! Congress blessed it.

Minimize Future Taxes

Potential ways to lower future taxes include:

avoid penalties
use the real estate exclusion
save receipts
do Roth conversions
delay Social Security
give strategically

1. Avoid Penalties

Perhaps the simplest way to minimize taxes is to avoid penalties.

A 10% penalty applies for those who access pre-tax retirement accounts before age 59.5 unless an exception applies.

The IRS can also charge under-payment penalties. Solutions could include:

making quarterly estimated tax payments
increasing withholding on Form W-4 with an employer
reducing taxable income

2. Use the Real Estate Exclusion

Real estate receives many tax benefits, including the ability to exclude a portion of the gain of a home sale.

The taxpayer would need to both own and live in the property for:

at least two (2)
of the last five (5) years.

According to the IRS, the tax exclusion for a qualifying residence is:

$250,000 single
$500,000 married, filing jointly

Life choices matter more! However, it may make sense to consider this exclusion if planning to move.

3. Save Receipts

It’s also important to keep track of expenses.

_Home
_Some expenses may increase the cost basis of the home. Doing so could reduce the tax due on a home sale.

Medical and Dental
Medical and dental expenses above 7.5% of Adjusted Gross Income may be deductible. Keeping those receipts can help lower tax bills.

Also, qualifying medical expenses need not be reimbursed by Health Savings Accounts (HSAs) right away. Waiting can allow the account to grow longer. However, it’s critical to store the medical receipts and documentation in a safe place physically and/or digitally.

Itemized
Charitable contributions and donations may also lower taxes for the year. Other taxes paid could as well. If someone is planning to itemize deductions, it may make sense to systematically save the receipts!

4. Do Roth Conversions

Another option to lower future taxes is to convert pre-tax to Roth accounts. Doing so increases taxable income in-year yet may avoid future taxes.

It’s especially helpful to do Roth conversions in a year with lower income. Doing so could limit future Required Minimum Distributions (RMDs), which might significantly increase taxes later in life.

Roth conversions can also benefit heirs. If a loved one inherits a traditional (pre-tax) account, they’ll need to pay the taxes the deceased didn’t! Those taxes might occur when they’re in their peak earning years.

Whether to do Roth conversions depends on each person’s specific circumstances. Depending on the size of the tax-deferred accounts, it may make sense to convert up to the top of the:

12%,
22%, or
24%

tax bracket each year.

5. Delay Social Security

Each year Social Security retirement benefits are delayed increase the monthly payment.

For those born in 1943 or later, each year delayed increases the monthly benefit 8%. Benefits can be delayed until age 70.

It’s not like an 8% investment return. It’s more like an annuity. That higher payment will persist for the life of the individual and may transfer to a surviving spouse.

However, there is also a tax benefit! Up to 85% of Social Security benefits are taxed. Delaying the payments delays the tax.

Of course, it depends on each household’s specific situation. If the money is needed or someone has a short expected lifespan, it may make sense to start taking the benefits earlier.

6. Give Strategically

Giving cash may not be ideal.

Tax-Deferred Accounts
Someone may be able to receive a full deduction on a contribution of a tax-deferred account like a 401(k), 403(b), 457(b), or IRA.

The nonprofit doesn’t care because they don’t pay income taxes! However, it could save the donor income tax.

Qualified Charitable Distributions (QCDs) are a version of this type of giving. These distributions can satisfy the annual Required Minimum Distributions (RMDs) while avoiding the income tax.

Appreciated Assets
Another trick is to give appreciated assets instead of cash. Doing so avoids the capital gains tax from selling the assets.

It rarely makes sense to donate or gift an asset which is worth less than its original cost. Typically, sell the asset for the deduction and give cash.

Bunching
Bunching is another clever technique. Giving every week, month, or year may not maximize charitable deductions.

The Tax Cuts and Jobs Action (TCJA) nearly doubled the standard deduction. That made it harder for charitable contributions to lower taxes.

It may make sense to make a really big deduction which covers multiple years. More of the contributions would likely be deductible. The taxpayer could use the standard deduction in the other years.

Donor Advised Fund (DAF)
Individuals can contribute to a DAF now and suggest it be distributed to specific charities later. A Donor Advised Fund does not distribute funds to every charity so it’s worth checking beforehand!

DAFs are particularly good at supporting:

large contributions (bunching) and
appreciated assets.

A nonprofit may not have the resources to use appreciated assets. A Donor Advised Fund may. However, each situation is unique!

Hey, thanks for reading my post on how to minimize lifetime taxes.

Just a reminder, I share a lot of resources that can help you.

Shop Auto Insurance

Kevin Estes — Wed, 08 May 2024 15:30:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to shopping auto insurance in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Consider the Source

I’m not an insurance agent or other insurance professional. Because I don’t work for an insurance company, I don’t have a conflict of interest.

Overpaying

Many people overpay for auto insurance. It’s often because they haven’t shopped their policy in a while.

According to a recent LinkedIn poll, the last time people shopped was:

25% in the last year
29% in the last 3 years
12% in the last 5 years
33% at least 5 years ago

A third of the respondents haven’t shopped auto insurance in over five years. Nearly half (45%) haven’t shopped it in three years.

Guideline

Consider shopping if you:

haven’t gotten quotes from at least two insurers within the last three years or
are paying more than $1,000 a year.

Trust everyone but cut the deck!

Insurance Framework

The cost of additional insurance tends to fall with more coverage. Higher limits cost more - just not a lot more.

That’s because accident expenses roughly follow half a bell curve:

Small, Frequent

There are many small incidents:

the wind catches a car door and dents the vehicle next to it
loose gravel on the highway leaves a mark
one car bumps another hard enough to dent a license plate

Dings happen often. The best way to lower their cost is to drive:

a less expensive vehicle,
less often, or
very carefully.

It rarely makes sense to insure small expenses. It’s not even worth the time and cost to submit a claim!

Paying for repairs out of pocket is called self-funding or self-insuring.

Medium, Infrequent

More expensive impacts happen less often:

someone sideswipes a parked car
loose gravel cracks a windshield
two cars get in a fender bender

These medium-sized impacts might cost a few hundred to a few thousand dollars.

Whether it makes sense to submit it to insurance depends on the:

cost,
at-fault driver’s financial position,
impact on future insurance premiums, and
deductibles.

_Cost
_It generally makes sense to submit a claim for thousands of dollars.

However, time is of the essence. The more time elapses, the less likely someone is to get paid.

Financial Position
Whether someone can afford to pay for smaller incidents may depend on their cash position.

One of my high school teachers slid off the road onto a golf course when he was a teenager. It caused $800 in damage.

His parents:

didn’t file a claim,
paid the bill, and
forced him to pay them back with his part-time income.

This is part of why I usually suggest people keep at least three (3) to six (6) months’ of living expenses in an emergency / opportunity fund.

For more, check out: Is Your Cash Starving?

Impact on Premiums
It may not make sense to submit a claim for even bigger incidents.

I know someone whose teen drove off the road and caused over $10,000 of damage to their car. The driver was fine - just shaken up.

The accident wasn’t reported.
No ticket was issued.
The family towed the car to a body shop.

Instead of paying the deductible and higher insurance premiums, they paid out of pocket for the repair. It was an expensive driving lesson!

Consider the premium costs before submitting an insurance claim - especially one less than $1,000.

Deductibles
A deductible is the amount someone pays out of pocket before the insurer pays if there’s an accident. It’s a way to self-insure up to a limit.

Deductibles can be win-win:

the insurance company doesn’t pay for every little incident and
the policy holder pays a lower premium.

Consider how large an expense would need to be to go through the hassle of submitting a claim. If someone wouldn’t file a claim for less than $500, it probably makes sense to have at least a $500 deductible!

Check the premiums at different deductible levels.

It’s unlikely someone will be in an expensive accident every year.
If so, it’s probably not safe for them to drive!

Large, Uncommon

Big expense are even rarer. It’s essential to have proper coverage for such accidents.

Property
Damages can get expensive in a hurry if someone:

hits a truckload of foreign imports,
takes out a fire hydrant which floods a business, or
causes an interstate pile-up.

People
However, property damages pale in comparison to the cost of injuries.

An at-fault driver may be liable for hospital, rehabilitation, pain, suffering, and other expenses.

Based on another U.S. Department of Transportation source, the average comprehensive cost of an accident in 2001 dollars was:

$7,400 with property damage only
$44,900 with a possible injury
$79,000 with an evident injury
$216,000 with a disabling injury
$4,008,900 with a fatality

Percent and Expense

About 3% of drivers were in a reported accident in 2021.

The U.S. Department of Transportation reported that in 2021 there were:

6 million police-reported motor vehicle crashes
233 million licensed drivers

The crash types were:

71% property damage only
28% injury
1% fatal

The average cost per accident using 2001 dollars were:

$7,400 property damage only
$82,600 injury
$4 million fatal

Coverage Limits
Because expensive accidents are relatively rare, higher limits may not cost much more.

I like to see coverages like:

100/300/100 or
250/500/250

100/300/100 translates to:

$100,000 for bodily injury per person
$300,000 for bodily injury per accident
$100,000 for property damage per accident

250/500/250 is coverage of:

$250,000 for bodily injury per person
$500,000 for bodily injury per accident
$250,000 for property damage per accident

Huge, Rare

There’s no way to compensate for the loss of human life. However, the American judicial system tries!

Fortunately, there’s an insurance which offers even more protection.

Umbrella insurance sits on top of other insurance - home, auto, motorcycle, boat, etc. It pays amounts above those policies’ limits.

Umbrella generally requires higher limits for the other policies. That means umbrella insurance only pays in rare situations.

Because it’s used infrequently, it’s quite affordable:

$1 million might only cost $200 a year
$2 million might cost under $400 a year

A general guideline is $1 million in umbrella insurance for every $1 million in net worth.

What to Have

It often makes sense to keep:

cash for small, frequent incidents
deductibles for medium, infrequent accidents
high limits for large, uncommon crashes
umbrella insurance for huge, rare tragedies

Branding

Insurance is highly regulated. What truly matters is the:

coverage and
financial security of the insurer

Yes, customer service matters.

However, having a personal agent nearby is expensive. Someone has to pay for both their rent and availability!

Insurance endorsed by celebrities can also be expensive. Someone has to pay their acting fees!

Large online insurance companies like Geico and Progressive can be just as responsive at a lower cost.

No Penalty for Checking

Shopping for auto insurance isn’t like shopping for a credit card.

Shopping Credit

Someone’s credit score can fall just by checking rates.

There are essentially three outcomes for people who apply for credit:

They’re approved and accept it
They’re denied
They’re approved and pass on it

All three are bad for lenders.

1) Approved and Accepted
Taking out more credit increases the risk someone will take on more debt than they can afford. They may have trouble paying their bills or - worse - face bankruptcy.

More available credit is higher risk for lenders.

2) Denied
Denying credit is even worse for creditors.

One of their peers reviewed someone’s situation and didn’t feel comfortable lending them money. That’s a red flag!

3) Approved and Passed
The consumer may have just been shopping. However, creditors would prefer only seriously interested people apply.

The first two reasons are why hard inquiries are is a key component of credit score. Reduced shopping is a side benefit for lenders.

Shopping Auto Insurance

There isn’t a good reason for insurers to penalize people for shopping auto insurance.

If someone gets a new auto insurance policy, they’ll almost certainly drop their existing one.

Otherwise, two insurers might pay less separately if there’s a claim! Their payments would be coordinated.

There’s not an “insurance score” which gets impacted by checking for auto insurance like there is with a credit score.

Pay in Full Discount

Some insurance companies offer steep discounts for paying a premium upfront. These discounts can be up to 15% every six months!

That’s like a 30%+ annual return with high certainty. Few opportunities have such a good return for so little risk.

Discounts are another reason to have cash available.

Add-Ons

Regulators want insurers to make money. That way, they have more than enough money to pay the insurance claims.

As a policyholder, you also want them to make money. That means you weren’t in a major accident!

The “extras” are profitable for insurance companies. Use them sparingly.

If someone already has AAA, it probably doesn’t make sense for them to pay for roadside assistance!

Hey, thanks for reading my post on shopping auto insurance.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for T-Mobile Employees in May

Kevin Estes — Wed, 01 May 2024 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to potential steps for May in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Nearly Summer

Families with school-age children are BUSY. If that’s you:

You’ve got this!

Fortunately, summer’s almost here.

Potential Steps for T-Mobile Employees This Month

Financial steps T-Mobile employees might take in May include:

Review tax withholding (Form W-4)
Update goals and financial plan
Check student loan / other debt balances
Fund education savings
Schedule fall Paid Time Off (PTO)

1. Review Tax Withholding (Form W-4)

Tax returns and payments can be unnecessarily painful.

Owe Often?

Paying tax when filing pinches cash flow. It could require someone to sell assets that have gone up value, further increasing taxes.

Psychologically, it can be tough to click “submit” on the payment. Having to pay can create angst and even anxiety.

If someone owes enough, they may have to pay interest charges or penalties.

These are reasons tax software often recommends making more payments throughout the year.

Consistent Refund?

There also are downsides to receiving refunds each year.

Some credits are non-refundable. A taxpayer might pay more in tax because they paid extra!

Getting a refund is like giving the government an interest-free loan. Those funds would likely earn more interest now than a few years ago.

Assets values tend to rise over time. On average, having less invested results in less growth.

Unique Situations

Less tax may be withheld than needed, including for:

Bonuses. A company might only withhold 22% of bonuses for an employee in the 35% tax bracket.
RSUs and PSUs. A company plan might only sell 22% of Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) as they vest to cover taxes. Remember: vests are treated like income.
Other Business Income. Business income can raise personal income taxes. Real estate is a common example.

W-4: More Than Dependents

People sometimes think all they can do on their Form W-4 is update their dependents as their family changes. That’s not true!

For instance, they can declare fewer dependents than they have. They can also have more withheld from their paychecks for both state and federal taxes.

Cash Flow

Before making a change, it’s important to consider the cash flow impact. Can someone afford more taken out of their paychecks?

Bonus payouts and Restricted Stock Unit (RSU) vests often occur early in the year. That may be a feature, not a bug! Those might fund taxes.

How to Update

Companies usually have the Form W-4 and instructions on their intranet.

If not, a Human Resources (HR) teammate will have access and know how to update it.

2. Update Goals and Financial Plan

I like to think of finances like surfing.

We can plan but many things are beyond our control:

sometimes, there’s a perfect wave
often, it’s a lot of waiting
watch out for sharks!

Refresh Goals

Situations change.

Someone could expect to pay in-state tuition until but then their child:

gets a full-ride scholarship or
is accepted to an Ivy League school

The stock market might rise or fall 20% in a year… or more!

Someone could get promoted or laid off.

A couple may want to retire to a warmer climate - until grandchildren come along.

Goals adapt accordingly!

Update Plans

Major changes impact a financial plan. That’s life!

I like what Dwight Eisenhower said:

Plans are useless,
but planning is indispensable.

It’s unfortunate how some software labels plans successes or failures. I’m looking at you, Monte Carlo.

It’s not success or failure. It’s how much to adjust in which direction! People adapt.

3. Check Student Loans / Other Debt Balances

Late spring is a good time to check loan balances.

Student Loans

Paying student loan debt off may not be a priority:

The interest rate may be low
Loans might be forgiven with consistent on-time payments
Student loans are discharged at death

Instead, a focus on investing and saving could leave more to loved ones. “Die with debt” can be a valid plan!

Consumer Debt

There are many methods for paying off debt, including snowball and avalanche.

Snowball

The snowball method pays off the lowest balance account first, then the next lowest, and so on.

Pros

Wins now - creates momentum by paying off the first debt
Cuts payments - no payments for paid debts
Reduces mindshare quickly - leaves fewer accounts to manage

Cons

Pays more interest - unlikely to pay higher interest debt first
Improves credit slower - does not lower high balances quickly
Repays less quickly - higher interest means less is paid off

Avalanche

The avalanche method pays off the balance with the highest interest rate first, then the next highest, and so on.

Pros

Minimizes interest - highest interest debt is paid first
Improves credit faster - credit utilization falls quicker
Maximizes repayment - more is paid with lower interest rates

Cons

Wins later - takes longer to pay off the first balance
Keeps payments - more accounts need a monthly payment
Holds attention longer - extends how long accounts are managed

4. Fund Education Savings

It could also be a good time to fund education savings accounts.

Funding priorities depend on location, income, and assets.

Location

States without income tax like Washington and Texas offer no immediate tax benefit of saving to a 529 plan.

Other states like California and Kentucky don’t allow 529 contributions to be deducted.

The benefit of 529 contributions also depend on each state’s:

marginal income tax rate
state tax deduction cap
deduction or credit structure
taxpayer or beneficiary limit
tax parity policy…

Income

Fortunately, 529 plans do not have an income limit for contributions.

However, many other education options do. 2023 income limits included:

Contribute $2,000 to a Coverdell Education Savings Account (ESA) with Modified Adjusted Gross Income (MAGI) below $110,000 single or $220,000 married filing jointly
Receive an American Opportunity Credit of $2,500 per student with Modified Adjusted Gross Income (MAGI) below $90,000 single or $180,000 married filing jointly
Earn a Lifetime Learning Credit of $2,000 per return with Modified Adjusted Gross Income (MAGI) below $90,000 single or $180,000 married filing jointly
Exclude income tax on EE or I Bonds with Modified Adjusted Gross Income (MAGI) below $106,850 single and $167,800 married filing jointly
Deduct student loan interest paid with Modified Adjusted Gross Income below $90,000 single and $185,000 married filing jointly

Additional restrictions and phaseouts apply. Many income limits change annually.

Assets

Who owns an asset can also impact financial aid.

Up to 5.64% of the asset will count toward the Student Aid Index (SAI) if owned by a parent.
Up to 20% of the asset will count toward the Student Aid Index (SAI) if owned by a student.

The Student Aid Index (SAI) recently replaced the Expected Family Contribution (EFC) on the Free Application for Federal Student Aid (FAFSA®) form.

How each school factors assets into its own financial aid is even more variable. For instance:

Northwestern University includes home equity when calculating financial aid.
Stanford University does not.

5. Schedule Fall Paid Time Off (PTO)

You've already scheduled your summer vacations, right? RIGHT?

If so, now’s a good time to plan fall vacations.

Rentals and hotels get booked.
Flights prices rise.
Calendars fill.

It’s not just the schedule of friends and family. It's coworkers’, too!

Scheduling Paid Time Off (PTO) early is like calling dibs.

For more, check out: Schedule Your PTO ASAP.

Hey, thanks for reading my post on potential financial steps for T-Mobile employees in May.

Just a reminder, I share a lot of resources that can help you.

Benefit from Stop, Start, Continue!

Kevin Estes — Wed, 24 Apr 2024 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to rich versus wealthy in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

What Is Stop, Start, Continue?

Processes grow stale over time. What worked in the past may not anymore.

The Stop / Start / Continue technique is a good way to prioritize! Current and potential actions are considered and labeled:

Start,
Stop, or
Continue.

Business

It’s a great way to:

end low value activities,
pursue more lucrative ones, and
streamline processes.

Zombies

Every business accumulates processes of little or no value. They drain resources.

Left unchecked, Zombies can overrun an organization. Death by bureaucracy is a terrible way to go!

It’s a good reason to do a zero based budget. Checking everything can unlock massive savings.

Opportunities

Market conditions change. Organizations must adapt to survive.

A “Start” list can lean into growth areas.

It’s easier to come up with ideas when stopping time-consuming tasks. The “Stop” list also frees up resources for new items!

There’s a tendency for businesses to go overboard with new ideas. A whole department might get spun up, products built, and a marketing plan set before the product’s tested.

Entrepreneurs do the opposite. They:

lower the stakes,
test ideas, and
invest in what gets traction.

Core Activities

Businesses add value. If not, they go out of business quickly!

Focus on the bread and butter.

Can any steps be removed?
Are there backups in case of failure?
How can the process be improved?

Job

Stop / Start / Continue also works for careers!

Save

No-one loves every part of their job. It’s especially hard to love low-value tasks. They feel like a waste of time.

Those items are especially important to discuss with your manager! One of three things will likely happen:

you’ll learn how important it is and appreciate it more,
your supervisor will better understand your effort (and may even give it to someone else), or
you’ll be able to stop doing it!

Let’s say 20% of your job is uninspiring.

Maybe 15% of could be “flipped” from negative to neutral:

5% - appreciate the value
5% - reassign to someone else
5% - stop altogether

That might leave only 5% of the job you dislike, which could be a huge boost in job satisfaction!

By the way, a task is more likely to get reassigned with preparation:

Is there someone on the team who could grow by doing that work?
Does somebody else want to do it?
Are there any tools which could make it easier?

Don’t just drop a problem on your manager. Bring a potential solution!

Remember:

Don’t delegate what can be automated and don’t automate what can be cut.

Develop

People - and by extension - organizations are good at solving problems. That’s what we’re trained to do from a very young age in school!

Finding problems is a far bigger opportunity.

The trick is to better understand an existing problem:

What’s causing customers to leave?
Why are those products often shipped late?
Are steps in the wrong order?

Once you find an opportunity:

do some research
calculate the cost (especially time)
draft solutions

Figure out who might benefit from that going well. Mention it to your manager and ask permission to discuss it with that person. Even if it isn’t feasible, your manager will appreciate your initiative!

It’s also important to advocate for your growth. What would you like to get in the way of:

training,
certifications, and
on the job development?

Streamline

Consider the parts of your job you don’t mind which are important.

Quantify your impact:

That which gets measured gets improved.

Also, numbers are critical for your resume!

Even though you generally like the task, consider how it might be done more easily:

Could strengthening your relationship with a coworker help?
Is someone using a tool that might do it faster?
How could you take the process to the next level?

Optimize

These steps might help you mold your job into more of what you like and less of what you don’t!

Focusing on your passions may lead you to develop new skills, have a bigger impact, and enjoy what you’re doing.

Expenses

Stop / Start / Continue also works for personal spending.

Cut

Whenever my wife and I review our expenses, we seem to find a cost we didn’t know we had:

a subscription we forgot about,
an inaccurate (or fraudulent) charge,
something we no longer need…

We stop these undead expenses as soon as we can!

Try

New things are a part of our financial lives. Variety’s the spice of life.

I like to think of a new expense like an experiment:

We hypothesize buying this will improve our lives.

We make the purchase and observe the results!

Did it make our lives materially better?

If so, we’ll continue it!
If not, we’ll scale back or cut it.

Extend

Most of our expenses are recurring and worthwhile. However, they’re still worth reviewing!

Another Way

What is the real benefit we receive from each expense?

Could we achieve the same result another way?

Maybe instead of going out for lunch, we picnic in a beautiful park
Instead of going to a movie, we might watch a show at home

Replay

If something’s totally worth it, would doing it more make sense?

We bought new bicycles so we can ride ride together more when the weather’s nice.

Go Big

Could we add a twist?

We recently traveled to see the eclipse in totality.

On the way there, we:

ate at a restaurant where servers threw us rolls,
checked out the resort town of Branson, Missouri, and
stayed at a retro creek-side lodge.

On the way back, we dined at a wonderful Peruvian restaurant in Springfield, Missouri.

The extra cost was minimal. However, these “extras” made the trip memorable.

Your Turn!

Now, it’s your turn to review expenses with Stop / Start / Continue.

Which expenses will you cut, try, or extend?

Hey, thanks for reading my post on the start, stop, continue technique.

Just a reminder, I share a lot of resources that can help you.

Rich Is Flashy

Kevin Estes — Wed, 17 Apr 2024 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to rich versus wealthy in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Wealth Destroyer

Few things destroy wealth faster than trying to look rich.

Investopedia’s take is:

Conspicuous consumption is the purchase of goods or services for the specific purpose of displaying one's wealth.

Common examples include a:

mansion,
luxury SUV, and
fancy boat.

Mansion

Good news! Paying back a loan isn’t an expense.

It’s more like moving money from one pocket to another:

from cash
to home equity.

Paying off a loan has no immediate impact on net worth.

However, home expenses add up:

interest,
property taxes,
utilities,
repair / maintenance, and
homeowners insurance.

5.5% Interest

The cost to borrow money is an expense.

The Federal Reserve reported the average interest rate for a 30-year fixed mortgage was 6.88% the week of 4/11/2024. (See “Sources” at the bottom for more detail.)

With a standard 20% down payment, 80% of a home purchase is financed. Interest costs about 5.5% of the home value (6.88% * 80%).

1.1% Property Tax

According to Business Insider, the effective property tax rate ranges:

from 0.29% in Hawaii
to 2.47% in New Jersey

The national average is 1.1%.

1% Utilities

Common utility expenses include electricity, natural gas, water, sewer, cable, phone, security, garbage, and recycling.

Forbes estimates the average American household spends $429.33 a month on utilities. Costs vary by the:

location,
size, and
energy efficiency of the home.

Nonetheless, a decent estimate is $5,152 a year ($429.33 * 12 months).

As of the end of 2023, the average price of a house sold in the United States was $492,300. (See “Sources” for more detail.)

That puts the average utility expense at about 1% of the home value each year ($5,152 / $492,300).

1% Repair & Maintenance

Upkeep costs also vary. They tend to be:

Higher in the first few years, as the home is personalized.
Lower for some years since it’s new and may be under warranty.
Higher as the home ages and needs major repairs and upgrades.

However, 1% of the home value each year is a decent estimate.

0.3% Homeowners Insurance

According to Forbes Advisor, the average homeowners insurance was $1,678 for April 2024 for a $350,000 policy. Land usually isn’t insured.

Let’s assume 0.3% of the home value each year ($1,678 / $492,300) for homeowners insurance.

Nearly 9%

Altogether, the annual expense of a home might run 8.9% of its value:

5.5% interest
1.1% property taxes
1.0% utilities
1.0% repair and maintenance
0.3% homeowners insurance

That excludes the expense of buying and selling the home. Switching homes often is a great way to build wealth… for realtors, brokers, loan officers, home inspectors, title insurers, notaries, insurance agents, etc.

8.9% comes to:

$17,800 for a $200,000 home
$44,500 for a $500,000 home
$89,000 for a $1,000,000 home
$178,000 for a $2,000,000 home

It raises the question: Is a Home an Investment?

Luxury SUV

A Mercedes-Maybach GLS 600 stopped next to us the other day on our way to practice.

We were in the 2014 Ford Escape my wife and I purchased in September 2013 for about $17,000.

The Mercedes-Maybach currently has a Manufacturer’s Suggested Retail Price (MSRP) of $174,350.

Our families received the same primary benefit: transportation from one location to another. Our mobile living rooms are similarly sized. We were stuck at the same traffic light.

Sales Tax vs. Purchase Price

The sales tax in King County (where Seattle’s located) is over 10%.

The owner of the Mercedes-Maybach may have paid more in sales tax than we did for our SUV!

Last a Century?

We’ve owned and driven our Escape for over a decade.

The Mercedes-Maybach is roughly ten times (10x) as expensive as our Ford Escape. For the annual cost to be similar, the Mercedes-Maybach would need to last over 100 years!

How many generations of drivers is that?

Will it look like this to those alive then?

By the way, we were fortunate to make it through the next light.
The Mercedes-Maybach wasn’t.

Fancy Boat

Our family loves the water! We watch a sailing show together almost every week.

My daughter and I started sailing during the pandemic. (My wife doesn’t, as she gets motion sickness.)

We’ve sailed the San Juan Islands twice. Last summer, we were fortunate to earn American Sailing Association certifications.

Here’s a picture I took at Roche Harbor halfway through the trip:

However, we’re not buying a boat anytime soon!

B. O. A. T.

The cost of ownership really adds up:

initial purchase
repair and maintenance
marina (moorage) fees
insurance
utilities like electricity, gas, oil, and cell service

It’s like owning another house!

Did you know BOAT is an acronym? It’s stands for:

Bust
Out
Another
Thousand

Some say the second happiest day of their life was when they bought a boat.

The happiest? The day they sold it.

So Glamorous

Think sailing is posh? One marina shares amenities with an RV park.

Showers are few and far between. When available, they’re often coin operated. Pro tip: bring quarters!

Every few days, you need to pump out. For the uninitiated, think of a sailboat as a floating porta potty.

This is the best case scenario! Worse things happen at sea.

Still, we love it! It’s like camping on water.

Flashy vs. Boring

Flaunting money is like fireworks - an exciting way to blow wealth!

Real wealth is boring. It quietly toils around the clock for its owner.

Instead of buying things, the wealthy invest in businesses. For more, check out: Own Like a Billionaire?

Sources

U.S. Census Bureau and U.S. Department of Housing and Urban Development, Average Sales Price of Houses Sold for the United States [ASPUS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/ASPUS, March 27, 2024.

Hey, thanks for reading my post on boring wealth.

Just a reminder, I share a lot of resources that can help you.

Own Like a Billionaire?

Kevin Estes — Wed, 10 Apr 2024 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll explore what the wealthiest Americans own in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Who Are the 0.1%?

According to the Federal Reserve, the wealthiest 1/10th of 1% of U.S. households had at least $46.4 million in the third quarter of 2022.

By the end of 2023, approximately 133,364 households owned:

about 13.6% of the net worth in the United States,
nearly $20 trillion, and
averaged $150 million per household.

(See Sources at the bottom of this article for more detail.)

These are the wealthiest households in the country. However, perhaps more interesting than how much they own is what they own.

Their Business is Business

What the Top 0.1% Own

Business ownership is over two-thirds of their net worth:

Corporate equities and mutual fund shares, 46%
Private businesses, 22%

That’s not what less wealthy Americas own.

What the Bottom 50% Own

The least wealthy half of American households own very different assets:

Real estate, 50%
Consumer durable goods, 19%

For these individuals, real estate is primarily the equity in their home. Consumer durable goods include vehicles, appliances, furniture, etc.

Primary Differences

Real estate and consumer durable goods together are about:

12% of net worth for the 0.1% wealthiest households
69% of net worth for those in the bottom half

The wealthiest households’ have less than one fifth (1/5th) the weighting of the least wealthy households.

Public and private business ownership accounts for about:

69% of net worth for the 0.1% wealthiest households
6% of net worth for those in the bottom half

The wealthiest households have about 12x the weighting of the least wealthy households.

Other categories have less meaningful differences.

Physical Limits

Part of the difference is likely due to physics. The bigger a home is, the more effort (and cost) it takes to clean, maintain, and repair it.

Scaling with leads to outlandish numbers.

Refrigerators

one (1) refrigerator with $100,000 net worth
1,500 with $150 million

Do they even have 1,500 electrical outlets?

Vehicles

two (2) vehicles with $100,000 net worth
3,000 with $150 million

That’s like 10 car dealerships with 300 vehicles each!

Square Footage

2,000 square foot home with $100,000 net worth
3 million square foot home with $150 million

The Willis Tower in Chicago (formerly the Sears Tower) is about 4.5 million square feet. All for one household?!

Fortunately, a $150 million brokerage account takes the same physical space as one with $100,000 - none!

May Not Be Causal

It’s important to note that these households may not be wealthier because they own different assets. It might even be the reverse!

Nonetheless:

durable goods tend to depreciate over time and
home appreciation has lagged that of stocks - especially after accounting for home size and expenses.

Owning assets which have historically risen in value faster may have helped the wealthiest households grow their net worth.

No Fluke

It’s not just the outliers! The differences grow with wealth.

Real Estate

Real estate’s proportion of net worth trends down with higher wealth:

50% for the bottom half
38% for the 50-90% wealth percentiles
24% for the 90-99% wealth percentiles
16% for the 90-99.9% wealth percentiles
9% for the top 0.1%

Physical limits likely matter more than financial limits for higher net worth households.

Larger homes and more acreage require more time and/or cost to maintain. All else equal, higher expenses slow wealth creation.

Durable Goods

Consumer durable goods’ proportion of net worth also trends down with higher wealth:

19% for the bottom half
6% for the 50-90% wealth percentiles
3% for the 90-99% wealth percentiles
1% for the 99-99.9% wealth percentiles
3% for the top 0.1%

As with real estate, the limits may be more physical than financial.

Owning some durable goods is all but required for all wealth levels:

a vehicle is a necessary form of dependable transportation across most of America
a cellphone is critical for everyday communication
a refrigerator, washer/dryer, and washing machine are needed for healthy living

There’s an interesting bump at the top 0.1%. That may be driven by some people in the top wealth bracket buying multimillion dollar luxury items like yachts and airplanes.

Equities

Corporate equities and mutual funds’ proportion of net worth rises with wealth:

4% for the bottom half
9% for the 50-90% wealth percentiles
26% for the 90-99% wealth percentiles
41% for the 99-99.9% wealth percentiles
46% for the top 0.1%

The jump is especially sizable from the 50-90% to the 90-99% categories, which may be partially caused by a relative fall in the amount of defined benefit pensions.

A bright spot here is that the largest component of wealth for the top 0.1% is publicly traded companies. Those are accessible to all! Also, public companies can often be sold more quickly than private ones.

Private Businesses

Private business’ proportion of net worth also grows with wealth levels:

2% for the bottom half
4% for the 50-90% wealth percentiles
9% for the 90-99% wealth percentiles
15% for the 99-99.9% wealth percentiles
22% for the top 0.1%

Much of the private business wealth for the top 0.1% is likely held by founders and executives of private companies. Small business owners often have much of their net worth tied up in their business.

Angel investing, venture capital, and private equity investments also play a role.

Each of these ownership forms may require an event like a business sale or Initial Public Offering (IPO) to access the capital.

Pensions

Pensions are still a surprisingly high percentage of net worth.

They’re split into two categories:

Defined benefit - companies promise to pay a certain benefit after the employee retires
Defined contribution - companies contribute a certain amount to employee retirement accounts over time

Defined Benefit

Defined benefit pensions are an especially high percentage of wealth in the 50-90% percentiles:

5% for the bottom half
17% for the 50-90% wealth percentiles
11% for the 90-99% wealth percentiles
4% for the 99-99.9% wealth percentiles
2% for the top 0.1%

That may in part be due to the types of occupations with defined benefit pensions. Important positions like teachers, first responders, and government workers often receive defined benefit pensions instead of higher base compensation.

Defined Contribution

Defined contribution pensions peak at the 90-99% wealth percentiles:

6% for the bottom half
9% for the 50-90% wealth percentiles
10% for the 90-99% wealth percentiles
6% for the 99-99.9% wealth percentiles
1% for the top 0.1%

Missing Ends

It’s striking that defined benefit and contribution pensions represent such a small percentage of wealth for both the bottom half and top 1%.

For those who’ve accumulated less wealth:

lower pay positions often lack access to pensions
pensions are being phased out and younger households may never be able to participate in one

For those who’ve accumulated more wealth:

some of those in the top 1% may have worked for - or owned - small businesses which invested in growth instead of funding a pension
high income industries like financial services and technology have prioritized other compensation like bonuses and stock grants
workers with good pensions may not have needed or been able to invest as much personally - limiting their wealth creation during what’s generally been a strong market for decades

Other

The “other” category includes all other assets, including:

cash and cash equivalents,
bonds and other debt,
cryptocurrency…

This category is noteworthy in that it’s sizable and remarkably consistent at 14-17% across the wealth group:

It Depends!

However, it’s critical to recognize ownership is not “one size fits all".

A household may make different real estate decisions if they have a:

low fixed rate 30-year mortgage or
a high 5-year Adjustable Rate Mortgage (ARM).

A small business owner may make different decisions if:

business is growing 20% a year in an growing industry or
holding steady with high profitability in a shrinking one.

Someone may make very different investments if they are:

early in their career and were recently promoted or
are just hoping to make it to retirement in two years.

Hey, thanks for reading my post on what the wealthy own.

Just a reminder, I share a lot of resources that can help you.

Sources

Board of Governors of the Federal Reserve System (US), Minimum Wealth Cutoff for the Top 0.1% (99.9th to 100th Wealth Percentiles) [WFRBLTP1311], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/WFRBLTP1311, April 1, 2024.

Board of Governors of the Federal Reserve System (US), Share of Net Worth Held by the Top 0.1% (99.9th to 100th Wealth Percentiles) [WFRBSTP1300], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/WFRBSTP1300, March 27, 2024.

Board of Governors of the Federal Reserve System (US), Household Count in the Top 0.1% (99.9th to 100th Wealth Percentiles) [WFRBLTP1310], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/WFRBLTP1310, April 1, 2024.

Board of Governors of the Federal Reserve System (US), Net Worth Held by the Top 0.1% (99.9th to 100th Wealth Percentiles) [WFRBLTP1246], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/WFRBLTP1246, April 1, 2024.

Board of Governors of the Federal Reserve System (US), Survey of Consumer Finances and Financial Accounts of the United States, https://www.federalreserve.gov/releases/z1/dataviz/dfa/, 2023: Q4.

Is a Home an Investment?

Kevin Estes — Wed, 03 Apr 2024 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll consider whether a home is an investment in a moment.

But first - here are some links you may want to save for later.

Charge Market Rent!

Now, let's get on to the blog! 😀

The American Dream

“Home” has many connotations.

Home is where the heart is.
Home is a place of warmth, comfort, and affection.
There’s no place like home.

Home is a state of mind - a place of security and belonging.

It may or may not include a stereotypical:

white picket fence,
grill, and
backyard with a dog and 1.94 children.

In many parts of the country, buying a home grants access to a great public school system.

Buying a home locks in a lifestyle. But is it an investment?

Survey Says: Yes

A poll I conducted recently on LinkedIn suggests most people do consider a home an investment:

52% “Yes”
18% “No”
31% “It depends”

The poll ran for a week (3/22-3/29/2024) and received 95 votes.

Heavy Government Support

The federal government really gets behind homeownership.

Special Tax Treatment

There are a host of special tax treatments for homeowners. They can:

deduct property taxes up to the state and local tax maximum of $10,000
deduct mortgage interest expense on the first $750,000 of debt, or up to $1 million if grandfathered
exclude up to $250,000 (single) or $500,000 (married, filing jointly) gain on the sale of a home from income tax
receive the lower capital gain tax treatment
increase the tax basis with home improvements, which may lower future taxes
treat depreciation as an expense if renting the home…

Buying Mortgages

The government creates a market for loans by buying them through two quasi-governmental agencies:

Fannie Mae - Federal National Mortgage Association (FNMA)
Freddie Mac - Federal Home Loan Corporation (FHLC)

Safety Net

Perhaps more telling than the regular structural support is what governmental agencies do in times of crisis.

Federal Reserve Targets Lower Interest Rates

One of the first responses in a recession is for the Federal Reserve to lower interest rates.

Lower interest rates encourage consumers and businesses to use debt to buy assets. That increases demand for big-ticket items and helps stabilize falling prices.

The federal funds rate has fallen after each recession since 1955:

The federal funds rate is how much big banks charge each other to lend overnight. It’s set by the market but influenced by the Federal Reserve, which uses open market operations to reach its target rate. Please see this page for more.

Great Recession

The U.S. Government Accountability Office (GAO) was tasked with tracking what the government spent in response to the Great Recession of 2007-2009.

Below are some of the GAO’s highlights:

Congress passed the American Recovery and Reinvestment Act of 2009, which included $800 billion to promote economic recovery.
In response to the 2008 housing crisis, the Treasury Department used Troubled Asset Relief Program (TARP) funding to establish 3 housing programs to help struggling homeowners avoid foreclosure and preserve homeownership.
In 2008, the federal government took control of Fannie Mae and Freddie Mac and has continued to maintain this role 13 years later… leaving taxpayers on the hook for any potential losses incurred by the two entities.

The Great Recession also led to the creation of the Consumer Financial Protection Bureau (CFPB). Here’s what that organization has to say about its founding:

In the wake of the financial crisis of 2007-2008, it became clear that the nation needed a financial regulator solely focused on looking out for consumers.
The housing finance bubble and Great Recession were fueled by reckless practices in the mortgage industry, which trapped millions of homeowners in mortgages they could not afford, and Congress created the CFPB to ensure that never happened again.
The CFPB officially opened its doors as an independent agency on July 21, 2011, with a simple message to American families and consumers: We’ve got your back.

What It Was Like

It’s hard for those who weren’t old enough to appreciated the magnitude of the housing crisis. It was a scary time.

People were “underwater” on their mortgages. A friend of mine essentially tossed his keys to his lender and walked away - trouncing his credit in the process.

I went to a closing for a few properties where the previous owners brought over $100,000 out of pocket. They owed that much more than the sale price.

Government support kept most financial institutions in business. It was a serious threat to the economy.

The sad thing is the home prices didn’t drop all that much. Based on quarterly economic data, the median home sales price fell 19%:

from $257,400 in January 2007
to $208,400 in January 2009

However, millions of people lost everything they had in their home due to leverage.

Fortunately, real estate recovered and now looks like a mere blip.

A Big Part of Net Worth

A reasonable response I often get goes:

But homes are the largest portion of net worth!

That’s true. However, it’s worth a deeper dive.

Real Estate is About 27% of Net Worth

According to the Federal Reserve, real estate was the largest component of net worth as of the fourth quarter in 2023:

27% real estate
24% corporate equities and mutual fund shares
19% pensions

Many pensions are invested in “corporate equities and mutual fund shares” so it’s likely more of consumers’ net worth is invested in stocks than real estate.

Why So Big

It’s still worth exploring why real estate represents such a large percentage of consumer net worth.

1. Home purchases typically require a 20% downpayment.

That cash adds immediate equity to the home.

2. A home is typically a household’s single largest asset.

Simply multiplying inflation by the biggest asset could result in the largest dollar gain.

Home purchases are often leveraged 5x.

Viewed another way, a 20% downpayment is 5:1 leverage.

Unfortunately - as many learned during the Great Recession - that lever works both ways. Fortunately, homes become less leveraged as mortgages are paid down.

Shrinks with Wealth

Real estate falls as a percentage at higher wealth levels.

It makes up:

> 50% of net worth for those in the bottom half of wealth
38% of net worth for those in the 50-90%
24% of net worth for those in the 90-99%
16% of net worth for those in the 99-99.9%
9% of net worth for those in the top 0.1%

Pretend It’s an Investment

Let’s presume a home is an investment. What are some of its features?

Land in Limited Supply

With rare exceptions, land is fixed.

It’s the classic example of what economists call “inelastic supply” - higher prices can’t materially increase acreage!

All else equal, rising water levels would reduce the supply of land. Continued “greenfield” housing development gobbles up farmland, further driving up land values.

Land tends to at least hold its value. Accounting practices acknowledge the value of land. It can’t be depreciated!

However, land is generally much less valuable than the structure resting on it.

Location?

There’s an old saying:

The three most important things in buying real estate are location, location, and location.

However, chasing the hot dot can burn people.

The tech hub of America - the Bay Area - of 100 years ago was Detroit.

According to Business Insider, the population of Detroit spiked:

from just over 285,000 in 1900
to over 1.5 million by 1930.

Since then, the area’s fallen on hard times. Property values have plummeted.

Outrageous Fees

Here’s what home expenses might look like:

2-5% front-end load
1-3% annual expenses
6%+ back-end load

The 2-5% of front-end expenses are for things like:

home inspection
credit check
title search
origination
underwriting
mortgage points

The 1-3% ongoing expenses are for:

property taxes
homeowners insurance
maintenance
repair

A broadly diversified stock portfolio might earn that much in dividends each year.

The 6% (or more) back-end expenses include:

prepping it for sale
staging
closing costs
real estate commissions

All of this ignores the costs of interest and relocation! For more, check out: Investing in or Betting on Real Estate?

Real Estate Performance

It’s surprisingly difficult to compare the growth of real estate with that of investments like stocks.

Home Growth

Houses have literally gotten bigger!

According to the U.S. Census, the median square footage of a new single family home completed grew over 50%:

from 1,525 square feet in 1973
to 2,299 square feet in 2002.

Higher Price Per Square Foot

Fortunately, house values have grown faster than square footage:

Median House Square Footage grew 1.5x
- from 1,525 in 1973 to 2,299 in 2022
Median House Sales Price grew 12x
- from $35,200 to $429,000

(It’s imprecise, as two different data sources were needed.)

That led to an 8x increase in median sales price per square foot:

from $23 per square foot
to $187 per square foot

(Just) Beat Inflation

According to the Federal Reserve, inflation caused the price of goods and services to grow about 7x:

from 44 in 1973
to 293 in 2022

This is based on the Consumer Price Index for All Urban Consumers (CPI-U). Also, Shelter (housing cost) is a component of CPI-U.

Less Growth Than S&P 500

Over the same time period, the S&P 500 index price grew about 39x:

from about $98 at the end of 1973
to about $3,840 at the end of 2022

The index chosen didn’t make much of a difference. I reviewed the historical prices for the Dow Jones Industrial Average (DJIA) and it wasn’t materially different.

Overall from 1973 to 2022, the estimated growth was:

8x for the U.S. house price per square foot (excluding costs)
39x for the S&P 500 index price (excluding dividends)

Applying those growth rates, the median home in 1973 worth $35,200:

grew to about $284,569 in 2022 on price per square foot alone
might have grown to nearly $1.4 million with the S&P 500 index

Potential Growth Rates

For those 49 years, the price growth rates may have been:

4.4% in U.S. house price per square foot
7.8% in S&P 500 index price (excluding dividends)

However, the difference is likely substantially bigger. As mentioned above, a home might have annual expenses of 2% a year for:

transaction costs,
repair and maintenance,
property taxes, and the like

However, the S&P 500 has paid dividends over the same stretch with very few holding costs. Those dividends may have been reinvested and improved the annual returns.

Others’ Incentives

Stacked Against Homebuyers

Essentially everyone but the buyer has a vested interest in the home selling for more:

The seller gets a higher sale price.
The realtors split a bigger commission.
The bank earns more interest on the loan while they own it.

Remember Fannie Mae and Freddie Mac? Many conforming loans are sold soon closing.

Banks get their cut and move on. It may be helpful to think of lenders as loan marketing and processing businesses.

Fancy Expensive

It’s important to watch out for creative new mortgage offerings.

One example I saw recently - an All In One Mortgage - would likely have cost the borrower dearly over the life of the loan.

For more, check out:
Could an All In One Mortgage Cost an Extra $270,000?

Friends and Family

I hate to say it but it’s important to consider the motives of friends and family members as well.

They have a vested interest in having someone they know have a big, beautiful home. It could become a community gathering place and might even become a place for them to stay if needed!

When we were getting ready to purchase our home “space for people when they come visit” was definitely on the list. The first holiday season we owned our house, we hosted six of my wife’s family members!

It may be helpful to divide the annual cost of the additional space by the number of visits. It might be cheaper to spring for a hotel room whenever they visit!

Long-Term Impact of Undercharging for Rent

Taking it one step further, children who rent a home to their parents often charge less than market return. The financial impact of undercharging for rent can be significant.

Over 20 years with a 7% annual return:

$200 a month may grow to nearly $108,000
$500 a month may grow to over $269,000
$1,000 a month may grow to over $538,000

For more, check out Charge Market Rent and Raise Rent on Parents?

Investment or Not?

Both! I consider a home an investment in a lifestyle.

When factoring in growth in square footage and annual expenses, house prices seem to have approximately tracked inflation over nearly 50 years.

Nonetheless, the decision of whether to consider a home an investment is a deeply personal one. What matters is what you think.

Hey, thanks for reading my post on whether a home is an investment.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for T-Mobile Employees in April

Kevin Estes — Mon, 01 Apr 2024 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to potential steps for April in a moment.

But first - here are some links you may want to save for later.

Transactions in Retirement Accounts Aren't Taxed… Yet

Now, let's get on to the blog! 😀

In bloom

Wow, is it ever nice here in the Pacific Northwest! The rain stopped, the sun’s out, and it’s much warmer.

It was great to connect with so many neighbors at our local Easter Egg Hunt on Saturday.

Potential steps for T-Mobile employees this month

Financial steps T-Mobile employees might take in April include:

Evaluate stock purchased at a discount
File tax return(s) or extension(s)
Make tax payment(s) or plan refund(s)
Review / rebalance investment portfolio
Replenish emergency fund
Review tax return(s)

1. Evaluate stock purchased at a discount

Employees who participated in T-Mobile’s Employee Stock Purchase Plan may be in for a welcome surprise.

ESPP Purchase

Although not final, the stock closed at about:

$140 on 9/29/2023
$163 on 3/28/2024

The six-month lookback features takes the lower of the price at the beginning and end of the six months.

15% off $140 is about a $119 purchase price.

Funds contributed may result in a gain of about 37%:

gain of $44 ($163 less $119)
divided by $119

For more, check out: How Does an ESPP Work?

Employer risk

We have a lot riding on our employers:

income,
retirement contributions,
insurance,
benefits…

Employees who live near a major office for their employer may also risk the vale of their:

home(s),
real estate investment(s), or
small business(es).

Risk and return

We love our employers. That’s why we work there!

However, on average - they’re average.

They also have additional risk because of single stock exposure. That’s the risk something bad happens to a particular company:

a competitor enters their space,
an executive makes a poor strategic decision,
someone cooks the books…

Owning a single stock has higher risk for the same expected return. On average, that’s a poor investment.

Of course, there are may possible outcomes. Volatility might be a good thing if the big move is upward!

A good investment can underperform. A bad one can do well.

For more, check out: Hold Employer Stock?

2. File tax return(s) or extension(s)

Before filing for a tax return, it’s worth double-checking for last-minute contribution opportunities.

There’s still time!

Some plans still accept contributions for 2023 until April 15, 2024.

These include:

Traditional Individual Retirement Arrangement (IRA),
Roth Individual Retirement Arrangement (IRA),
Health Savings Account (HSA), and more.

Traditional IRA contributions are often overlooked. They’re especially helpful for spouses who don’t have access to a retirement plan at work.

A Spousal IRA contribution may reduce taxable income, depending on whether:

the spouse was covered by a retirement plan at work and
the couple’s married, filing jointly income

The deduction is phased out above the following Modified Adjusted Gross Income (MAGI) limits in 2023:

$116,000 if covered by a workplace retirement plan
$218,000 if not covered by a workplace retirement plan

For more, see: Ignoring the Spousal IRA?

The time is nigh

The deadline to file personal taxes is April 15, 2024.

May businesses have a deadline of March 15 to give investors a month to include business income (such as Schedule K-1’s) in their personal returns.

A personal extension filed by April 15th pushes the filing deadline to October 15th. However, taxpayers still need to pay any tax due by April 15th to avoid underpayment interest and penalties.

3. Make tax payment(s) or plan refund(s)

In a perfect world, a taxpayer would neither owe a filing tax payment nor receive a refund. However, that rarely happens.

Bad extremes

It’s less than ideal to either:

make a sizable tax payment or
receive a significant discount.

Making a large payment is hard both psychologically and on cash flow. Underpayment can also incur interest and fees - even if paid when the tax return is filed.

Receiving a big refund is also a problem. It means someone essentially gave an interest-free loan to the government!

How to pay the tax

If a taxpayer has to pay with their tax return, it’s important to mindfully source the funds. Will they:

dip into their emergency / opportunity fund?
go on a payment plan?
sell an investment?

Selling an appreciated investment may drive up taxes this year!

If a household consistently has to pay when filing taxes, it may make sense to:

make quarterly estimated payments,
adjust their W-4 withholding with their employer, or
both.

What to do with a refund

Consider the highest and best use of a refund:

build up an emergency / opportunity fund?
pay down high interest debt?
increase deductibles?
make a payment in advance for a hefty discount?…

Will the money be needed over the next few months or can it be invested? Keep in mind that it may take weeks for the refund to arrive.

Planning cash flow is especially important for T-Mobile employees, who are often flush with cash this time of year after receiving their:

annual bonus,
merit increase,
Restricted Stock Units (RSUs), and
stock purchased through the Employee Stock Purchase Plan (ESPP).

How to invest the refund

If it can be invested, would it be best to contribute to a:

401(k) up to the company match or even contribution limit?
Employee Stock Purchase Plan (ESPP)?
traditional or Roth IRA?
Health Savings Account (HSA)?
taxable brokerage account?
small business?
real estate investment?

For more on saving and investing, check out:

Is an HSA Worth It?

If considering a real estate investment, it’s important for it to be profitable. Real estate losses are often classified as passive losses. They may not lower taxable income until sold.

Feeding a property cash every month can be particularly painful if:

income drops,
property values fall, or
both.

For more, check out: Investing in or Betting on Real Estate?

4. Review / rebalance investment portfolio

Recent events may have impacted a portfolio.

A household may have:

received a sizable bonus in February, pushing their cash balance above what’s needed,
vested shares of stock through Restricted Stock Units (RSUs) in February, and
just purchased shares of stock at a discount through the Employee Stock Purchase Plan (ESPP).

In addition, the stock market has performed well recently. The S&P 500 index has risen over 10% year to date!

Rapid appreciation in equities can leave a portfolio more aggressively invested. It’s important to check allocations are in line with their targets.

It may also make sense to ensure dividends are set up for automatic reinvestment. That’s especially important for broadly diversified investments. Interest from high-yield savings and money market mutual funds may have accumulated a significant amount of cash. Investing this additional cash may improve returns.

For more investment considerations, check out:

5 Ways to Lower Taxes Besides Donations

5. Replenish emergency fund

Now’s a great time to check up on the emergency / opportunity fund.

Recurring expenses

I generally suggest someone keep about three (3) to six (6) months of living expenses in cash or cash equivalents.

Factors that could push the household’s target up to the higher end or even higher include having:

a single income source,
variable income,
real estate,
job uncertainty, and the like.

Major purchases

It’s important to also add any upcoming expenses like:

summer vacations and camps,
home improvement projects,
compensation claw backs,
vehicle purchases,
new business ventures, and
real estate purchases.

Investments in stocks, bonds, automobiles, real estate, cryptocurrencies, and the like don’t count for an emergency / opportunity fund!

Even though they may be sold quickly, the market can move even faster.

With interest rates where they are today, high-yield savings account and money market mutual funds might pay 4% or more. Because traditional checking accounts pay very little interest, moving funds to a higher yield account might result in an extra:

$400 a year for $10,000
$2,000 a year for $50,000
$4,000 a year for $100,000

However, it’s important to keep some in a checking account for ongoing expenses. It’s critical to pay bills on time to avoid late fees, penalties, and credit score blemishes.

For more, see: Is Your Cash Starving?

6. Review tax return(s)

As important as preparing and submitting a tax return is reviewing it when the pressure’s off.

Reviewing a tax return with a professional can be insightful. Tax preparers generally have more time after April 15th!

Here are some potential questions to answer:

What were the marginal and effective tax rates?
What lowered taxes?
Were there any missed opportunities?
How can we minimize lifetime taxes?

For more, check out:

Sammy Says: 13 Things the U.S. Tax Code Encourages

Hey, thanks for reading my post on potential financial steps T-Mobile employees can take in April.

Just a reminder, I share a lot of resources that can help you.

Raise Rent on Parents?

Kevin Estes — Wed, 27 Mar 2024 17:14:24 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to whether or not to raise rent on parents in a moment.

But first - here are some links you may want to save for later.

Charge Market Rent!

Now, let's get on to the blog! 😀

Charging Below Market Rent

Adult children sometimes rent to their parents. However, they often charge less than market rent.

Doing so may impact the family’s taxes, finances, and dynamics in unintended ways.

Unaware

Neither the adult children nor their parents may know what the market rent is! Recent inflation plays a part.

The overall Consumer Price Index (CPI) has risen 20% since the start of the pandemic.

Shelter (housing) has grown even faster, at 21.4%.

The monthly Shelter CPI curve looks similar to the All items CPI curve for the last few years, only less responsive and more drawn out.

Housing expenses have been impacted not just by housing prices but also higher interest rates.

It takes time for higher interest rates to fully impact the rental market because homeowners with low fixed interest rates or who own their home outright aren’t directly impacted. Their below market interest rates give them the flexibility to charge below market rents.

However, charging less than market may be an unintentional gift from children to their parents.

Taxes

Other reasons children undercharge their parents can impact taxes. Providing something for less than its fair market value is either a gift or compensation.

Gift

The first is a bit of a nuisance.

Exclusion

Fortunately, there’s a gift tax exclusion of $18,000 per person for 2024.

Someone could:

charge up to $18,000 a year below market,
provide an individual no other gifts, and
not have to worry about gift tax.

Gift Split

A married couple can usually give double the amount - $36,000 in 2024 - to a single individual. They’ll need to complete Form 709 if they want to split the rent gift.

Double Gift Split

The annual gift tax exclusion is also per individual. A married couple who rents a home below market to two parents could rent it at $72,000 below market in 2024. Again, they’d need to complete Form 709.

Income

Other reasons children charge their parents below market include:

Well, they take care of the property.
They help rent the other side of the duplex.
It’s worth that in babysitting alone.

The IRS could interpret those all as compensation!

That might require:

issuing 1099-NEC’s
the parents recognizing ordinary income, and
following all labor laws - including minimum wage.

They’d also need to pay market wages or risk having the rent discount classified as both income and a gift!

Worse, what happens if they can no longer do the job? Firing a parent can be messy.

Financial

Charging below market rent sacrifices the children’s future for the parent’s present. Is that what the parents want?

Operating at a Loss

There’s a reason the IRS allows the costs of a rental to lower rental income. They’re economic losses to the owner(s)!

Home deteriorate over time.
Style change.
What was a nice-sized home may be considered tiny in 30 years.

A home may require major remodels and renovations to change with the times.

Regular Expenses

Common ongoing costs include:

interest payments,
property taxes,
repairs and maintenance (1% of the home value annually?)
management fees,
homeowner association (HOA) fees,
depreciation, and more!

Investing or Betting?

When adult children include all their costs, their rental often operates at a loss!

My take is that real estate which operates at a loss every year isn’t an investment. It’s a speculation. The owner’s betting the home will appreciate - often with significant leverage!

For more, check out Real Estate Investing or Betting?

Long-Term Impact

The financial impact of undercharging for rent can be significant.

Over 20 years with a 7% annual return:

$200 a month may grow to nearly $108,000
$500 a month may grow to over $269,000
$1,000 a month may grow to over $538,000

Check out Charge Market Rent for more.

Uninformed Decision

Charging below market rent can also influence the sell vs. keep decision.

Someone who rents to their parents at a low rent might assume that’s the market rent. They often have more visibility into the market value of the home!

Knowing the current value of the home without knowing the current rent can cause someone to decide to sell the property once their parents move.

However, there are major selling expenses. They may actually be ahead to continue renting the property - especially if it’s financed at a low fixed interest rate!

It’s critical to know the market rent of the property:

A quick search on sites like Zillow and Redfin can provide some decent estimates.
Consulting a local property manager or realtor may help dial in the market rent based on comparable homes nearby.

Dynamics

Charging below market rent can impact family relationships.

Undone Maintenance

Landlords who undercharge may not be able to fund necessary repairs and maintenance.

It Happens

Don’t think it happens? Our family lived a version of it!

We rented a three bedroom, two bath home in Northeast Seattle a few blocks from University Village.

Our rent was $1,600 a month - up to $800 below market at one point. You’d better believe we were low maintenance tenants.

The landlords got divorced - hopefully not because of our rent! He needed to move in the home, so we were forced out.

Afterward, he mentioned to our previous neighbors that he was surprised by the things we didn’t ask to have fixed. We justified them as not that bad. The issues were relatively minor. However, we didn’t want to rock the boat.

Dump With Character

There’s a story of a woman who lived in a “dump with character” for over 60 years. The spartan apartment had neither heat nor hot water.

The reason?

She paid $28.43 a month for a two-bedroom apartment in Greenwich Village in New York City. She never complained or moved because she couldn’t afford market rent.

Do parents deserve to live in sub-standard housing?

Big Emotions

Perhaps even more important are the big emotions and conflicting messages of renting a home below market to parents.

Parents

Parents can feel guilty about underpaying for rent. The gift may be a burden.

They also may not be jazzed about working for their children. Parent/child relationships are complicated enough without adding in employer/employee dynamics!

Real estate appreciation can hurt. Parents might feel regret on having missed out on home appreciation.

Extended

Other family members might see the preferential treatment the parents are getting and expect the same. They might feel surprise or even be upset if that doesn’t happen!

Consider the other sets of grandparents, aunts, uncles, brothers, sisters, cousins, etc. Boundaries need to be set. Clear is kind.

Children

More is caught than taught. Passing comments and interactions could clue children in that their grandparents are paying below market on their parents’ rental.

A common goal of parenting is to develop self-sufficient children. At times, parents need to be a little strict. Giving massive monthly gifts to parents sends mixed messages.

Below are a few possible interpretations young adults may have:

My parents talk tough. However, I see what they do for grandma and grandpa. My parents will take care of me no matter what.
In my family, we take care of the older generation. I need to work extra hard now to afford to take care of my parents soon.
Why do my parents love my grandparents more than me?

Without clear communication, all of these thoughts are perfectly rational!

Potential Solutions

Raising rent 20%+ could be quote the jolt for parents. Maybe just before the holidays isn’t the best time to do so?

Rent Controls

Many state and local laws cap how much rent can rise.

The allowable rent increase is currently:

These limits even apply to parents!

For rent significantly below market in rent controlled locations, it may make sense to raise it the maximum allowed by law.

Negotiate Increase

These caps may also help inform rent increase in other areas. With single-digit inflation, an increase above 10% could be challenging.

Deep empathy is needed for a rent increase for parents. It’s important for them to understand it’s not about them. The market rent has simply risen.

It can be helpful to bring facts such as:

rental estimates for the home from places like Zillow and Redfin,
growth in both the total and shelter Consumer Price Index (CPI),
property tax growth detail,
tax return details showing the rental operating at a loss, and
interest expense increases.

Buy a Home

If parents would prefer to live someone else, let them!

Sometimes, they’ve been saving to purchase a home of their own and this might inspire them to take action. That’s wonderful.

It also means the home can be touched up and rented for the fair market value almost immediately.

Of course, I don’t suggest selling the home out from under parents! However, them moving out may be the result of communicating a rent disconnect and plan to raise rent.

Nonetheless, the decision of whether to charge parents market rent is deeply personal and nuanced.

Hey, thanks for reading my post on whether to raise rent on parents.

Just a reminder, I share a lot of resources that can help you.

Will You Owe Estate Tax?

Kevin Estes — Wed, 20 Mar 2024 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to estate and inheritance taxes in a moment.

But first - here are some links you may want to save for later.

Gifts above $18,000 are generally taxable in 2024.

Now, let's get on to the blog! 😀

Good Question

A recent conversation inspired today’s article.

I was speaking with someone who’s:

single,
lives here in Washington state, and
has a net worth of about $5 million.

He had no idea that Washington has a state estate tax or that he’s already subject to it!

Based on his net worth projection, his estate may have to pay over $2 million in Washington estate tax!

What Is Estate Tax?

Estate tax is a tax someone pays after death.

It’s basically a tax on those who - in the eyes of state and federal government - accumulated too much wealth by the end of their lives.

Technically, no-one pays an estate tax. They’re dead!
However, their estate might.

Fortunately, there are exemptions! Unfortunately, those exemptions are subject to change and vary wildly by state.

Federal Estate Tax

The estate tax in the news is the federal one.

Current Exemption

For 2024, the federal estate tax exemption is $13.61 million.

That’s pretty high - especially considering married couples can double it with something called DSUEA:

Deceased
Spouse
Unused
Exemption
Amount

This allows a married couple to combine their exemptions to $27.22 million if certain conditions are met.

How We Got Here

Previously, the federal estate tax exemption was much lower and taxed at a higher rate.

Rose Over Time

The exemption grew over 5x quickly:

from $650,000 in 1999
to $3.5 million in 2009

The highest estate tax rate also fell 10%:

from 55% in 1999
to 45% in 2009

Increased to $5 Million Plus Inflation

New legislation created in 2009 and 2010 raised the exemption to $5 million.

George Steinbrenner - the owner of the New York Yankees - died as the federal estate tax was changing. His approximately $1.1 billion estate paid no federal estate tax because he passed in 2010!

Legislation adjusted the federal exemption to $5 million plus inflation after 2011.

The top-end estate tax rate trended down. It:

fell from 45% in 2009
to 35% in 2010, and then
grew to 40% in 2013 - where it is today.

More Than Doubled the Exemption

The Tax Cuts and Jobs Act of 2017 raised the exemption to $11.18 million, indexed for inflation. It’s grown to $13.61 million as of 2024.

Scheduled to Drop

However, the higher exemption only goes through the end of 2025. It’s scheduled to fall back to $5 million plus inflation since 2011 on Jan. 1, 2026.

Unified Gift and Estate Tax

The federal estate and gift tax system is combined. Taxable gifts eat into the lifetime exemption.

A married couple can double that exclusion amount by gift splitting. Together, they could give $36,000 a year to an individual before it starts to reduce either of their $13.61 million lifetime exemptions.

State Estate and/or Inheritance Tax

18 states have an estate tax, inheritance tax, or both.

States with an Estate Tax

13 states have an estate tax which are on top of the federal estate tax. Each state exempts or excludes a portion of estates from taxes.

However, only one state - Connecticut - follows the federal limit. The other states’ exemptions are lower, causing more people to be taxed.

Below is each state’s (rounded) estate tax exemption or exclusion:

States with an Inheritance Tax

Six states have an inheritance tax. Maryland has both an estate and inheritance tax.

Here’s how state inheritance taxes generally work:

beneficiaries pay the tax
only be a few thousand dollars may be excluded
tax rates depend on how closely related the beneficiary was to the deceased
the closer the relation, the lower the tax rate

The six states with an inheritance tax are:

How Much Could It Cost?

The cost of estate and inheritance taxes can be huge!

Here in Washington state, the highest estate tax rates are:

40% federal plus
20% state

That means at least a portion of someone’s estate could be taxed 60%!

How to Reduce Estate Taxes

There are many ways to reduce estate taxes. Some of them are more fun that others!

Spend It

This may be the most fun!

Maximizing Spending

Some questions I might ask myself in that situation include:

Are my long-term care costs fully funded? (Nope.)
Is my house paid off? (It’s not.)
Are there any updates I’d like to do to my home? (Several.)
Do I need to buy a new car? (Yes, ours is a decade old.)
Are there any trips I’d like to take? (Oh, yeah!)
What have I not done that I’d like to do in life? (Wait - that’s personal!)

Conducting Tests

For someone who’ll likely be subject to the federal estate tax, it may make sense to test spending more.

I like to think of every expense as a hypothesis.

My hypothesis is this expense will positively impact my life.

I test is by making the purchase.

Did the expense improve my life?

If so, I might repeat or even expand it.
If not, I’ll probably cut it.

Either way, I learn something!

Enjoy It Now

Aging takes its toll:

senses dull,
bodies weaken, and
energy fades.

The same dinner in Paris literally may not look, smell, and taste the same in 30 years.

I recently saw a tragic photo of an older couple fast asleep on a gondola ride in Venice. The fellow navigating the boat looked to a fellow gondolier with an expression of:

Now, what?

The couple may have waited too long to take that trip!

Who, Not What

At some level of wealth, spending becomes more about who than what.

Who’s invited to that:

nice dinner?
weekend trip?
European vacation?

Doing those things while everyone still has their health can create once in a lifetime experience.

Get or Stay Married

Making major life decisions for money is cringeworthy. It’s even worse with romance!

Nonetheless, the Deceased Spouse Unused Exemption Amount (DSUEA) effectively doubles the estate tax exemption.

If both spouses are U.S. citizens, they can usually gift each other as much as they like without having to worry about limits or gift tax. That opens up some other planning opportunities.

Donate It

Charitable contributions can lower estate and/or inheritance taxes. Someone must be able to afford giving to consider it.

Giving assets away to qualify for Medicaid is generally a bad idea!

The U.S. government is wise to that scheme and sifts through previous transactions for any gifts or donations. Amounts given within the last five years would delay Medicaid benefits and require medical expenses be paid out of pocket!

That could be nearly impossible if someone would otherwise qualify for Medicaid.

Contribute to a Donor Advised Fund

A Donor Advised Fund (DAF) is an interesting tool.

Benefits of a DAF

These funds can:

receive contributions - and hopefully a tax deduction - now,
grow through investing, and
be distributed to qualifying charitable organizations later.

They’re also fairly easy to set up and fund.

Someone can even contribute highly appreciated assets! Doing so avoids the capital gains they’d have to pay if they sold them.

Nonprofits don’t mind selling them for a gain because they don’t pay income taxes! Donor Advised Funds often sell single stocks right away to diversify contributions.

Contributing to a DAF can be especially helpful in years with abnormally high income.

Income tax is progressive. Funding a Donor Advised Fund can lower income for higher than usual tax rates.

Drawbacks of a Donor Advised Fund

However, a DAF is not always the best option!

For instance:

Charitable contributions work best if someone already itemizes expenses for their tax return. Otherwise, someone would need to give more before it lowers their taxes.
It would generally be better to sell investments which have fallen in value to get the tax benefit nonprofits can’t.
Holding appreciated assets until death could make sense because those assets receive a step-up in basis. That could result in less tax for heirs.
There are many other planning techniques which may be more appropriate, depending on the situation.

Give to Individuals Now

Another option is to start giving to individuals.

Exemptions and Exclusions

This is where that $18,000 per person or $36,000 per couple gift tax exclusion can come in handy. Annual gifts to to many family members can move significant wealth to future generations.

Larger gifts may also avoid gift tax such as:

tuition paid directly to an educational institution or
medical expenses paid directly to healthcare institutions.

Benefits of Giving While Alive

It could make sense to give with a warm hand instead of a cold one. The giver gets to see recipients enjoy it!

Also, gifts now might make a material impact on someone’s life. They might not need it by the time the donor passes!

Giving while still alive offers the opportunity to teach the recipient:

about the gift,
investing tips, and/or
life lessons.

It’s also helpful to learn how the recipient responds:

How do they spend it?
Did they appreciate it?
Was it a burden?
Did it impact their relationship with the giver?

Giving a little can help someone learn a lot! It’s especially helpful to do so when someone has all their cognitive abilities.

Giving now also allows the assets less time to grow. Avoiding growth can further reduce estate and/or inheritance taxes.

Give to Individuals Now

Someone may also choose to give at the end of their life.

Benefits of Bequeathing

Giving at death is especially helpful if someone with means wants to remain anonymous. Flashing cash can bring unwanted attention!

End of life giving can also significantly reduce the risk of running out of money. A long stay in a nursing or hospice facility is unlikely. However, a decade stay might cost hundreds of thousands or even millions of dollars!

End of life giving also gives assets more time to grow.

At a 7% annual return, $10 million might become:

$20 million in 10 years
$39 million in 20 years
$76 million in 30 years

Drawbacks to Bequeathing

It’s crucial to plan carefully for end of life giving.

Estate plans get stale over time:

people move to a new state,
divorces and re-marriages occur,
children or grandchildren are born…

Title and beneficiary designations are extremely important. They pass by law automatically - not based on what’s in someone’s Last Will & Testament!

Assets can get misplaced - especially if only one person knows about them! Looking at you, crypto.

Wills can be contested, which can get ugly. At death can tear a family apart.

Planning and communication are key to avoiding a mess. I consider estate planning as the ultimate act of love.

Hey, thanks for reading my post on estate taxes.

Just a reminder, I share a lot of resources that can help you.

How Does an ESPP Work?

Kevin Estes — Wed, 06 Mar 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to how Employee Stock Purchase Plans work in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

What Is an Employee Stock Purchase Plan?

An Employee Stock Purchase Plan (ESPP) offers employees the opportunity to buy company shares at a discount. That discount often depends on how the company stock does.

ESPPs are common for large tech companies. They’re usually qualified plans under section 423(c) of the federal tax code.

Non-qualified plans are less common yet do exist. This article focuses on qualified ESPPs.

How Much Is the Discount?

The maximum discount for a qualifying Employee Stock Purchase Plan is 15%.

Some companies offer less. However, the discount may also depend on whether the plan has a lookback.

Lookback Feature

An ESPP could take the lower of the price at the beginning and end of an offering period. The company “looks back” at the starting price to set the purchase price.

Say a plan offers a 15% discount and a six month lookback.

The price of the stock was:

$100 on 4/1 and
$110 on 9/30.

An employee participating in the program would buy at the lower of $100 and $110 - so $100.

The discount is then applied. The purchase price would be $85:

$100 less 15%

The lookback feature is like an option. That’s how the IRS refers to it!

It’s like employees are granted an option to buy the stock at 15% off the current price in the future.

The Best Plans

The most attractive Employee Stock Purchase Plans offer:

the maximum 15% discount,
a lookback feature, and
a long offering period.

A longer period gives the stock more time to grow before it’s purchased. With a lookback, the more a stock grows, the bigger the discount gets.

**Extreme Example:
**Say the stock doubles from $100 to $200 during the offering period. With a 15% discount, employees would purchase shares at $85.

That’s a gain of $115 on an $85 investment - a 135% gain!

How Much Can Be Contributed?

Up to 15% of gross income can be contributed to a qualified Employee Stock Purchase Plan.

For this definition, gross income includes compensation like:

salaries
wages
bonuses
commissions

However, it excludes vesting Restricted Stock Units.

There’s also an annual contribution limit of $25,000. A higher income employee might not be able to contribute a full 15%.

How Long Is the Offering Period?

The time between the offering date and the purchase date is known as the offering period:

offering date = date an employee can start contributing
purchase date = date shares are bought with the money the employee has contributed

Let’s say the company plan has a six-month offering period and the next one starts on 4/1:

offering date = 4/1
purchase date = 9/30

The offering period is 4/1 through 9/30.

Although it can be shorter or longer, ESPP offering periods are often six months.

Length is a bit of a mixed bag:

Shorter periods are easier on cash flow and make it easier for employees to participate.
Longer periods give the stock more time to grow before purchase.

How Can Someone Sign Up?

Employees can usually sign up to contribute to the Employee Stock Purchase Plan the month before the offering date.

If an offering period starts 4/1, the window to update the contribution percentage might open in early March.

The most common way to sign up is to increase the contribution percentage with the plan custodian (Fidelity, Vanguard, etc.) The default is no contribution (0%) yet can be set as high as 15% for a qualified ESPP.

How Are Purchases Made?

The amount an employee contributes to the ESPP each paycheck depends on:

how much they chose to contribute and
their gross income.

Gross income is before taxes and other deductions. Contributing 15% could lower their take-home pay much more!

After-Tax Contributions

Contributions are made after tax. They’re deposited to the ESPP instead of the employee’s checking account.

Purchase

The funds in the account at the end of the offering period are used to buy discounted shares of company stock.

The plan usually buys the most whole shares possible based on:

the account balance and
the purchase price.

Leftover funds are rolled over to the next offering period.

**Example:
**Jon earns a $100,000 base salary and is paid biweekly. Each paycheck, he grosses $3,846.15 ($100,000 / 26 pay periods).

His company offers a 15% discount with a six-month lookback.

Jon decided in early March to fully participate by contributing 15% of his salary to the Employee Stock Purchase Plan.

That period’s:

offering date was 4/1 and
the purchase was made on 9/30.

Payroll Contributions
Starting in early April, his ESPP account received $576.92 each payday ($3,846.15 * 15%). His checking account received $576.92 less with each paycheck.

Jon’s ESPP account had:

$576.92 after the first April paycheck
$1,153.84 after the second April paycheck
$1,730.76 after the first May paycheck…

After his last September paycheck, his ESPP account had a balance of $7,499.96.

Purchase
On 4/1, the company stock price was $100. Fortunately, it rose during the six months to $110 by 9/30.

To determine the purchase price, the plan administrator took 15% off the lower of the price at the beginning an end of the offering period.

That’s 15% off $100 - or $85.

Since Jon’ ESPP had $7,499.96 and the purchase price was $85, he purchased 88 shares.

He paid $7,480 ($85 * 88) for the shares. The remaining $19.96 rolled over to the next ESPP offering period.

Unrealized Gain
The shares Jon purchased are now worth $9,680 (88 * $110).

That’s an immediate gain of $2,200 ($9,680 - $7,480), or 29.4%!

He might sell them right away and pay ordinary income taxes on the entire gain.

The difference between the purchase price ($85) and the stock price on the day the stock was purchased ($110) is called the bargain element. That ordinary income would be included on Jon’s W-2. However, the gain wouldn’t be taxed Social Security or Medicare.

Cancelling Contributions

If an employee needs money before the purchase date, they may be able to cancel out of the program for the offering period. It depends on the plan.

If possible, the employee would receive cash instead of stock.

The benefit is they’ll receive much-needed cash. However, the employee would miss out on buying stock at a discount.

End of Employment

If an employee leaves the company before the purchase date - either voluntarily or involuntarily - they’ll likely receive cash, not shares. That’s not all bad as they might benefit from the extra cash then!

If someone continues to receive paychecks as part of their severance package (“garden leave”), they may stay enrolled in the ESPP. Again, it depends on the company plan.

Pros and Cons

There are many benefits and drawbacks of participating in an Employee Stock Purchase plan.

Pros

Significant upside potential
Discount lowers risk… a little
No early withdrawal penalty like with retirement plans
Bargain element is additional compensation
Discount provides leverage
A form of automatic saving
May contribute up to 15% or $25,000 each year

Cons

Not a diversified investment
Adds to employer risk (income, housing, business…)
Requires sufficient cash flow to participate
Limited ability to adjust contributions
Must remain employed until purchase date
May be subject to trading restrictions
Long holding requirements for favorable tax treatment

How Are Employee Stock Purchase Plans Taxed?

Funds employees contribute are taxed as earned income before they’re contributed to the ESPP.

Ordinary Income and Capital Gain

Normally, stock held at least a year and a day after purchase would be treated as a long-term capital gain and taxed at a lower rate. There are additional requirements for the sale of shares bought with an ESPP.

To receive partial long-term capital gains treatment, shares purchased through an ESPP need to be held:

at least two years from the start of the grant (offering date) and
one year from the purchase (purchase date).

Six Month Offering Period

For an ESPP with a six month offering period, the shares would need to be held over a year and a half after purchase.

Shares sold before that date would be considered a disqualifying disposition.

Part of the gain would likely be treated as:

ordinary income reported on the employee’s W-2 and
short-term capital gain reported on the employee’s 1099-B.

Shares generally must remain in the employee’s account with the company custodian (Fidelity, Vanguard, etc.) until they’re sold. That helps the custodian, employer, and employee file tax forms correctly!

Example 1: Sell a Month After Purchase

Let’s go back to Jon’s ESPP with a:

15% discount and
six-month lookback.

The stock did well and grew:

from $100 on 4/1 - the offering date
to $110 on 9/30 - the purchase date.

Jon’s purchase price was $85 - 15% off $100.

He then sold the shares a month later (10/30) at $115.

The sale is a disqualifying disposition because it fails both the holding requirements of over:

two years after the offering date (4/1) and
one year after purchase (9/30).

The entire discount of $25 a share ($110 - $85) is treated as ordinary income. In addition, the $5 gain since purchase is taxed as a short-term capital gain.

Example 2: Sell 19 Months After Purchase
Assume Jon instead held the stock 19 months and sold it for $130.

The sale would be a qualifying disposition because it passes both holding requirements of over:

two years after offering date (4/1) and
one year after purchase date (9/30).

In this case, only $15 of the discount ($100 - $85) is treated as ordinary income. For qualifying dispositions, the bargain element is based on the stock price on the offering date.

The remaining $30 is treated as a long-term capital gain!

Which Tax Forms Apply?

Four tax forms will likely apply to an ESPP purchase and sale:

Form 3922: purchase information
Form W-2: ordinary income (bargain element)
Form 1099-B: capital gain or loss
Form 1099-DIV: dividends

Form 3922

Perhaps the most important form is Form 3922, Transfer of Stock Acquired Through An Employee Stock Purchase Plan. It’s sent early each year to employees who participate in the plan.

Because the tax code refers to a lookback like an option, the form includes:

Date option granted = offering date
Date option exercised = purchase date
Fair market value per share on grant date = stock price on offering date
Fair market value per share on exercise date = stock price on purchase date
Exercise price paid per share = purchase price
No. of shares transferred = number of shares purchased
Date of legal title transferred = purchase date
Exercise price paid per share determined as if the option was exercised on the date shown in box 1. = purchase price if it had been purchased on the offering date

It’s critical to keep this form! The information on it is used to calculate income taxes after the stock is sold.

Tax software often assumes the employee was given the shares. However, they may only have gotten a 15% discount.

Using the details on Form 3922 can avoid paying taxes twice!

Form W-2

The definition of bargain element depends on whether the sale (disposition) is qualified or disqualified.

A disqualified disposition will likely have more of the gain taxed as ordinary income instead of long-term capital gain.

The bargain element is reported as ordinary income on the employee’s W-2.

Form 1099-B

After the employee sells the stock, they’ll receive a Form 1099-B from their custodian (Fidelity, Vanguard, etc.)

Among other things, it will include the:

purchase price and purchase date as well as the
sale price and sale date.

Depending on the sale price, the form will also report a short-term or long-term capital gain or loss.

Form 1099-DIV

If the company stock receives dividends before it’s sold, the employee will also receive a Form 1099-DIV.

Whether dividends are classified as qualified or non-qualified mostly depends on how long the shares have been held. Qualified dividends are generally taxed at the lower long-term capital gain tax brackets.

Hey, thanks for reading my post on how an Employee Stock Purchase Plan works.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for T-Mobile Employees in March

Kevin Estes — Fri, 01 Mar 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to potential steps for March in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Growing season

We may have just weathered winter’s last blast.

The season was mild here in the Pacific Northwest. While tough on the ski resorts, it’s been great for our day to day lives!

The days are getting longer, leaves are budding, plants are sprouting… spring has sprung!

Potential steps for T-Mobile employees this month

Financial steps T-Mobile employees might take in March include:

Select employee stock contribution %
Plan major purchases
Finalize last year contributions
Prepare taxes
Schedule summer Paid Time Off (PTO)

1. Select employee stock contribution %

T-Mobile offers an Employee Stock Purchase Plan (ESPP) with a:

15% discount and a
six-month lookback.

The program takes 15% off the lower of the price at the beginning and end of six months.

Example:
Mike works for T-Mobile and maxes his contribution by funding the ESPP with 15% of his gross income each paycheck.

At the end of six months, T-Mobile uses the funds to buy stock at a discount. If Mike leaves the company before the purchase, he’ll receive the cash instead.

What happens if the stock price rises from $100 to $110?

Mike would buy at $85, 15% off $100
However, the stock’s worth $110!
That's a 29% gain ($25 / $85)

What happens if the stock price falls from $100 to $90?

Mike would buy at $76.50, 15% off $90
However, the stock’s worth $90!
That’s an 18% gain ($13.50 / $76.50)

If able to sell right away, Mike might only hold the shares a day or two.

Participating in the Employee Stock Purchase Plan may offer higher returns and lower risk than holding company shares.

Maximum ESPP contribution

The maximum Employee Stock purchase plan contribution each year is:

15% of compensation, up to
$25,000 for the year.

Compensation includes gross salaries, wages, bonuses, and commissions. It doesn’t include Restricted Stock Unit vests.

Not for everyone

However, participating in the T-Mobile’s ESPP isn’t for everyone. 0% may be the right percentage!

It may not make sense for households with:

high interest debt,
living expenses higher than income, or
large upcoming purchases.

For more, check out:

2. Plan major purchases

Now is a good time to prepare for big-ticket expenses.

Remodel

Home upgrades are often easier in the summer than they are in the winter. It’s much easier to move earth once it thaws! Also, planting in spring gives landscaping more time to get established before winter.

Buy a car

The least expensive time of the year to buy a car may be the fall. That’s when the new models come out, which can result in good deals for previous year models.

Someone may be able to minimize their financing costs by preparing now:

review their most recent credit report,
pay down high balance credit,
update income (if it’s grown) with financial institutions…

Also, shopping around may save thousands on a car purchase. For more, check out: Buying a Car

Move

While it may be more expensive to buy a home in the summer, it’s easier to move. There’re also more homes on the market.

Families often prefer to move during the summer because it’s easier on children. Changing schools is hard enough without doing so during the school year!

3. Finalize last year contributions

There’s still time to make contributions for 2023!

Traditional IRA

Contributions to an Individual Retirement Arrangement (IRA) can be made up into April 15th, 2024.

It’s possible a family may earn too much to either:

receive a tax deduction on a pre-tax (traditional) IRA or
be able to contribute directly to a Roth IRA

Roth IRA

A Roth Individual Retirement Arrangement (IRA) account works differently than a pre-tax account. There’s no tax deduction for the contribution on the front end.

Contributions are taxed initially. However, they may never be taxed again if certain conditions are met!

Spousal IRA

A spouse without earned income might still be able to contribute to a traditional or Roth IRA!

The employed spouse would need to have enough income to fund all of the couple’s retirement contributions. This is known as a spousal IRA.

Whether pre-tax contributions would lower taxable income depends on:

whether the spouse was covered by a retirement plan at work and
how much the couple earned in 2023.

Here’s a quick decision tree with the limits:

Health Savings Account

If someone was on a qualifying High Deductible Health Plan (HDHP) by December 1st, 2023, they have until April 15th, 2024 to contribute to a Health Savings Account.

The primary benefit of an HSA is that contributions are triple tax advantaged. They:

lower taxable income when made,
grow tax-free, and
can be used tax-free for qualifying medical expenses

According to the IRS, the 2023 contribution limits are:

$3,850 for individual coverage
$7,750 for family coverage

For more, check out:

4. Prepare taxes

Even if taxes are self-prepared, it’s important to dedicate time to them.

Scheduling time is even more important when working with a tax professional! They’re overworked and in high demand.

Get organized and come prepared.

Tax checklist

Everyone’s busy. Things get missed - even by tax preparers!

Crashes happened frequently in the early days of aviation. Implementing simple checklists significantly improved safety.

Checklists have expanded to other areas like:

building construction
truck driving
surgery

We even use checklists when getting ready to sail!

One thing I like to do both for myself and for clients is draft a tax checklist. It lists everything I know that could impact taxes for the year!

A good place to start is the previous year’s tax documents:

Which still apply?
Are there any changes?

Creating the checklist also reminds me of other tax items!

5. Schedule summer Paid Time Off (PTO)

Now is a wonderful time to book Paid Time Off (PTO) for the summer!

Vacation rentals begin to book.
Flight prices start to rise.
Calendars get full.

Call Dibs

It’s not just the calendars of your friends and family members. You also have to worry about your coworkers’!

Summer coverage can be a struggle for many teams. People who schedule late may have limited say in which days they can take off. 😯

Claim the days which work best for you and your family now!

Use It or Lose It

T-Mobile limits how many hours can be rolled over. Hours above the limit are involuntarily donated to the company.

Full time employees can usually roll over two weeks (80 hours) at the end of the year.

During my tenure with T-Mobile, the rollover:

shrank to as little as 1 week (40 hours) and
grew to as much as 3 weeks (120 hours).

Avoid the drama. 🎭 Schedule Paid Time Off (PTO) now!

Hey, thanks for reading my post on potential steps a T-Mobile employee can take in March.

Just a reminder, I share a lot of resources that can help you.

What to Do with RSUs?

Kevin Estes — Mon, 26 Feb 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to what to do with Restricted Stock Units in a moment.

But first - here are some links you may want to save for later.

Frequent Restricted Stock Unit Vests May Be Win-Win-Win

Now, let's get on to the blog! 😀

15+ Options for Restricted Stock Units (RSUs)

What should someone do with RSUs when they vest?

The decision isn’t simply hold or spend! Planning ahead can unlock other opportunities.

Some options include:

Build an emergency fund
Max the match
Participate in the ESPP
Pay down high interest debt
Fund a Health Savings Account
Save beyond the company match
Pay in advance
Increase deductibles
Contribute to an IRA
Fund a Mega Roth
Invest in personal development
Remodel
Launch a business
Diversify investments
Do something fun

0. Keep the Shares

The default is to hold onto RSU shares after they vest.

From a tax perspective, keeping the shares is like using money in a checking account to buy company stock. Someone could sell the shares at the price when the RSUs vest and owe no additional income tax.

Employees already have a lot riding on their employer:

income,
retirement saving,
healthcare,
other company stock,
home value,
local business interests…

Employers that offer Restricted Stock Units are usually large enough to impact the local real estate and economy. It’s crucial for households that own real estate or a small business near headquarters to consider their total employer risk.

Holding employer stock compounds that risk. Is that the plan?

For more, check out:
Hold Employer Stock?
How Are RSUs Taxed?

1. Build an Emergency Fund

Another option is to sell the RSU shares and deposit the cash into an emergency / opportunity fund.

Interest rates are higher these days. Many high-yield savings and money market accounts are earning over 4%.

Having ready access to cash can significantly reduce cost. Instead of financing a home or auto repair with high-interest debt, someone could use their savings.

How Much to Have

I generally suggest people keep three (3) to six (6) months’ of living expenses in a high-yield savings or money market account. More may be needed for large upcoming expenses.

Factors which could push a household to the upper end of the range and beyond include:

single income
variable cash flow
real estate ownership
business needs
job uncertainty

For more, check out:
Is Your Cash Starving?

2. Max the Match

Many companies match employee retirement contributions:

100% on the first 3%
50% on the next 2%

If an employee contributes 5%, the employer matches 4%. That’s an 80% increase!

Low to moderate income households may also receive a saver’s tax credit.

3. Participate in the ESPP

Some employers offer employees a chance to buy discounted stock through an Employee Stock Purchase Plan (ESPP).

The plan at a couple of my employers was:

a 15% discount
with a six-month lookback.

The program took 15% off the lower of the price at the beginning and end of six months.

Example:
Mike’s company offers this plan. He maxes his contribution by funding the ESPP with 15% of his gross income each paycheck.

At the end of six months, the company uses the funds to buy stock at a discount. If he leaves the company before the purchase, he’ll instead receive the cash.

What happens if the stock price rises from $100 to $110?

Mike would buy at $85, 15% off $100
However, the stock’s worth $110!
That's a 29% gain ($25 / $85)

What happens if the stock price falls from $100 to $90?

Mike would buy at $76.50, 15% off $90
However, the stock’s worth $90!
That’s an 18% gain ($13.50 / $76.50)

If the company allows an immediate sale, Mike might only hold the shares a day or two.

Participating in the Employee Stock Purchase Plan can offer higher returns and lower risk than holding company shares.

ESPP contributions are limited to the lower of:

15% of gross compensation and
$25,000 a year.

For more, check out:
Own Stock or Participate in ESPP?
Underrated ESPPs?

4. Pay Down High Interest Debt

Paying high interest is painful.

It’s not uncommon for people to pay 20% or more on credit card debt. I think of that as a nearly certain loss.

Paying it off is like buying a bond earning 20% interest. However, it’s less risky since the corporation might default on the bond!

5. Fund a Health Savings Account

A Health Savings Account is triple tax advantaged because contributions:

lower income the year they’re made,
grow tax free, and
can be used tax free for qualifying medical expenses.

The funds can be invested for long-term growth. Also, the list of qualifying expenses is long.

The biggest drawback is that someone can only contribute if they’re on a qualifying High Deductible Health Plan (HDHP). Someone with significant medical expenses might pay a lot out of pocket.

Contribution Limits

The HSA contribution limits are relatively low. According to the IRS, the 2024 limits are:

$4,150 for an individual
$8,300 for a family

For more, check out:
Is an HSA worth it?

6. Save Beyond the Company Match

It may make sense to contribute to a retirement plan beyond the company match to:

lower taxable income and
benefit from tax-deferred growth.

Interesting Opportunity

Contributing to a pre-tax retirement account is especially attractive if someone:

is currently in a high income tax bracket and
will be in a lower tax bracket later.

A good example is a high earner who plans to retire before 60. It may make sense to do things to raise income like Roth conversions during lower income years.

Pushing income from a high income year to a future low income year could both:

reduce lifetime taxes and
delay tax payments.

Contribution Limits

For 2024, the contribution limit is $23,000 for those under 50 years old who participate in a:

401(k),
403(b),
most 457 plans, and
the federal government’s Thrift Savings Plan.

There’s an additional catch-up contribution limit of $7,500 for employees aged 50 and wiser.

These limits aren’t reduced by employer contributions.

7. Pay in Advance

Some businesses offer significant discounts for paying ahead.

Buying flights and hotel rooms months in advance can save 10% or more. They’re also still available!

Auto insurance is another good example. My auto policy offers a 28% discount for paying every six months instead of monthly!

Using Restricted Stock Units to pay ahead could save in the long-run.

8. Increase Deductibles

Another way to use vesting Restricted Stock Units to lower insurance costs is to increase deductibles.

An emergency / opportunity fund can pay these expenses. Increasing deductibles may significantly lower premiums for many types of insurance.

Of course, it’s important to factor in the risk of paying the deductible should an accident occur!

9. Contribute to an IRA

Another potential use of vesting RSUs is to contribute to an Individual Retirement Account.

Traditional IRA

Contributing to a traditional (pre-tax) IRA could:

lower current taxes and
grow tax-deferred.

As with other pre-tax retirement accounts, IRA funds are taxed when withdrawn.

Spousal IRA

There may be an opportunity for a spouse to contribute despite having no earned income. The spouse with income would just need to earn enough to cover the couple’s retirement plan contributions.

Whether contributions lower taxes depends on:

whether the spouse is covered by a retirement plan at work
how much the married couple filing jointly earns together

Contributions can be made for 2023 until April 15, 2024. Below are the income limits for IRA contributions to be deductible:

For more, check out:
Ignoring the Spousal IRA?

Roth IRA

If income or taxes are expected to rise significantly in future years, it may make sense to instead contribute to to a Roth IRA.

With a Roth account, someone pays taxes up front. The funds then grow and can be withdrawn tax-free if conditions are met.

A Roth IRA is also a helpful estate planning tool.

10. Fund a Mega Roth

Many tech workers earn income above the limit to contribute to a Roth IRA directly. They might already max out their pre-tax retirement plan contributions and want to save more.

Two-Step Process

Some employers enable workers to contribute to after-tax (not Roth) accounts. If they also allow in-service distributions, it’s possible an employee could:

contribute to an after-tax account and
convert the funds to a Roth IRA.

Doing so avoids the income restrictions. It’s known as a Mega Roth or Mega Backdoor Roth. Don’t worry. It’s perfectly legal!

Contribution Limits

After-tax contribution limits are higher. For 2024, the limit is:

$69,000
less the employee and employer contributions.

Example:
Jen’s 45 years old and:

earns $250,000 a year,
maxes her pre-tax 401(k) contributions, and
receives a 4% company match.

$33,000 would be deposited into her 401(k) for 2024:

$23,000 in employee contributions plus the
$10,000 company match.

She could contribute another $36,000 ($69,000 - $33,000) to an after-tax account and then convert it to a Roth IRA.

Convert Right Away

There can be tax complications if someone keeps funds in an after-tax account. It’s best to convert the funds to a Roth IRA as soon as possible.

Many custodians (Fidelity, Vanguard, etc.) allow someone to automatically convert after-tax contributions to a Roth IRA. It may take a phone call to set up.

11. Invest in Personal Development

Restricted Stock Unit vests can also fund personal development.

Direct

Stock proceeds can be used to pay for:

books,
subscriptions,
travel,
courses,
certifications…

Many companies offer education assistance up to the federal limit of $5,240 in 2024.

Tuition reimbursement may require an employee to:

pursue a degree in a related field,
receive approval before starting, and
earn a “C” or better in each course.

Indirect

RSU vests can also fund personal development indirectly by enabling someone to hire for some tasks. Outsourcing can help someone do less of what they:

don’t like,
aren't good at, or
both.

Focus
Outsourcing could help someone:

take a lateral role with more upside,
apply for a promotion, or
prepare to change careers.

_Wage Arbitrage
_If someone can pay $20 an hour and earn an extra $50 an hour, they net $30 an hour!

That’s wage arbitrage. Trade dimes for quarters all day.

Entrepreneurship
While this concept is helpful for working professionals, it’s critical for entrepreneurs.

Everyone has the same 24 hours in a day. How we use them defines our lives.

12. Remodel

Another option vesting Restricted Stock Units affords is to improve real estate.

Energy Efficient Upgrades

Someone’s home may be their largest personal expense.

They might lower costs by investing in:

energy efficient doors and windows,
insulation,
a heat pump,
a water heater,
roofing,
solar panels, and the like.

Qualifying energy efficient home improvements may also receive a tax credit.

Home Remodel

More significant remodels could include:

upgrading appliances,
repainting,
updating floors,
improving landscape,
adding a bathroom,
finishing a basement,
remodeling a kitchen, or
building an Accessory Dwelling Unit (ADU).

Upgrade Benefits Home improvements may:

lower living expenses,
earn a tax deduction or credit,
lower future taxes,
lift the home’s value, and
improve the living experience.

_Save on Transaction Costs
_It’s expensive to buy and sell homes! Selling one place and buying another might cost 10% of the home value or more.

Improving the home could extend how long someone lives there, saving transition costs.

Timing The highest return on investment home improvements may occur just before selling because they’ll be:

on trend and
nearly pristine.

Rental Remodel

Someone may use their vesting Restricted Stock Units to remodel an existing rental.

Relatively minor upgrades like lighting, paint, and flooring can have an outsized impact on rent.

Raise Rent Homes have appreciated and rents have risen since the pandemic. If a rental is below market, it opens up one of my favorite real estate tactics: charge market rent.

Raising rent is a win/win for the landlord:

If the tenant agrees to the increase, the property becomes immediately more profitable.
If not, the landlord can touch up the home and charge the market rate.

Other considerations For home upgrades, it may make sense to consult a realtor on the estimated return on investment.

Save the receipts! Money spent improving the property could lower current or future taxes.

For more, check out:
Charge Market Rent
Real Estate: Investing or Betting?

13. Launch a Business

Another option for vesting Restricted Stock Units is to use them to start a side business.

Income I’m a fan of multiple income sources. If someone’s able to cover their expenses with their day job, they can save what they earn in their side business!

Side income could substantially reduce how long it takes someone to reach financial independence.

A side business may also de-risk personal finances. Losing a job is less devastating if living expenses are partially covered by a side business.

Skills
People develop new skills and perspectives by owning a business or partnership. I believe that makes them even better employees!

Ramp
It can take a while for a business to get traction. I usually assume three years.

Starting a business while working can help it take off faster once someone leaves (or loses!) their full-time position.

Exploration Finally, a side business is a great way to explore options.

Someone may decide they love it and leave their full-time position on their terms. They may also learn they dislike it and choose to focus on their career.

Risks
There are certainly risks with starting a side business while employed.

Certain industries - especially reputation-based professions - frown on someone starting a business. Some employers restrict employees from engaging in other businesses.

The employer could view the side business as either a:

threat to their business or a
distraction to the employee.

The business would likely need to be disclosed to avoid conflicts of interest.

Finally, a small business is one of the riskier investments someone can make. It could also be the most rewarding.

14. Diversify Investments

One of the simplest things someone can do with RSU shares is to replace them with a more diversified investment.

As mentioned above, holding company shares after RSUs vest is like using money in a checking account to buy company stock. Employees already have a lot riding on their employer!

Average Returns We love our employers. That’s why we choose to work there!

Unfortunately - on average, they’re average.

I believe in Modern Portfolio Theory and decades of research which suggest it’s nearly impossible to consistently outperform the market.

Single Stock Exposure
There’s additional risk investing in one company:

a competitor could enter the market,
an executive could make a strategic blunder,
someone could cook the books…

Average Risk, Higher Return An investment with an average return and above average risk is a poor investment.

Sometimes a good bet loses.
Sometimes a bad bet wins.

Diversifying should - on average - maximize returns.

15. Do Something Fun

A final option is to spend vesting Restricted Stock Units on something fun.

A career is a marathon, not a sprint. Burnout is real and self-care is essential.

Paid Time Off (PTO) is given for a reason. Use it!
Schedule Your Paid Time Off

If taking a vacation is the best way for someone to recharge, I’d argue doing so is critical for their long-term career.

Benefits of a Longer Career Professionally, working longer tends to enable someone to:

deepen their skillset,
build a personal brand,
develop a professional network,
grow earnings, and
expand their options.

Financially, working longer helps someone:

extend the years they save,
give investments more time to grow,
fund more of life’s major expenses,
save on healthcare costs,
pay down their mortgage(s),
increase Social Security / pension benefits, and
limit the years of retirement they must fund.

All of these increase the odds of their money outliving them!

For more, check out:

Hey, thanks for reading my post on what to do with Restricted Stock Units (RSUs).

Just a reminder, I share a lot of resources that can help you.

Frequent Restricted Stock Unit Vests May Be Win-Win-Win

Kevin Estes — Mon, 19 Feb 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to Restricted Stock Unit vesting in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Evaluating Compensation

Companies constantly evaluate compensation to:

stay competitive in the labor market,
maximize performance, and
minimize attrition.

Restricted Stock Units (RSUs) have been especially popular with tech companies.

RSU Vest Process

The three-step Restricted Stock Unit process is:

Company grants units to employees
Restricted Stock Units vest and convert to shares
Shares are withheld for taxes or given to employees

Below is more detail on each step.

1. Company Grants Units to Employees

Employers issue stock grants to employees - usually based on title or pay level. Shares are then earned (“vest”) over time.

The nice thing is that employees don’t have to buy shares to own company stock! They simply need to accept and honor the terms of each grant.

Employment is the primary condition for Restricted Stock Units. If an employee stays with the company, they usually receive shares of company stock.

RSUs are essentially stock bonuses. Each unit typically equals one share of company stock. The value depends on the stock price when the units vest.

2. Restricted Stock Units Vest and Convert to Shares

“Restricted” is the key term.

The units typically vest over two (2) to five (5) years. As they do, the units convert to shares of company stock.

How they vest depends on the stock plan.

For instance:

Microsoft RSUs have vested quarterly over five (5) years
T-Mobile RSUs have vested annually over two (2) to three (3) years

3. Shares Are Sold for Taxes or Transferred to Employees

When an employee receives something of value from their employer, it’s compensation!

RSU vests are taxed. Specifically, they’re subject to:

Social Security,
Medicare,
federal income, and
state income taxes (if applicable).

Shares are normally sold automatically to fund employee taxes. The remaining shares pass to employee brokerage accounts.

Example:

Say someone was granted 100 RSUs on 2/25/2023. The units vest annually over three years as follows:

33 shares on 2/25/2024
33 shares on 2/25/2025
34 shares on 2/25/2026

To make the math easy, assume the stock was worth $100 on 2/25/2023. The total value of the stock grant was $10,000:

100 shares * $100

Price Rises

Pretend the stock price rises from $100 to $120 over the year.
(It just as easily could have fallen $20.)

The shares vesting 2/25/2024 would be worth $3,960:

33 shares * $120

That’s $660 more than the $3,300 they were worth when granted:

33 shares * $100

Taxes Withheld

Perhaps 10 shares will be sold and sent to the federal government to help cover taxes. $1,200 would be paid:

10 shares * $120

Shares Deposited

The remaining 23 shares worth $2,760 would be deposited into the employee’s brokerage account:

23 shares * $120

No Additional Taxes If Sold

Perhaps the best part is vested RSU shares have already been taxed! The employee might sell the shares right away and pay no additional tax.

For more detail on the tax treatment, check out:
How Are Restricted Stock Units Taxed?

Cost and Benefits for Three Stakeholders

The main groups impacted by Restricted Stock Units are:

companies
employees
shareholders

RSUs help align incentives across all three! However, each is impacted slightly differently.

Companies

Companies get:

improved talent acquisition,
lower employee turnover,
greater focus on results, and
more cross-functional collaboration

at the cost of:

paying the additional compensation and
administering the plan.

Employees

Employees get:

stock compensation,
real ownership, and
a more collaborative workplace

at the expense of:

other compensation and
having to wait.

Shareholders

Shareholders get:

employees to act more like owners,
potentially higher growth, and
possibly more profits

at the expense of:

RSU compensation,
administrative expenses, and
potential share dilution.

Different Incentives

There’s an inherent tension among the three groups.

Companies

Companies would prefer to offer more RSUs which vest over a long time to:

attract top talent,
retain employees with golden handcuffs, and
minimize the administrative burden of the plan.

Employees

Employees would prefer to receive more RSUs which vest frequently to maximize their:

income,
cash flow, and
employment flexibility.

Shareholders

Shareholders would prefer to grant fewer RSUs which vest over a long period to:

reduce cost,
limit the number of shares outstanding, and
align employee incentives with long-term profitable growth.

Unintended Consequences

The company and - by approval - shareholders use Restricted Stock Units to incentivize employee behavior. However, RSUs can lead to some unintended consequences including:

Spikey attrition
Price-driven attrition
Sawtooth stock price
Quiet quitting

Let’s review each.

1. Spikey Attrition

Large, infrequent RSU vests can lead to employee attrition spikes. Employees may wait until their next vest and bounce.

Other heavy compensation - such as commissions and bonuses - around the same time can compound the issue. If employees feel they’ll have to work a long time at lower wages, they might leave the company.

2. Price-Driven Attrition

Employees may be more prone to leave when a company’s stock price falls. With significant RSU compensation, a sudden drop could lower income for the foreseeable future.

Worse, employees who leave are often stronger performers.

3. Sawtooth Stock Price

For employees, the profit-maximizing move would be to:

help boost the share value before each vest and
then sell immediately.

That can whip the stock price around and negatively impact shareholders. This behavior can be mitigated by periodically issuing Restricted Stock Unit grants to all employees.

4. Quiet Quitting

A fourth unintended consequence occurs with underperforming employees.

When a company that issues RSUs lays an employee off, it often pays the next vest. That’s partially because the employee:

worked some of the year so could feel due some compensation and
could claim they were wrongfully terminated just before a stock vest.

A severance package with RSU vesting might convince someone who’s underperforming to stay put instead of seeking a better fit position.

Impact of More Frequent Vests

Shortening the time between vests may benefit all three stakeholder groups.

Company

Pros

A company that increases its vesting frequency can offer a more competitive compensation package without increasing the number of RSUs granted. Frequent vests are attractive to job candidates.

Shorter vests may also lower employee attrition. Someone who wouldn’t wait a year might wait another three or six months.

Shorter vests may also lower costs:

Companies often pay out the next vest with a layoff. Paying one quarter of RSUs in a severance package costs about a fourth an annual vest.
Shorter vesting schedules give the stock less time to rise. Employers pay half of Social Security and Medicare. Less appreciation could save the company payroll taxes.

Cons

Since each vest requires administrative support, vesting every six months instead of once a year might double the:

employee notifications,
paychecks with supplemental tax withholding, and
conversations with the plan custodian.

More moving parts increase the risk of error in any compensation model.

Finally, change takes work. The new plan would need to be:

drafted for,
presented to, and
approved by the board of directors.

The update might also require an SEC filing.

Employee

Pros

Employees may be the biggest winners of more frequent Restricted Stock Unit vests.

Shorter cycles reduce risk for employees. The chances of both employment termination and stock price volatility fall with shorter vesting periods. Employees in high turnover positions benefit most.

Earlier vests enable employees to access funds sooner to pay for things like a:

credit card payment,
home down payment, or
diversified investment.

Vesting more frequently also smooths employee cash flow. This is especially helpful in times of inflation, as employees can sell stock to pay for rising costs like:

food,
housing, and
transportation.

Cons

The biggest drawback for employees may be less “forced” saving. Bonuses paid frequently tend to be treated like guaranteed income - and spent.

A related con is the stock has less time to grow before it’s received. That’s a big deal for rapidly appreciating stocks.

Finally, an employee would likely receive fewer shares as part of a severance package. However, they’d receive more shares in the months leading up to the layoff!

Shareholder

Pros

What’s good for the company is often good for shareholders.

More frequent Restricted Stock Unit vesting may attract and keep higher caliber employees at little additional cost.

The shorter window may limit payroll tax costs due to:

fewer RSU severance payouts and
less appreciation before vesting.

Finally, the stock may become less volatile. Instead of many employees selling at once, stock sales might occur year-round.

Cons

Perhaps the biggest drawback for owners is that employees could start to view Restricted Stock Units as income instead of investments. That perspective may lead them to sell.

Shorter vesting cycles could put even more emphasis on short-term results. The company and employees might be less inclined to invest in long-term projects.

Finally, more frequent vests could dilute earnings per share. Shorter cycles put more shares in circulation, applying downward pressure on the stock price.

A Better Frequency?

The advantages of more frequent Restricted Stock Units may outweigh the costs. However, the costs and benefits are unique to each company.

Matching RSU and ESPP Cycles

More frequent RSU vests can fund many things - including company stock at a discount!

Say a company had an:

annual Restricted Stock Unit (RSU) vest and a
six-month Employee Stock Purchase Plan window.

If the company shortens its RSU vest to match the ESPP cycle, more employees might participate in the stock purchase plan.

Employees could sell their shares and use the funds to contribute to the ESPP program. Doing so might result in larger gains with less risk for employees.

For more, check out: Own Stock or Contribute to ESPP?

Hey, thanks for reading my post on how frequent stock unit vests may be win-win-win.

Just a reminder, I share a lot of resources that can help you.

Sammy Says! 13 Things the U.S. Tax Code Encourages

Kevin Estes — Mon, 12 Feb 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to what the U.S. tax code encourages in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Federal Tax Code

The U.S. government uses the tax code to:

encourage some actions
discourage others
treat taxpayers “fairly” ⚖

It seems to tell taxpayers:

Get educated
Get a job
Earn some money
Don’t earn too much
Pay medical expenses
Get married
Buy a home
Go green
Have or adopt up to three children
Invest long-term
Save for retirement
Give some away
Don’t get too rich

Each tax benefit includes additional restrictions and limitations. Consult a tax professional on your specific situation.

1. Get Educated

The government encourages continued education many ways.

American Opportunity Tax Credit

This is a credit for expenses paid for the first four years of a student’s higher education.

The credit is up to $2,500:

100% of the first $2,000 expenses
25% of the next $2,000 expenses

In 2023, the credit was phased out for incomes above:

$80,000 single
$160,000 married, filing jointly

Lifetime Learning Credit

Eligible students can earn up to a $2,000 credit per tax return for tuition and related expenses. The same expense cannot receive multiple deduction and the 2023 income limits were the same as those for the American Opportunity Tax Credit.

Federal Bond Interest Exclusion

Families that cash U.S. bonds (EE and I) in a year with tuition expenses may be able to exclude the interest from income.

Some of the many restrictions include that they’re not allowed for taxpayers with income higher than the 2023 limits of:

$106,850 single
$167,800 married, filing jointly

Student Loan Interest Deduction

Up to $2,500 of student loan interest can be deducted by the taxpayer annually. The 2023 income limits were the same as those for the federal bond interest exclusion.

Employer Tuition Reimbursement

An employer can pay up to $5,250 of an employee’s education expenses before it counts as income. As of 2020, the first $5,250 of student loans receive the same treatment.

Employers often adopt benefits which provide a tax deduction for them without increasing income for employees.

Gift Tax Exclusion

Gifts paid directly to an educational institution avoid gift taxes. Almost anyone can pay educational expenses for anyone else without having to worry about gift tax.

This is especially helpful for grandparents looking to support grandchildren. Gifts might otherwise be subject to the Generation Skipping Transfer Tax.

2. Get a Job

Payroll taxes are automatically taken out of paychecks for Social Security and Medicare. The employer and employee each usually pay the federal government:

6.2% for Social Security, up to a maximum employee income level
1.45% toward Medicare, with no income limit

A solopreneur pays both halves! They pay 15.3% in payroll taxes until they reach the Social Security cap. This is known as self-employment tax.

It’s not the government’s intent to discourage entrepreneurship. After all, it just wants to get paid!

Nonetheless, payroll taxes for employee compensation is 7.65% compared with 15.3% for self-employment income.

The tax code encourages someone to earn at least some money a variety of ways.

Standard Deduction

The standard deduction ensures lower earners pay no federal taxes other than payroll taxes for 2024 up to:

$14,600 single
$29,000 married, filing jointly

Earned Income Tax Credit

There’s also an Earned Income Tax Credit which reduces taxes for families with low and moderate incomes. It depends on income and number of children. A family with three or more qualifying children could receive up to a $7,430 credit in 2023.

The income limits for 2023 were:

No children: $17,640 single and $24,210 married, filing jointly
1 child: $46,560 single and $53,120 married, filing jointly
2 children: $52,918 single and $59,478 married, filing jointly
3+ children: $56,838 single and $63,398 married, filing jointly

Families who make more don’t receive the Earned Income Tax Credit.

4. Don’t Earn Too Much

The U.S. tax code discourages earning high income many ways.

Progressive Income Tax Brackets

Federal tax brackets are progressive:

The more you make,
the more they take.

However, tax brackets are often misunderstood.

Someone only pays a higher tax bracket on the income above the previous bracket. A raise is taxed at a higher rate yet doesn’t really impact how much tax is paid on the rest of the income. A taxpayer’s overall tax rate is lower than their marginal tax rate.

Deductions and Credits Phased out by Income

Another way the income tax system is progressive is in how deductions and credits are eliminated for higher earners. Additional taxes may also apply.

Benefits lost at higher incomes include:

$17,640 - $56,838 single; $24,210 - $63,398 married, filing jointly
Lose Earned Income Tax Credit

$36,500 single; $73,000 married, filing jointly
Lose Saver's Credit

$44,625 single; $89,250 married, filing jointly
Lose 0% Long-Term Capital Gains Rate

$80,000 single; $160,000 married, filing jointly
Lose American Opportunity Tax Credit
Lose Lifetime Learning Credit

$83,000 single; $136,000 married, filing jointly
Lose Traditional IRA Deduction if covered by a workplace retirement plan

$106,850 single; $167,800 married, filing jointly
Lose Federal Bond Interest Exclusion
Lose Student Loan Interest Deduction

$228,000 married, filing jointly
Lose Traditional IRA Deduction if not covered by a workplace retirement plan but spouse is

$150,000 single; $300,000 married, filing jointly
Lose Electric Vehicle Tax Credit

$200,000 single; $250,000 married, filing jointly
Pay additional 3.8% Net Investment Income Tax

$200,000 single; $400,000 married, filing jointly
Lose Child Tax Credit

$492,300 single; $553,850 married, filing jointly
Lose 15% Long-Term Capital Gains Rate

5. Pay Medical Bills

The government has a vested interest in taxpayers saving for and paying their medical bills. One estimate is 29% of government spending - nearly $2 trillion - was for healthcare expenses in 2023.

Healthcare Flexible Spending Account (FSA)

Employees are allowed to reduce income tax up to $3,200 for 2024 by contributing to a healthcare FSA.

However, it's critical not to overfund a Flexible Savings Account. These plans are use it or lose it! If an employer plan allows, the most that can be rolled over from 2024 to 2025 is $640.

Health Savings Account (HSA)

A Health Savings Account isn’t use it or lose it! Even if an employee leaves the employer, they can take the account with them. It's portable.

A Health Savings Account is also triple tax advantaged in that contributions:

lower taxable income the year contributed
grow tax-free
can be used tax-free for qualified medical expenses

The gotcha here is that someone has to be on a qualified High Deductible Health Plan (HDHP). Someone may pay substantially more out of pocket for medical expenses because of their high deductible.

The HSA contribution limits for 2024 are:

$4,150 for an individual
$8,300 for a family

Deductible Medical and Dental Expenses

Large medical and dental expenses may also lower taxes. Someone can deduct medical and dental expenses greater than 7.5% of adjusted gross income for the year.

This is especially helpful for older Americans who may have higher expenses and limited income in retirement.

Gift Tax Exclusion

Like education expenses, medical expenses can also be excluded from gift tax. Payments need to be made directly to medical institutions for this exclusion to apply.

6. Get Married

When a couple gets married, they’ll often - though not always - pay less tax together than they would have separately. As long as the couple is married by the end of the year, they can file a joint tax return.

Standard Deduction

The 2023 married, filing jointly standard deduction is double that of the single filing status:

$13,850 single
$27,700 married, filing jointly

Tax Brackets

The 2023 married filing jointly tax brackets are also generally double that of the single tax filing status:

10% for incomes up to $11,000; $22,000 for married couples filing jointly)
12% for incomes over $11,000; $22,000 for married couples filing jointly
22% for incomes over $44,725; $89,450 for married couples filing jointly
24% for incomes over $95,375; $190,750 for married couples filing jointly
32% for incomes over $182,100; $364,200 for married couples filing jointly
35% for incomes over $231,250; $462,500 for married couples filing jointly
37% for incomes over $578,125; $693,750 for married couples filing jointly

Tax Brackets

Another benefit is higher income limits for deductions on Individual Retirement Arrangement (IRA) contributions.

If covered by a retirement plan at work, the 2023 income limits are:

$83,000 for single
$136,000 for married, filing jointly

If someone who isn't covered by a retirement plan at work yet their spouse is, the limit is $228,000 for married, filing jointly.

It's possible to contribute to someone's traditional IRA even if a spouse doesn't have earned income. The spouse has to have enough income to cover both of their contributions. This option is called a spousal IRA.

Double Benefit

Many married, filing jointly deductions and credits are also double those of single taxpayers.

Health Savings Account

The Health Savings Account 2024 contribution limits are:

$4,150 for an individual
$8,300 for a family

Other benefits can be orders of magnitude larger.

Home Gain Exclusion

If someone selling their primary residence for more than what they have into it, they may be able to exclude up to:

$250,000 of the gain if single
$500,000 of the gain if married, filing jointly

There are other limitations. The biggest one is the couple needs to have owned and lived in the location for at least 24 months out of the last five years.

Estate Tax Exclusion

Only large estates are currently subject to federal estate tax. The limit for 2024 is $13.61 million.

It's double for married couples, filing jointly. A surviving spouse can use their spouse's unused exclusion with the Deceased Spouse Unused Exclusion.

Someone who was married and passes away in 2024 could avoid estate tax on up to $27.22 million.

7. Buy a Home

The government encourages home ownership several ways.

Capital Gain

First, the IRS usually treats income earned from the sale of real estate as a capital gain.

The long-term capital gains tax rates are 0%, 15%, and 20% - depending on the taxpayer's income.

Home Gain Exclusion

Much of the gain from selling a home could avoid income tax.

If the ownership and residency requirements are met, a taxpayer could exclude up to:

$250,000 of the gain if single
$500,000 of the gain if married, filing jointly

That's a massive incentive to buy a primary residence!

Home Mortgage Interest Deduction

Interest paid on a home mortgage may lower federal taxes.

For mortgages taken out after December 15th, 2017, the maximum home loan which can be deducted is $750,000. The limit was previously $1 million.

This is an itemized deduction. Whether the interest will lower taxes depends on whether the sum of all itemized deductions is greater than the standard deduction.

Interest expense is deductible for both a primary residence and a second home.

Property Taxes

Another tax benefit of home ownership is property taxes can be deducted, up to a limit. The Tax Cuts and Jobs Act lowered the limit to $10,000 for both state and local taxes - including property taxes.

As with the home mortgage interest deduction:

it's an itemized deduction and
property taxes paid for multiple properties can lower taxable income.

8. Go Green

The government encourages some environmentally friendly upgrades.

Energy Efficient Home Improvement Credit

Energy-efficient improvements to a primary home may qualify for a tax credit up to $3,200.

The credit is 30% of qualified expenses, including:

qualified energy efficiency improvements,
residential energy property expenses, and
home energy audits.

Additional limits apply such as:

$1,200 for energy property costs and home energy efficient home improvements
$250 per door and $500 total
$600 for windows
$150 for home energy audits

Residential Clean Energy Credit

There’s a tax credit of up to 30% for new, qualified energy property installed on a home can receive a federal tax credit.

These are things like:

Solar electric panels
Solar water heaters
Wind turbines
Geothermal heat pumps
Fuel cells
Battery storage technology

Electric Vehicle Tax Credit

A taxpayer may receive a $7,500 credit for the purchase of a new, qualified plug-in electric vehicle or fuel cell electric vehicle.

Restrictions apply, including a maximum modified adjusted gross income of:

$150,000 single
$300,000 for married, filing jointly

9. Have or Adopt up to Three Children

The tax code includes several provisions for children.

Child Tax Credit

There’s a credit of up to $2,000 per child, $1,600 of which may be refundable.

The credit is eliminated with income above:

$200,000 single
$400,000 married, filing jointly

Child and Dependence Care Credit

Dependent care expenses can receive a credit up to:

$3,000 for one qualifying individual
$6,000 for two or more qualifying individuals

The government wants parents to work

Earned Income Tax Credit

The earned income tax credit depends on the number of children:

No child - up to $600
One child - up to $3,995
Two children - up to $6,604
Three or more children - up to $7,430

Adoption Credit

Up to $15,950 per child can be credited for adoption fees and expenses.

The credit is non-refundable. However, an unused credit can be carried forward for up to five years.

10. Invest Long-Term

The U.S. government promotes long-term investing. Unlike some other countries, it has a lower tax rate for investments held at least a year and a day.

Long-Term Capital Gain

The long-term capital gains rates are 0%, 15%, and 20% and depend on taxable income. For 2023, the rates were:

0% for up to $44,625 and $89,250 married, filing jointly
15% for $44,626 to $492,300 single and $89,251 to $553,850 married, filing jointly
20% for taxable incomes above that

Net Investment Income Tax

There’s also a 3.8% surtax for taxpayers with investment income whose total income are above lower limits.

The surtax applies to taxpayers with income above:

$200,000 single
$250,000 married, filing jointly

These limits are not adjusted for inflation - meaning more Americans will likely be subject to this additional tax over time.

11. Save for retirement

The federal government encourages people to save for retirement in many ways.

It lets taxpayers reduce income by contributing to a pre-tax retirement account. Essentially, the government:

gives a tax break initially,
allows the investments to grow without being taxed, and
then taxes the distributions.

Traditional Retirement Accounts

The regular contribution limit for 2024 is $23,000 for plans like:

401(k)
403(b)
457(b)
Thrift Savings Plan

There's an additional catch-up contribution of $7,500 for those at least 50 years old.

Individual Retirement Account

Apart from employer plans, the traditional IRA offers a similar pre-tax saving option. However, the limits are much lower:

$7,000 regular contribution limit
$1,000 catch-up for those age 50 and older

Roth Accounts

Unlike with the traditional retirement accounts, contributions to Roth accounts don't lower income taxes when contributed. However, the investments grow tax-free and are designed to avoid income tax when funds are withdrawn.

The Roth contributions limits are the same as the traditional versions. An individual could contribute some to Roth and some to traditional. However, the limits are combined.

Saver's Credit

The government further encourages investing with the Saver's Credit. This is an additional credit for low to moderate income taxpayers who save for retirement.

The credit is up to 50% of the contribution made and is phased out with higher income. It's eliminated altogether above:

$36,500 single
$73,000 married, filing jointly

12. Give Some Away

The federal tax code includes several provisions to encourage people to give to individuals and charitable causes.

Gift Tax Exclusions

Payments made directly to educational and medical institutions are excluded from gift tax.

If both spouses are U.S. citizens, the gifts they give each other also avoid gift taxes. There's no limit to the amount of the gifts, which unlocks some interesting estate planning opportunities.

In addition, there's an annual exclusion for gifts. Anybody can give almost anyone else a gift less than $18,000 each year without having to worry about gift tax. The amount is doubled for married couples filing jointly to $36,000.

Annual giving is a way higher wealth households can pass assets to subsequent generations and avoid the gift tax. It also lowers their net worth and could help them avoid estate taxes.

Gifts to political organizations also avoid the gift tax.

Charitable Contributions

The government encourages charitable donations by allowing some of or all of it to be tax deductible. How much is deductible depends both on the organization receiving the donation and the type of donation.

As with mortgage interest and property taxes, charitable contributions are an itemized deduction. If someone's itemized deductions already exceed the standard deduction, charitable contributions will likely lower their income taxes.

If they would otherwise use the standard deduction, part of their contribution(s) likely wouldn't lower their income. Once the itemized deductions exceed the standard deduction, charitable donations begin to lower federal income taxes.

13. Don't Get Too Rich

The U.S. federal tax system is almost entirely based on income - not wealth. Estate tax is an exception.

Federal Estate Tax

The federal estate tax excludes wealth up to the following in 2024:

$13.61 million single
$27.22 married, filing jointly

State Estate Tax

However, some states have much lower exclusions.

The limit for Oregon is only $1 million. Estates larger than that are taxed.

The limit for Washington is only $2.193 million. Estate larger than that are assessed state estate taxes.

Hey, thanks for reading my post on 13 things the U.S. tax code encourages.

Just a reminder, I share a lot of resources that can help you.

Love Future You

Kevin Estes — Mon, 05 Feb 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to how to take care of your future self in a moment.

But first - here are some links you may want to save for later.

Ignoring the Spousal IRA?

Now, let's get on to the blog! 😀

It’s Almost Valentine’s Day

You know who could use some love? Future you!

It's the time of year many people receive their annual raise and bonus, making now a prime time to revisit saving.

Raise

Given recent changes in the cost of living, many companies have made big updates to employee compensation.

Keeping Up With Inflation?

Raises need to at least keep up with inflation.

According to the U.S. Bureau of Labor Statistics, the 12-month percentage change in the Consumer Price Index ending December 2023 was 3.4%.

If someone’s raise was below 3%, it might be because they:

received a recent raise,
accepted a promotion, or
are at the top end of their pay grade.

It might also be a sign of trouble in their current position.

Automatically Save More

Raises help employees save more without thinking about it.

Example:

Let’s say Bob was earning $100,000 and received a 4% raise. He now earns a $104,000 salary. Congratulations!

Bob contributes 5% of his gross income to his pre-tax 401(k) to receive his company’s maximum match of 4%. Without any other changes, his pre-tax 401(k) contributions would rise $360 for the year.

Bob’s contributions +$200:

from $5,000, 5% of $100,000
to $5,200, 5% of $104,000

Matching contributions +$160:

from $4,000, 4% of $100,000
to $4,160, 4% of $104,000

Gain Without Pain

Raises are a great time to save more without it hurting.

Let’s say Bob bumped his pre-tax 401(k) contribution percentage from 5% to 7%. His 401(k) contributions would rise $2,440 for the year.

Bob’s contributions +$2,280

from $5,000, 5% of $100,000
to $7,280, 7% of $104,000

…plus his employer match increase of +$160.

The best thing is that Bob’s take-home pay might still rise. It could grow from $2,740 to $2,790 per biweekly paycheck.

That’s nearly $1,300 more a year to his checking account on top of $2,440 more to his 401(k). Taking home more while saving more is a win!

Easier to Max Out

Raises also make it easier to max contribution limits.

Bob is 40 years old and his employer offers a 401(k) plan. The most he can contribute to his 401(k) for 2024 is $23,000.

If he were were at least 50 years wise, he could make an extra $7,500 catch-up contribution for a total of $30,500. According to the IRS, those contributions limits are the same for 403(b) plans, most 457 plans, and the federal government’s Thrift Savings Plan. For simplicity, this article refers to 401(k) plans.

Bob’s 2023 contribution limit was a bit lower at $22,500. For him to max out, he would have needed to contribute 22.5% of his salary to the plan.

22.5% * $100,000 = $22,500

For 2024, he’d need to contribute about 22.1% to his 401(k):

22.1% * $104,000 = $23,000 (rounded)

Larger raises have an even bigger impact.

Bonus

Many companies just closed their books on a great year. Employees may receive sizable bonuses soon!

It’s important not to take bonuses for granted. An employer might pay a reduced bonus - or none at all - if things go poorly.

There’s good and bad news with bonuses:

Good - they provide significant income
Bad - they’re heavily taxed

Saving Options

There are thousands of saving options, including six tax-advantaged ones.

Company retirement plans may include:

Pre-tax 401(k)
Roth 401(k)
After-tax

Options beyond company retirement plans include:

Health Savings Account
Spousal IRA
Brokerage Account

Pre-Tax 401(k)

Saving some to a pre-tax 401(k) has three primary benefits:

reduces taxable income (and likely income tax)
gives investments more time to grow
reduces how much needs to be taken out of the biweekly paychecks to reach the annual contribution limit

Money added to a pre-tax 401(k) reduces taxable income for the year and grows tax-deferred until withdrawn. However, funds count as taxable income when distributed.

That may not be so bad! People often earn more when they work than they do in retirement. Because of the standard deduction and progressive tax brackets, it’s possible someone will pay less tax later than they would now.

A 10% penalty would apply if funds are withdrawn before the pre-tax account owner turns 59.5 - unless an exception applies.

These accounts are also subject to required minimum distributions later in life. The U.S. government essentially gets impatient. It gave a tax break when money was earned and wants the income tax before the worker passes. The current age for these minimum distributions is 73 and is projected to rise to 75 starting 2033.

Roth 401(k)

Another saving option is the Roth 401(k) - sometimes shortened to Roth(k).

The benefit of the Roth option is that someone pays income taxes now and - if withdrawals meet certain criteria - never again!

The Roth option might appeal to someone if they:

don’t need the money to fund their living expenses or high-interest debt payments,
anticipate their income will grow significantly in the future,
expect to continue to work until full retirement age, and/or
might move to a state with a higher income tax rate.

Below is a quick comparison of the Roth and pre-tax 401(k):

After-Tax

An option many employers have added recently is after-tax contributions. It’s especially helpful for higher earners looking to save on top of pre-tax contributions like:

401(k) and
Health Savings Account.

According to the IRS, the 2024 contribution limits are:

$23,000 for employee deferrals like the pre-tax 401(k)
$69,000 in total defined benefits

The company match also counts toward the $69,000 limit.

Example:

Jen is a 45 year-old who earns a $200,000 salary and a $50,000 annual bonus. Congratulations!

Jen maxes her pre-tax 401(k) contributions at $23,000. Her employer also matches $10,000 (4% of $250,000).

That leaves her $36,000 to contribute to her after-tax account:

$69,000 total defined benefits limit
less $23,000 employee contribution
less $10,000 company match

Mega Roth

Jen’s employer also allows her to move money out of her after-tax account while still employed. (The fancy term is an in-service distribution.) She can sweep those funds to a Roth IRA.

If she uses her bonus check, she may only have to do the transfer once a year. She may also set funds to be automatically transferred (converted) to her Roth IRA with a call to her company’s plan administrator (custodian).

This is known as a Mega Roth. It’s sometimes referred to as a Mega Backdoor Roth. Don’t worry! Congress blessed it.

Health Savings Account

A Health Savings Account (HSA) is a portable way for employees to save for their future healthcare expenses. If they leave the company, they can take the HSA with them! The funds aren’t “use it or lose it” like other healthcare accounts.

In addition, the contributions are triple tax advantaged:

Avoids tax on the front end
Grows tax free
Can be withdrawn tax free for qualified medical expenses

HSA funds can build over time and even be invested. Most custodians require some cash - maybe $2,000. Anything above that limit can usually be invested.

The list of qualifying medical expenses is long. It even includes premiums for:

long-term care
COBRA
Medicare

Medical expenses need not be reimbursed right away. Someone could pay out of pocket, carefully save their receipts, and submit for reimbursement much later.

The biggest drawback is that a Health Savings Account requires someone to be on a High Deductible Healthcare Plan (HDHP). If someone has significant medical expenses, they’d likely need to pay more out of pocket.

Also, the contribution limits set by the IRS are relatively small. In 2024, they’re:

$4,150 for a covered individual
$8,300 for a covered family

Spousal IRA

Another retirement plan falls outside employers altogether.

A spousal Individual Retirement Arrangement (IRA) is an account a spouse can contribute to despite earning little or no income.

If the couple is married and files a joint tax return, they may be able to:

contribute to the spouse’s account,
invest it for long-term growth, and
reduce their tax bill.

Here’s the best part: a 2023 contribution can be made until 4/15/2024! A February bonus may be the perfect time for a last-minute retirement plan contribution.

Whether it would lower taxable income depends on:

whether the spouse was covered by a retirement plan at work and
how much the couple earned in 2023.

Here’s a quick decision tree with the income limits:

Brokerage Account

Finally, it’s easy to overlook a regular brokerage account!

Funds there can be accessed right away - without penalty. They also receive tax benefits like:

Long-term capital gain for investments owned over a year
Lower tax rates for qualified dividends
Step up in basis when the account owner passes

That last point is worth a double-click.

Example

Let’s say Mike passes with $2 million - all of it in a taxable brokerage account. His estate is small enough that it avoids both federal and state estate taxes - even in Washington.

Let’s say his account was invested in stocks that did well like Microsoft, Amazon, Costco, and T-Mobile. He paid only $200,000 to buy the shares and held them for decades.

His daughter, Marie, inherits Mike’s brokerage account. Again, it’s worth $2 million and he only invested $200,000.

Marie could now sell all $2 million and pay no taxes. The $1.8 million gain would avoid tax altogether!

Hey, thanks for reading my post on how future you could appreciate the financial steps you take now.

Just a reminder, I share a lot of resources that can help you.

Potential Financial Steps for T-Mobile Employees in February

Kevin Estes — Thu, 01 Feb 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to potential steps for February in a moment.

But first - here are some links you may want to save for later.

Transactions in Retirement Accounts Aren't Taxed… Yet

Now, let's get on to the blog! 😀

Most wonderful time of the year

Forget December. The most wonderful time of the year for T-Mobile employees is February!

That’s when they:

get their raise
receive their annual bonus
vest Restricted Stock Units (RSUs)

Potential steps for T-Mobile employees this month

Financial steps T-Mobile employees might take in February include:

Update saving for raise and bonus
Schedule tax prep meeting
Gather tax forms and create checklist
Accept Restricted Stock Units and grant
Review / rebalance investment portfolio

1. Update saving for raise and bonus

The annual raise and bonus are typically communicated around Valentine’s Day. I always loved getting the good news and celebrating with my wife!

Raise

The annual merit increase is often a whole percentage.

Keeping Up With Inflation?

The most important thing about a raise is whether it kept up with inflation.

According to the U.S. Bureau of Labor Statistics, the 12-month percentage change in the Consumer Price Index ending December 2023 was 3.4%.

If someone’s raise was below 3%, it may be because they:

recently received a raise,
accepted a promotion, or
are at the top end of their pay band.

It might also be a sign of trouble in their current position.

More Saving

Raises help employees automatically save more.

Example:

Let’s say Bob was earning $100,000 and received a 4% raise. He now earns a $104,000 salary. Congratulations!

Bob contributes 5% of his gross income to his pre-tax 401(k) to receive the full T-Mobile match.

Without any other changes, his pre-tax 401(k) contributions would rise $360 for the year.

Bob’s contributions +$200:

from $5,000, 5% of $100,000
to $5,200, 5% of $104,000

T-Mobile’s matching contributions +$160:

from $4,000, 4% of $100,000
to $4,160, 4% of $104,000

Gain Without Pain

Raises are a great time to save more without feeling it.

Let’s say Bob bumped his pre-tax 401(k) contribution percentage from 5% to 7%.

His 401(k) contributions would rise $2,440 for the year!

Bob’s contributions +$2,280

from $5,000, 5% of $100,000
to $7,280, 7% of $104,000

…plus his T-Mobile match increase of +$160.

The best thing is that Bob’s take-home pay might still rise! It could grow from $2,740 to $2,790 per paycheck.

That’s nearly $1,300 more a year!

Getting more while saving more is a win!

This trick comes courtesy of my grandmother. She consistently saved half of her and my grandfathers’ raises. It worked well.

Bonus

The T-Mobile annual bonus is no joke.

Many salaried employees are on the Short-Term Incentive Plan (STIP). It has both an individual and a company component; the split varies by pay level.

Individual Bonus

The individual piece is based on the employee’s performance according to their leadership:

Above 100% is good
Below it… not so much

Individual payouts were clustered tightly at just over 100% for years. However, there was a push to add more variation as an incentive for employees to put in additional effort.

Company Bonus

The company piece is tie to T-Mobile’s overall performance. It’s based on company performance relative to a set of targets.

In good years, it’s been well over 100%.

Bonus Considerations

My wife and I never took my annual bonus for granted. We knew the company might pay a reduced bonus - or no bonus at all - if things went poorly for the company that year.

There’s good and bad news with bonus payouts:

Good - they provide significant income
Bad - they’re heavily taxed

Bonus Retirement Saving Options

Three saving options within the T-Mobile retirement plan are:

pre-tax 401(k)
Roth 401(k)
after-tax

There’s also a spousal IRA saving option outside of T-Mobile.

Pre-Tax 401(k)

Saving some of the bonus to a pre-tax 401(k) has three primary benefits:

reduces taxable income (and likely income tax)
gives investments more time to grow
reduces how much needs to be taken out of the biweekly paychecks to reach the contribution limit

The 2024 employee contribution limits are:

$23,000 for those less than 50 years old
$30,500 for those aged 50 and wiser

Roth 401(k)

Another option is the Roth 401(k) - sometimes shortened to Roth(k).

The benefit with the Roth is that someone pays the income taxes now and - if the withdrawals meet certain criteria - never pays income taxes on it again!

The Roth option might appeal to someone if they:

don’t need the money to fund their living expenses or high-interest debt payments,
anticipate their income will grow significantly in the future,
expect to continue to work until full retirement age, and/or
might move to a state with a higher income tax rate.

Here’s a quick comparison of the Roth and pre-tax 401(k) features:

After-Tax

An option T-Mobile added more recently is the after-tax contribution.

It’s especially helpful for higher income employees looking to save on top of pre-tax contributions like:

401(k) and
Health Savings Account.

According to the IRS, the 2024 contribution limits are:

$23,000 for employee deferrals like the pre-tax 401(k)
$69,000 in total defined benefits

The T-Mobile match also counts toward the $69,000 limit.

Example:

Jen is a 45 year-old who earns a $200,000 salary and a $50,000 annual bonus. Congratulations!

Jen maxes her pre-tax 401(k) contributions at $23,000. T-Mobile also matches $10,000 (4% of $250,000).

That leaves her $36,000 to contribute to her after-tax account:

$69,000 total defined benefits limit
less $23,000 employee contribution
less $10,000 company match

Since T-Mobile allows someone to move money out of their after-tax account while still employed, Jen can sweep those funds directly into a Roth IRA.

If she uses her bonus check, she may only have to do the transfer once a year. She could also set the contributions up to be automatically transferred (converted) to her Roth IRA with a call to Fidelity.

The fancy term for this is Mega Roth. It’s sometimes referred to as a Mega Backdoor Roth.

Don’t worry! Congress blessed it.

Spousal IRA

A fourth retirement plan is outside T-Mobile altogether.

A spousal Individual Retirement Arrangement (IRA) is an account a spouse can contribute to despite earning little or no income.

If the couple is married and files a joint tax return, they may be able to:

stash some cash into the spouse’s account,
invest it for long-term growth, and
reduce their tax bill.

Here’s the best part: a 2023 contribution can be made until 4/15/2024! The February bonus may be the perfect time for a last-minute retirement plan contribution.

Whether it would lower taxable income depends on:

whether the spouse was covered by a retirement plan at work and
how much the couple earned in 2023.

Here’s a quick decision tree with the limits:

For more ideas, check out the article 5 Ways to Lower Taxes Besides Donations.

Yikes - that was a lot about raises and bonuses!

However, it’s so important that it deserved some extra love. ❤️

2. Schedule tax prep meeting

Another step T-Mobile employees and their families might take this month is to schedule their tax prep conversation.

Even if taxes are self-prepared, it’s important to dedicate time to them.

Scheduling time is even more important when working with a tax professional! They’re overworked and in high demand.

Get organized and come prepared.

3. Gather tax forms and create checklist

One way to get organized is to create both a physical and digital folder for 2023 tax documents.

Physical folder

All tax documents received in the mail would ideally go right into the tax folder.

W-2: salaries, wages, and taxes withheld
Form 1095: health insurance coverage details
Form 1098: mortgage repayment, interest, and property taxes
Form 1099: has many variations
Form 3922: details on stock purchased through a qualifying stock purchase plan like T-Mobile’s Employee Stock Purchase Plan (ESPP)
Schedule K-1: income, losses, and dividends for partnerships, S corporations, trusts, and estates

Some of the most common flavors of Form 1099 are

NEC: Nonemployee Compensation (freelance income)
B: gain or loss of stock
INT: interest
DIV: dividends
R: retirement plans
T: tuition payments
MISC: miscellaneous…

A custodian (Fidelity, Vanguard, Schwab…) may include several forms in one file!

Digital folder

It’s best to save digital versions of all tax documents.

Two good options include:

download the forms directly from financial institutions
scan a copy of forms received by mail

Even if I receive a physical copy, I like to download the forms. It’s a way for me to double-check I didn’t miss anything and that I’m using the latest version.

Common places to download forms include:

Banks and credit unions for interest paid or received
Custodians for investments
Employer portal for W-2 compensation detail

Since credit card interest usually isn’t deductible, those statements rarely need to be downloaded.

However, it’s a good idea to check every other financial account for important tax documents. Streamlining the number of accounts reduces workload - especially during tax season!

Tax checklist

Everyone’s busy. Things get missed - even by tax preparers!

Crashes happened frequently in the early days of aviation. Implementing simple checklists significantly improved safety.

Checklists have expanded to other areas like:

building construction
truck driving
surgery

We even use checklists when getting ready to sail!

One thing I like to do both for myself and for clients is draft a tax checklist. It lists everything I know that could impact taxes for the year!

A good place to start is the previous year’s tax documents:

Which still apply?
Are there any changes?

Creating the checklist reminds me of other things!

My personal checklist is in Microsoft Excel. I:

start with last year’s list,
remove what’s no longer relevant, and
add new items.

As I work through the list, I cross them off and record the date accomplished.

Once all the actions are complete, I carefully review our tax return inputs with my wife. Explaining the taxes helps clarify my thinking! She also asks wonderful clarifying questions and reminds me of other tax-impacting items.

Measure twice, cut once.

4. Accept Restricted Stock Units and grant

Restricted Stock Unit vest

T-Mobile’s Restricted Stock Units (RSUs) usually vest around February 25th each year. It may take a business day or two for the TMUS shares to settle into employee accounts.

For most employees, some units are automatically sold to cover taxes. T-Mobile provides Fidelity with an estimated tax percentage. Fidelity then sells those shares and sends the proceeds to the IRS (and states) for income taxes.

There’s good, bad, and great news for employees:

Good - don’t have to manually pay the RSU taxes
Bad - receive fewer shares of TMUS
Great - may be able to sell the shares immediately and pay no additional taxes

From a tax perspective, choosing to keep the shares is the same an employee taking cash out of their checking account to purchase more company stock.

Is that what they want to do? 🤔

For more on the subject, check out:

[

Restricted Stock Unit grant

It’s important to accept stock grants as soon as they’re made available.

Even if someone is certain they’re going to leave T-Mobile, it still makes sense to accept the grant!

A variety of situations might result in a partial or complete vest:

new manager, team, department, or role,
layoff,
merger or acquisition,
employee death…

Accepting the next grant early ensures it isn’t missed.

5. Review / rebalance investment portfolio

A great time for a T-Mobile employee to rebalance their portfolio is after the annual bonus is paid and Restricted Stock Units (RSUs) vest.

It’s critical to have a 3-6+ month emergency / opportunity fund. Check out the article Is Your Cash Starving? for more.

[

Asset allocation

After prioritizing liquidity, the next step is to check the family’s investment categories are close to their target percentages.

It’s common for market performance and recent compensation to throw the allocation off balance.

For example, tech stocks have had a wonderful run recently. T-Mobile families might have too much riding on this one industry!

Asset location

The next step is to consider whether each investment is held in the right account. Check out the article Are My Assets in the Right Location? for more.

If either the portfolio allocation or asset location are off, it likely makes sense to adjust.

I hope this helps. Happy Valentine’s Day! 💝

Hey, thanks for reading my post on potential financial steps T-Mobile employees can take in February

Just a reminder, I share a lot of resources that can help you.

Ignoring the Spousal IRA?

Kevin Estes — Mon, 29 Jan 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get the spousal IRA in a moment.

But first - here are some links you may want to save for later.

I Changes Jobs. Should I Roll Over My 401(k)?

Now, let's get on to the blog! 😀

What’s a Spousal IRA?

A spousal IRA is a traditional retirement account a spouse can contribute to despite earning little or no income.

It’s an often overlooked retirement account.

Contributing to a spousal IRA may help a couple:

lower their taxable income
reduce their taxes
save for retirement

One spouse may earn a high income while the other doesn’t. Given the cost of childcare, it’s especially common for families with children.

One spouse may:

work a part-time job or
dedicate themselves to managing the household.

People Assume They’re Not Eligible

Couples with income over $100,000 often assume they can’t benefit from these accounts.

It mostly depends on whether the spouse is covered by a retirement plan at work.

No Income

If a spouse doesn’t earn income, they’re probably not covered by a workplace plan.

However unlikely, it’s possible a former employer may continue to make retirement plan contributions on their behalf!

Little Income

Lower wage and part-time positions have less access to retirement plans.

According to a study done in March 2023 by the U.S. Bureau of Labor Statistics, civilian access to retirement benefits varies by income:

Someone with a wage in the top 10% is about two and a half times more likely to have access to workplace retirement benefits than someone in the bottom 10%! 😮

If someone wanted to reduce wealth inequality, this seems like a good place to start.

Are Spousal IRA Contributions Deductible?

Whether a spousal IRA contribution will reduce taxable income depends on:

whether the spouse is covered by a retirement plan at work
how much the married, filing jointly couple earns

Spouse Covered by a Retirement Plan at Work

The married filing jointly income limit if the spouse is covered by a retirement plan at work is:

2023: $136,000, and it’s phased out starting at $116,000
2024: $143,000, and it’s phased out starting at $123,000

Spouse NOT Covered by a Retirement Plan at Work

The married filing jointly income limit if the spouse is NOT covered by a retirement plan at work is:

2023: $228,000, and it’s phased out starting at $218,000
2024: $240,000, and it’s phased out starting at $230,000

The income used for these limits is Modified Adjusted Gross Income (MAGI).

Income Requirement

Wait, wouldn’t the spouse need earned income?

Nope! As long as the working spouse has enough income to cover their retirement plan contributions AND those of their spouse, they’re fine.

Let’s say someone earns $200,000. Their spouse takes care of their two young children and doesn’t have earned income.

No problem! The stay at home dad could still contribute to a traditional IRA and get a deduction on their joint tax return.

The maximum 401(k) employee contribution in 2023 was $22,500. That leaves $177,500 ($200,000 - $22,500) to contribute to the traditional IRA.

That Was So Last Year

Why do you keep talking about 2023?

Trust me. I didn’t celebrate the New Year so hard that I forgot it happened!

A cool thing about IRA contributions? Americans have until their tax filing deadline to contribute for the previous year.

A 2023 contribution can be made up to 4/15/2024!

A couple might still be able to grow their retirement account(s) and their upcoming tax refund. They would need to specify 2023 for the traditional IRA contribution.

Account Ownership

Who owns the account?

The “Individual” in “Individual Retirement Arrangement” matters. They aren’t owned jointly.

Regardless of who contributes funds to the account, the person whose name is on the account owns it.

Age Is Irrelevant

Isn’t there a limit on how old someone can be and contribute to an IRA?

Not anymore!

The limit used to be 70.5. However, that limit was removed for 2020 and later.

There also isn’t a minimum age requirement. A teen who works a summer job could contribute (or have a parent contribute) to their Roth or traditional IRA account!

Contribution Limits

Isn’t the amount that can be contributed low?

The maximum contribution for traditional (and Roth) IRA for those 50 years old and younger is:

$6,500 for 2023
$7,000 for 2024

Someone who’s at least 50 years old can make an extra $1,000 catch-up contribution.

True - that’s far below the employee 401(k) contribution limit of:

$22,500 for 2023
$23,000 for 2024

However, it’s well above the individual limits for another attractive option - the Health Savings Account (HSA):

$3,850 for 2023
$4,150 for 2024

Roth vs. Traditional

As good as the traditional IRA is, there may be a better option in some situations.

Unlike traditional IRA contributions, Roth contributions don’t lower taxable income for the year they’re made.

However, funds withdrawn from a Roth IRA aren’t taxed if criteria are met.

Lowers Taxable Income the Year Contributed

With a traditional IRA, contributions generally lower taxable income for the year. However, they won’t be deductible if income exceeds the limits.

Roth IRA contributions don’t reduce taxable income in the year they’re made.

Grows Tax Advantaged

Fortunately, neither traditional nor Roth IRA accounts are taxed annually:

Traditional IRA accounts typically grow tax-deferred
Roth IRA accounts typically grow tax-free

This saves on both the hassle and tax cost. In addition, interest and dividends earned in those accounts are reinvested. They may start to grow exponentially!

Two major exceptions are:

required minimum distributions and
inheritance.

We’ll explore those later.

Withdrawals are Tax-Free

Because the Roth IRA account owner paid taxes on the front end, they may never be taxed again! Withdrawals will be tax-free if certain requirements are met.

A common metaphor is a fruit tree. Is the seed or fruit taxed?

With a traditional IRA, the seed is not taxed yet the fruit is.
It’s the opposite for a Roth IRA. The seed is taxed and the fruit isn’t.

Roth IRA withdrawals come out in the following order:

Contributions - can be withdrawn tax and penalty free at essentially any time.
Conversions - generally need to be withdrawn at least five years after they’re converted and after someone turns 59.5.
Earnings - would be taxed if withdrawn either less than five years after the account was funded or before age 59.5.

Unless an exception is met, a 10% penalty would apply if contributions and/or earnings are withdrawn before age 59.5. The same penalty applies to early traditional IRA withdrawals.

Requires Minimum Distributions (RMDs)

The U.S. Government gets impatient with traditional IRAs. Someone received a tax break year or even decades ago.

It’s time to pay!

Many people would prefer to never take money out of their traditional IRA accounts. The IRS forces them to with Required Minimum Distributions (RMDs).

The government would prefer to have traditional IRA owners distribute their entire balance before they die.

How much must be withdrawn each year is based on age. The older someone is, the larger the percentage they must take out each year. It’s based on life expectancy tables.

People are now living longer. Fortunately, the age someone must start taking Required Minimum Distributions (RMDs) has also increased.

The current age is 72.
However, it’s planned to rise to 75 by 2033.

Typically, people subject to Required Minimum Distributions (RMDs) have done well. They don’t really need to use these retirement accounts to fund their living expenses.

Roth IRAs aren’t subject to annual Required Minimum Distributions.

That makes sense! The government received its taxes years ago.

Roth Use Cases

There are many potential scenarios for Roth IRA contributions, including:

Income Expected to Rise: Younger workers tend to earn less than they will later. Since tax rates are progressive, it may make sense to pay the taxes now instead of later.
No State Income Tax: Earners who live in an income tax free state like Texas or Washington and plan to move might be ahead to pay the income taxes now. Doing so could avoid state income taxes later!
Inheritance: If someone were to leave a traditional IRA to a family member when they pass, that person would have to pay income taxes! The timing could be especially bad if the heir is in their peak earning years. Inherited Roth IRA aren’t really subject to income taxes.

Other Cash Needs

Someone needs to be able to contribute to an IRA.

Other things which often take priority include:

living expenses - including child support and alimony
taxes - especially back taxes
high interest credit debt
business expenses
emergency fund
insurance premiums
matched retirement plan contributions
discounted stock purchases…

Everyone’s situation is unique.

Must Be Eligible

This assumes the couple can contribute to a Roth IRA!

Unlike with a traditional IRA, the limits don’t depend on whether the spouse is covered by a retirement plan at work. What matters is the couple’s income.

The Roth IRA income limits for a married couple filing jointly are:

2023: $228,000, and it’s phased out starting at $218,000
2024: $240,000, and it’s phased out starting at $230,000

It’s Worth Checking

Even if previously unable to contribute to a Roth IRA or deduct a traditional IRA contribute, it’s worth checking. Things change!

Hey, thanks for reading my post on the spousal IRA.

Just a reminder, I share a lot of resources that can help you.

Your Last Career Will Be Investor

Kevin Estes — Mon, 22 Jan 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to your last career in a moment.

But first - here are some links you may want to save for later.

17 Investment Signs You Need a Financial Plan

Now, let's get on to the blog! 😀

Final Career

When I was in high school, a mentor said something that stuck:

No matter what you do,
your last career will be investor.

Three of the many reasons to learn how to invest include:

No one cares about your money as much as you.
People take special care of what they own.
Think of the difference between renting and owning a home. There’s pride in ownership!
If someone else cares more about your money than you, it’s likely you and your money will part ways. 😬
You know yourself best.
No one will know your dreams, goals, and preferences better than you.
You’re in the best position to use money as the tool it is to live your best life.
It costs a lot to have someone manage investments.
A typical investment management fee is 1% a year.

Someone with a:

$500,000 portfolio might pay $5,000 a year
$1,000,000 portfolio might pay $10,000 a year
$5,000,000 portfolio might pay $50,000 a year

That’s like buying a brand-new luxury car. Every. Year.
Where would you even put them?

Costs More Over Time

It usually takes time to accumulate wealth.

According to the U.S. Federal Reserve Survey of Consumer Finances, the median family net worth by age in 2022 was:

Less than 35: $39,000
35-44: $135,600
45-54: $247,200
55-64: $364,500
65-74: $409,900
75 or more: $335,600

Wealth tends to grow with age.
Investment fees typically rise as well.

Learning how to invest young could save more later!

Professionals Underperform

It’s stunning how few active managers consistently outperform the market.

According to a New York Times article:

… over a full 20-year period ending last December, fewer than 10 percent of active U.S. stock funds managed to beat their benchmarks.

Add in active management fees and active stock funds have - on average - underperformed low-cost index funds.

Think about that for a minute!

Companies who:

employ an army of highly educated (and compensated) people dedicated full-time to beating the market,
spend billions on research each year,
talk to all the right people on Wall Street…

consistently underperform basic index funds. 😯

What chance does someone with a few thousand dollars working late Wednesday night have to outperform?

Why Outsource?

Why do people outsource investment management?

It seems to be a lack of one of the three T’s:

Time
Training
Temperament

Time

People are busy. Many folks would prefer someone - OK, anything - other than make investment decisions.

That’s completely understandable.
However, would they make the same decision if they knew how much it was going to cost them?

If they streamlined their investments, would it take less time?

Training

If someone doesn’t know the difference between a stock and a bond, it could be tough to construct a portfolio!

However, these things can be learning quickly.

For instance:

If someone owns a stock, they own a tiny portion of that company. If the company earns a profit, they may receive some if through a dividend payment.
If someone owns a bond, they own a loan that a company or government owes them. They receive interest payments and will (hopefully!) get what they loaned back later.

Temperament

There’s a belief - and some research to suggest - that people tend to buy high and sell low.

When prices are rising, it’s human nature to want to buy the “can’t miss” thing.
When prices are falling, people want to sell before they lose even more.

Buying high and selling low is a bad combination.

Like Breathing?

A metaphor may help.

Millions of people have trouble breathing.

Quitting smoking might help.
Escaping city pollution by enjoying the great outdoors may as well.
Getting more exercise can improve lung capacity.
An inhaler or other medical treatment might also ease someone’s breathing.

Very few people need a ventilator to breathe for them!

Similarly, many people don’t need someone to manage their investments for them. They may just need someone to help them strengthen their investing capabilities!

Developing Investing Discipline

Becoming a good long-term investor takes discipline.
It’s a skill that takes time to develop.

There is no easy path to expertise.

Good judgment comes from experience, and experience - well, that comes from poor judgment

- A.A. Milne, creator of Winnie-the-Pooh

An expert is a person who has found out by [their] own painful experience all the mistakes that one can make in a very narrow field.

- Niels Bohr, developer of the atomic model

What to Do?

Don’t want to learn from the School of Hard Knocks?
Already have enough saved that a mistake could be costly?
Lack the time, training, or temperament to invest on your own?

Hire - and listen to - a professional!

There are advice-only planners who help people develop the skills they need to successfully manage their own money.

Prepare to Change Careers

If it’s too expense for you to hire an expert, focus on preparing for your final career. It may be helpful to start now - perhaps decades before it becomes your primary role!

Educate Yourself!

Listen to podcasts.
Read investment books.
Take the no-cost 11-episode financial education course.

Cut Back on Financial News

Moderate how much financial news you consume.
Watching those shows can cause someone to make short-term decisions which negatively impact long-term performance.

Here are some helpful tips:

If you know yesterday’s closing price for either the Dow Jones Industrial Average or the S&P 500, you’re likely listening to too much financial news.
If you’re watching a TV show with a ticker tape scrolling across the bottom, change the channel.
If your friends often talk about how their investments are performing, get new friends.

Of course, I’m kidding… a little.

Simplify and Streamline

People sometimes feel overwhelmed by their finances.

One way to reduce the workload is to have less to manage!

Checking and Savings

Instead of playing a shell-game with a half-dozen checking and savings accounts, consider paring back to:

one (1) checking and
one (1) savings account - ideally a high-yield savings account or money market fund.

Funneling more cash into and out of one account reduces volatility. It’s easier to maintain the water level in a swimming pool than in many buckets!

Doing so also makes that checking account more of a one-stop shop to check and make transactions.

For people in a committed relationship, it depends on what works best for the couple. There are many ways to combine finances. It’s more like a dimmer switch than a light switch.

Investment Accounts

I often see people with a dozen or more investment accounts. Many of them are the same type owned by the same person!

Instead, work to combine like accounts. It may be best to have one account - per person - for each account type:

brokerage account
traditional IRA (Individual Retirement Arrangement)
Roth IRA (Individual Retirement Arrangement)
employer retirement account like 401(k), 403(b), and 457(b)

From One-Man Bands to a Symphony

Good news! People have gotten the message to diversify.
Bad news! They’ve taken it too far.

I often see portfolios where every account is diversified. 🤯

Each account is acting like a one-man band - someone who plays a number of instruments simultaneously using their hands, feet, limbs, and various contraptions.

Think: Dick Van Dyke’s character in Mary Poppins.

The performance of a symphony is objectively better than that of a one-man band.

One requires an expensive ticket for admission.
The other is performed on the street.

As in an orchestra with professionals dedicated to playing one instrument, it’s best for each account to be specialized.

The (financial) instruments are then harmonized to optimize performance.

(While each account may have a specific goal, it might contain one, two, or even a handful of low-cost diversified investments.)

Below is a potential ranking of how aggressively accounts might be invested (least to most) as well as sample investments:

checking - cash
emergency / opportunity funds - cash or cash equivalents
brokerage - broadly diversified low-cost index stock and bond funds
traditional IRAs - low-cost index stock and bond funds
Roth IRAs and Health Savings Accounts (HSAs) - low-cost index stock funds
stock plans - individual stocks until they can be diversified

Investing Is Just Part of the Plan

Today’s topic was investing. However, investments may be only 5-10% of a comprehensive financial plan!

It’s just one of many topics - some of which may be more critical:

If you’d like to learn what else financial planning includes, check out this list of topics.

Hey, thanks for reading my post on how your last career will be investor.

Just a reminder, I share a lot of resources that can help you.

Money and Freedom on MLK Day

Kevin Estes — Mon, 15 Jan 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to money and freedom in a moment.

But first - here are some links you may want to save for later.

Own Like a Billionaire

Now, let's get on to the blog! 😀

Happy Martin Luther King, Jr. Day!

Let’s celebrate one of the best orators of all time.

A martyr who gave his life to advance civil rights.

A man who - hours before his assassination - had a friendly pillow fight in his motel room with fellow civil rights leaders.

He wasn’t even 40 years old.

Most Don’t Have It Off

Because MLK Day is a federal holiday, my daughter has always had it off school.

My wife worked in healthcare and didn’t have it off.

Unfortunately, that’s all too common. Less than half of American companies observe Martin Luther King, Jr. Day.

I also didn’t have it off initially. T-Mobile added it as a holiday years after I’d joined the company. Nonetheless, I took the day off and spent it with my daughter.

I was so thankful when T-Mobile added it as a paid holiday. The worst part wasn’t using a day of Paid Time Off (PTO). It was having a “get behind day.” Work piled up when everyone else worked and I didn’t.

Started a Tradition

When my daughter was in either first or second grade, we stumbled onto something that became an annual tradition.

I wanted her to hear Dr. Martin Luther King, Jr.s’ great “I Have a Dream” speech, so I played it for her.

However, she was confused. She was either five or six years old at the time.

Do you have a question?

It was definitional:

What does ‘captivity’ mean?

I answered and she seemed to understand. We listened to the speech a little longer.

However, there are a lot of big words in the speech. She was soon perplexed again. I paused the speech and answered her question.

We slowly worked our way through the 17-minute speech video. It took over an hour!

Then, we grabbed lunch and went to the Pacific Science Center to check out the model train exhibit.

Became an Annual Event

My daughter and I continued to study the speech the morning of MLK Day together for years.

Her questions got consistently deeper and her comments more insightful. My answers grew to provide more context. They sometimes required research!

Money and Freedom

I worked then - as I do now - in finance.

A part of the speech that resonates with me is early on when Dr. King uses debt as a metaphor for human rights.

It’s beautiful how he articulates that the lack of freedom is a debt owed by the U.S. government to all Americans.

I typically think of it the other way. Money can buy time. You can hire someone to do most tasks!

Money can also buy occupational freedom. Someone who’s saved enough to cover their living expenses for the rest of their life has achieved Financial Independence (FI).

Someone in the FI community put it this way:

I spend all my money on shiny objects.
My freedom is the shiniest object I’ve found.

Fight for Freedom

In a way, I feel I’m helping liberate people.

Saving enough to pay for all living expenses without a full-time job can feel daunting. Many give up.

They resign themselves to having to work forever.

It’s only money.
What difference does it make?
Since I’m going to have to work forever, I might as well enjoy it!

The tragedy is that thinking becomes a self-fulfilling prophecy. Money’s spent that might have been saved and invested. Instead of benefitting from interest, they wind up under its thumb.

A higher cost lifestyle also requires a larger portfolio to reach financial independence.

Such a Bore

Building wealth is boring. It’s:

watching the kids’ soccer matches instead of taking the family to a professional sporting event
contributing to a retirement plan before it can hit checking
enjoying a week in town instead of flying to France
buying a much less expensive home than the bank would finance

It’s about knowing what to accomplish and taking thousands of deliberate steps to do so.

There are no small things in finance. Every decision has an impact - good or bad - which plays out over decades.

Spend Less or Earn More?

Costs

Spending mindfully can have outsized impacts on financial outcomes because changes:

are more guaranteed,
compound over time, and
reduce the size of a portfolio needed to support them.

People are often able to impact far more costs than they realize:

challenge fraudulent charges
cut subscriptions they never use
bid different insurance companies for home, auto, etc.
increase deductibles to save premiums
receive discounts by paying expenses in advance
sell existing investments to pay off high interest debt
minimize hidden investment charges…

Income

Many people have little impact on their income. It may take years or even decades with an employer to reach higher income levels.

However, there may be things someone might do:

prepare for performance reviews
request a raise if paid less than the position’s market rate
raise rent if it’s below market
get a mentor
develop a career plan
apply for an interesting position
start a new certification program
pursue an undergraduate or graduate degree
start a side business…

Both

I find the “Spend Less!” / “Earn More!” debate comical.

Changing one often impacts the other!

spend less ➡ save more ➡ invest more ➡ earn more
earn more ➡ save more ➡ have more ➡ spend less

Do both. The forces amplify:

Hey, thanks for reading my post on money and freedom on MLK Day.

Just a reminder, I share a lot of resources that can help you.

Investing in or Betting on Real Estate?

Kevin Estes — Mon, 08 Jan 2024 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to a real estate investments in a moment.

But first - here are some links you may want to save for later.

Charge Market Rent

Raise Rent on Parents?

Now, let's get on to the blog! 😀

Experience

I grew up working in real estate.

In addition to their full-time positions, my parents designed, built, and sold our family homes.

My nights, weekends, and summers were often spent:

researching properties,
walking open houses,
reviewing floorplans,
and constructing our homes.

Later, we bought and managed an apartment complex.

When the Great Recession hit, homes in the Midwest were selling for the price of a car. We found we could:

buy and rehab the homes for $50,000 to $80,000 and
rent them for $700 to $850 a month.

We took on investors and expanded into many more properties:

single family homes,
duplexes, triplexes, quadplexes, and
commercial.

The real estate made money. I consider what I learned far more valuable.

Is It an Investment?

At the risk of oversimplifying, ask two questions to determine whether a property is an investment:

Is it primarily used for the owner’s personal enjoyment?

If so, it’s a lifestyle - not an investment.

Is it profitable?

That is - are the cash inflows consistently more than the cash outflows? If not, it’s a speculation - not an investment.

If the property consistently earns a profit, it’s an investment.

Lifestyle

Hundreds of millions of Americans own real estate. There’s nothing wrong with that!

When someone buys property for their own enjoyment, it’s a lifestyle purchase. The costs are living expenses.

Outrageous Fees

Let’s pretend for a minute that owning a personal residence was an investment. Here’s what the expenses might look like:

2-5% front-end load
1-3% annual expenses
6%+ back-end load

The 2-5% of front-end expenses are for things like:

home inspection
credit check
title search
origination
underwriting
mortgage points

The 1-3% ongoing expenses are for:

property taxes
homeowners insurance
maintenance
repair

A broadly diversified stock portfolio might earn that much in dividends each year.

The 6% (or more) back-end expenses include:

prepping it for sale
staging
closing costs
real estate commissions

All of this ignores the costs of interest and relocation!

Why Buy?

According to the U.S. Census, the homeownership rate was 66% as of the Halloween 2023 survey.

Why do roughly two thirds of American adults own a home?

According to a LendingTree survey, the primary reasons are:

59% Flexibility to do what I want with the space
58% Stability - I don’t want to have to worry about renewing a lease
49% The pride of homeownership
47% Homes typically increase in value
42% No rules against pets
35% Build wealth
28% Improves credit score over time
27% Strong ties to the community/neighborhood
24% Tax deductions
17% Can rent out the home for extra income

It’s telling that the top three and four of the top five reasons were lifestyle-related.

Principal Repayment is NOT an Expense

Unlike interest charges, property taxes, and homeowners insurance premiums, the portion of the monthly mortgage which reduces the loan balance is not an expense.

However, each monthly principal repayment is more like taking money from the left pocket and moving it to the right. It simply goes from someone’s checking account to their home equity.

Better yet, the financing portion of a traditional mortgage (principal + interest) is fixed. These payments don’t grow with inflation - making them less expensive over time in real dollars.

The principal payment still needs to be funded with cash flow!

Highly Leveraged

An element of home ownership not often discussed is leverage.

It’s rare for someone to be able to leverage an investment or speculation 5:1 at less than 10% annual interest rates.

Even if properties only rose with inflation, leverage helps magnify the growth in home equity. Higher inflation should - on average - increase home equity for borrowers.

Fixed payments and leverage are real estate’s secret ingredients.

Leverage Cuts Both Ways

During the Great Recession, millions of Americans saw their home values plummet below their mortgage value.

It created a moral hazard. Some people stopped paying their mortgage and just let the banks foreclose on their home.

How under water does someone have to be on their home to willingly wreck their credit?

How to Go from Lifestyle to Investment

A lifestyle property can be turned into an investment. The most direct way is to rent it out.

However, there are other options! Be sure to check state and local laws before pursuing any of these.

Someone could “house hack” by renting out a portion of the home:

second floor
separate wing of the house
spare bedroom

Someone may also build a smaller unit on the property. These are called Accessory Dwelling Units (ADUs). They’re especially popular in high cost of living areas where space is at a premium. Ordinances often allow them because they provide affordable housing and increase property taxes.

Short-term rentals have become especially popular with the rise of Airbnb and VRBO. Homes serve as more of an extended stay option and are especially helpful for large families visiting from out of town.

With short-term rentals, it’s critical to fully furnish and stage the property for its intended use.

Speculation

Real estate prices have appreciated nationwide. Some owners feel bullish and have purchased multiple properties - even in expensive areas.

Sustained Losses

Rent often barely cover what may be a historically low interest.

Mortgage expenses also don’t include things like:

Home Owner Association (HOA) fees
repair/maintenance costs,
property management fees,
vacancies, and
unpaid rents.

Add in depreciation and millions of landlords are reporting a tax loss every year.

Worse, these losses are often classified as Passive Activity Losses. They don’t reduce taxes until either the property turns a profit or is sold.

ARMed

Those who took out Adjustment Rate Mortgages are in an especially precarious position.

According to Freddie Mac, the average 30-year mortgage interest rate the week end 1/4/2024 was 6.62%.

Let’s say someone took out a $750,000 5-year ARM in late 2020 at 2.5%.

They’re currently paying just under $3,000 a month ($2,963) in principal and interest.

After five years (2025), they’ll have paid down $88,435 of the mortgage. The balance will be $660,565.

Let’s assume their new interest rate will be 6.5%. Their financing payment would rise nearly $1,500 a month ($1,497)!

The market rent is unlikely to jump overnight. The investment may become cash flow negative.

Location?

There’s an old saying:

The three most important things in buying real estate are location, location, location.

However, chasing the hot dot can burn people.

That’s right. The tech hub of America - the Bay Area - of 100 years ago was Detroit.

According to Business Insider, the population of Detroit spiked:

from just over 285,000 in 1900
to over 1.5 million by 1930.

Since then, the area’s fallen on hard times.

Property values have plummeted.

To Seattle!

People forget that Seattle also faced its share of tough times.

A 1971 billboard read:

Will the last person leaving Seattle - turn out the lights.

The population fell:

from 557,087 in 1960
to 493,846 in 1980.

It’s no coincidence that the grunge era started in the mid-80’s!

Fueled by tech, the population then grew to 737,015 by 2020. Population growth drove up home prices.

Microsoft, Amazon, T-Mobile, Expedia, and Tableau are homegrown. Even Bay Area companies have established presence in and around Seattle:

Meta (Facebook)
Alphabet (Google)
Apple

Why?

Because of the:

lower cost of living,
lack of income tax, and
availability of local tech talent.

From Seattle!

However, tech jobs are always on the move.

Business unfriendly policies like the head tax have resulted in employers relocating thousands of employees from Seattle to Bellevue or even further to places like Virginia and Texas.

Austin, TX is especially intriguing as it has:

a major research university,
a central location (and time zone!),
no income tax, and
lower costs than San Francisco and Seattle.

Digital companies aren’t tethered to geographic locations. Since they’re already recruiting nationally, it may be easier to attract workers to somewhere like Austin than Palo Alto at the same salary.

However, there’s no telling where their offices will move next.

Employees Scatter

The geographic flexibility of tech workers was on full display during the pandemic. The internet finally lived up to its potential by enabling seamless work from remote locations!

Employees ate up the opportunity to work from home. They even purchased more affordable homes out of town - driving up those prices.

Take Snohomish, WA - a town about 40 miles Northeast of Seattle.

According to Redfin, the median price of homes sold there nearly doubled in about two years:

from $541,250 in February 2020
to $1,008,500 in June 2022.

The median price then fell to $670,070 by December 2022, as employers pushed employees back into the office.

Why stop there? They didn’t.

West coast resort towns were invaded!

Park City, UT saw home prices dip in March 2020 - likely because of the temporary COVID-19 ski resort shutdowns.

According to Redfin, the median price of homes sold in Park City then more than doubled in a year and a half:

from $800,000 in March 2020
to $2,275,000 in December 2021.

Given tech employers’ desire to relocate somewhere less expensive and tech employees’ desire to relocate somewhere nicer, there’s no guarantee of continued appreciation in current tech strongholds.

How to Turn a Speculation into an Investment

We’ve already discussed residential housing opportunities.

Perhaps the purest form of real estate speculation is buying “unproductive” land hoping it will appreciate.

If the parcel is many acres, it might be used for farming or ranching activities. Irrigation is especially important for these endeavors and may require sufficient water rights.

Timber is common in some parts of the country. The best thing is it can be replanted!

Mineral or other deposits might provide a one-time profit.

The land’s proximity to cities could determine its uses. Some lower development cost options include:

Hunting
Camping
Pumpkin patch
Corn maze
Paintball
Driving range
Go cart track
Christmas tree farm
Billboard advertising
Equestrian arena / stables
Storage

Utilities can be especially profitable at some locations - especially wind, solar, and cell towers. The best part is the companies will make many - if not all - of the investments themselves!

Investment

To me, the definition of a real estate investment is simple:

It has to earn a profit once it’s established.

A property is established once it can generate revenue for its intended use. That’s when it is:

staged (Airbnb, VRBO, etc.)
prepared (rental)
improved for tenants (commercial)
accessible and irrigable (agriculture)

That can take a few months to a few years.

A property could also be an investment if the work done on it raises its value so much that it can be immediately sold for a profit:

build (new construction),
remodel (flip), or
teardown (and new construction).

These projects can take several years to be completed and are then sold almost immediately.

1% Heuristic

There’s a handy 1% heuristic for buying a residential rental:

Look to invest in properties where the monthly revenue is at least 1% of the total purchase price.

The monthly rent would need to be:

$2,000 a month for a $200,000 home
$5,000 a month for a $500,000 home
$10,000 a month for a $1,000,000 home…

As with any sweeping generality, the formula is no guarantee.

However, properties that exceed 1% often provide financial flexibility. They’re also rare these days.

Hey, thanks for reading my post on the difference between real estate investing and betting.

Just a reminder, I share a lot of resources that can help you.

2023 Year in Review

Kevin Estes — Sun, 31 Dec 2023 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to a review of 2023 in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

2023 Was a Busy Year! 🎢

Inflation started high and was tamed
There were widespread layoffs, especially in tech
The S&P 500 returned approximately 26.3% for the year
Billions in student loans were forgiven
Revenge spending exploded

Inflation Tamed

Inflation started 2023 higher at 6.4% in January and feel throughout the year to 3.1% by November. Here’s to hoping that higher inflation was temporary!

For those who don’t know, the Consumer Price Index (CPI) tracks a basket of goods and services over time. It covers essentially all expense categories to estimate average prices.

According to the U.S. Bureau of Labor Statistics, annual inflation was:

Annual inflation for the last three Novembers was:

6.8% in 2021
9.1% in 2022
3.1% in 2023

These increases stack on each other. The 3.1% increase was on top of 9.1% inflation last year and 6.8% the year before. Overall, prices have risen 18% in three years.

Those emerging from pandemic hibernation awaken to a world with substantially higher prices. Gas, grocery, restaurant, car, and concert prices have all risen.

Hundreds of Thousands Laid Off

Thousands of companies laid off employees in 2023.

Tech professionals were disproportionally impacted. According to Layoffs.fyi, over 260,000 tech employees were laid off in 2023.

Not included in that list was the approximately 5,000 employees laid off by T-Mobile in August. These positions were largely higher income support roles.

Some of these layoffs were for redundant positions or those added during the pandemic-fueled tech boom. Others appear to have been pre-emptive, hoping to force companies to unlock Artificial Intelligence productivity gains.

However, little of work has disappeared. It’s resulted in even heavier workloads for the remaining employees - and hard tradeoff conversations.

General panic was avoided for several reasons.

Layoffs disproportionally impacted higher earners.
The severance package for many employees was generous and facilitated career changes or early retirements.
Many of the impacted employees were able to find comparable positions within a few weeks or months.

The national unemployment rate held steady between 3.4% and 3.9% throughout 2023, per reports by the U.S. Bureau of Labor Statistics. It was 3.7% as of the latest report in November 2023.

Stocks Boomed

Inflation and layoffs are enabling corporations to:

charge more for their goods and services and
spend less on labor.

That’s a recipe for stock price appreciation.

The Standard & Poor’s 500 (S&P 500) is an index which tracks about 500 of the largest companies in the United States.

According to Yahoo Finance, the S&P 500 rose 24.2% in 2023:

from $3,839.50 close on 12/30/2022
to $4,769.33 close on 12/29/2023

As good as that was, it understates the returns.

S&P 500 companies also paid dividends of about 2%. Between appreciation and dividends, investors earned a 26.3% return on their S&P 500 investments in 2023.

Student Loans Forgiven

President Biden has worked to cancel the student loan debt for millions of Americans. According to a 12/3/2023 U.S. Department of Education press release:

Today's announcement brings the total approved debt cancellation by the Biden-Harris Administration to nearly $132 billion for more than 3.6 million Americans.

That’s an average of nearly $37,000 forgiven per borrower!

It could have been much more. According to Reuters, the U.S. Supreme course blocked a plan by the administration in June 2023 to forgive $430 billion in student loan debt for up to 43 million borrowers.

Revenge Spent

Travel

Americans continue to spend following their COVID-19 repression.

According to the Delta Air Line CEO in a June 2023 Fortune article, revenge travel is:

$300 billion dollars - with a B

A strong U.S. dollar has fueled international travel - despite wars in both the Ukraine and Gaza.

$1,000 Concert Tickets

Taylor Swift’s concert tour was the cultural event of 2023.

According to The Washington Post, she:

stands to make as much as $4.1 billion from the Eras Tour

CNBC reported that her her tickets fetched an average $1,088.56.

Shockingly, they weren’t the most expensive ticket in 2023. That honor went to fellow female artist Adele, with an an average $1,243.96!

Happy New Year! 🎆

Hey, thanks for reading my 2023 financial year in review.

Just a reminder, I share a lot of resources that can help you.

Do You Even Need a Budget?

Kevin Estes — Mon, 18 Dec 2023 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to whether you need a budget in a moment.

But first - here are some links you may want to save for later.

Hierarchy of Expenses

Types of Spending

Now, let's get on to the blog! 😀

Not sure where to start

A T-Mobile employee recently asked me for ideas on how to budget for the new year.

I don’t know how to start other than putting my monthly bills in an Excel sheet.

Words matter

I spent 20 years in corporate finance and analytics.

Want to know a secret? We rarely used the word budget!

Internally, we used terms like “actual”, “projection”, and “forecast.”

For example:

Actuals came in $2 million favorable to forecast.

The word “favorable” represents another mental shift.

Who’s to say whether expenses are good or bad?

Wages could be up because the company crushed revenue.
Spending less on wages might have starved sales!

“Better” and “worse” are judgmental.
“Favorable” and “unfavorable” are factual.

The six-letter b-word (budget) was reserved for telling someone no.

Unfortunately, that’s not in the budget.
Was that in the original budget?
Would it make sense to prioritize that over something else in the budget?

In reality, it’s all about tradeoffs. If something’s important, it can and should be prioritized!

Mind games

Money evokes big feelings!

As much as I loathe the “girl math” and “boy math” trends, they highlight the fact that we play mind games with money.

Spending is behavior
Behavior is complex

Personal finance is deeply personal.

Want to pick a fight? Tell someone how they “should” spend their money… especially around the holidays!

Budgeting is like dieting

It might work for a few days, weeks, or even months. However, it won’t last if it feels like starvation.

Restrictive diets yo-yo. Big losses are followed by big gains.

As hard as that is on the body, it’s even harder on the brain. Here’s how someone may feel on an overly restrictive diet:

deprived on the way down,
guilty on the way up,
… and repeat.

It’s much more effective to make lasting lifestyle changes:

drinking water,
keeping fresh fruits and vegetables handy,
preparing tasty, healthy meals,
going for walks,
engaging in fun physical activities…

Mindful spending

Similarly, it’s better to spend mindfully than cut to a number.

Emergency funds are there for a reason! It’s also important to be able to jump on wonderful opportunities when they arise. Sometimes, it makes sense to spend.

How do you know if an expense is worth it? Here are three frameworks which may help.

Evaluate all expenses for a month

Is each worth it?

Whenever my wife and I go through this exercise, we find many expenses which are worth it to us and a few which aren’t.

Sometimes, we didn’t even know we were spending that money!

A subscription we stopped using months ago
Renting our router
Fraud

If something’s worth the investment, what’s the real benefit?

Is there are way to accomplish that without more expense?
Are there less expensive substitutes?
Would it make sense to spend more on it?

If something’s not worth it to you, how could you reduce the cost or cut it altogether?

If you’re struggling to evaluate expense, consider estimating how many hours it costs you:

Start with your base after-tax pay
Subtract any work-related expenses like commuting, convenience, and clothing
Divide by the total number of hours you devote to work each year - including dialing in early in the morning and late at night, commuting, traveling, studying, etc.

The result is your effective hourly wage.

Divide each expense by your hourly wage. Then, determine whether each is worth the hours you must work to fund it!

Recommend it?

A second way to evaluate expense is to decenter.

Would you recommend that expense to a good friend?

Why or why not?
What are its best attributes?
Its worst?

Wait $300 a day

We sometimes make different purchases in the heat of the moment than we would with more time to consider it. Think: TODAY ONLY sales and timeshare presentations!

The trick is determining how long to wait.

Everyone’s threshold is different. It also changes over time with inflation.

Here’s something which currently works for me on unnecessary expenses: wait $300 a day.

Let’s say you’re about to purchase a $300 tablet. Give it 24 hours.

For a $100 pair of shoes, consider waiting 8 hours.

If shopping online first thing in the morning, wait until after work.
Instead of buying it late at night, wait until the next morning.

Larger expenses benefit from more time:

$10,000 international family trip - give it a month before booking
$60,000 new car or truck - consider the purchase for six months
$200,000 down payment for a home - plan over a year and a half

Find and lower hidden expenses

Visibility is key to reducing expenses. You can’t cut what you can’t see!

Recurring monthly expenses

Many people have a good sense how much their recurring monthly expenses are. Their mortgage, cable bill, utilities, and subscriptions.

However, opportunities may be hidden in plain sight:

Mortgage - especially insurance and interest expenses - might be lowered by removing Private Mortgage Insurance (PMI) or refinancing to a lower interest rate
Cable - may be eligible for a discount once a promotional rate ends; also, it might be cheaper (and better) to buy a router instead of continuing to rent it
Subscriptions - it makes sense to cut an unused subscription and may make sense to choose a lower service tier after a price increase

Convenience expenses

Fuel

Gasoline and diesel can be a major expense for families. It’s shocking how much gas can vary from one location to the next!

What’s even more surprising is that it’s literally the same gasoline! Oil moves through our county many ways - including pipeline, rail, and barges. It’s then processed at refineries throughout the country. After it’s refined, it’s usually sent by pipeline to large storage terminals near major cities.

According to the U.S. Energy Information Administration:

Gasoline is usually sent by tanker truck from the large storage terminals to smaller blending terminals, where it is processed into finished motor gasoline. These smaller terminals are typically where fuel ethanol is blended into gasoline.

The only material difference in gasoline between companies is the additives they mix in when loading the tanker trucks and trailers. Sometimes, the additives are added directly to the tanks!

Paying more for the same thing is silly. It’s worth shopping around.

Gas stations in cities near major interstate highway exits are generally more expensive than other locations. High income areas tend to have more expensive gas - presumably because of real estate prices and customers’ willingness to pay more.

Driving a few blocks may save up to a dollar a gallon! Our family saw a dollar difference between gas stations on three corners of the same intersection last weekend!

The GasBuddy app has helped us check gas stations prices - especially when in an unfamiliar area. Less expensive gas stations tend to be consistently more affordable.

Snacks

Quick food and drinks are another convenience expense. The best way to reduce those costs is to keep a filled water bottle with you at all times.

The next best solution is to buy in bulk. Gross profit margins on snacks and drinks at convenience stores and vending machines are extremely high. It may pay to bring a snack wherever you go.

Meals Out

Purchasing meals out is a third major convenience expense. People often dine out because they don’t have time to cook.

Meal preparation is a way to limit these expenses. For instance, cooking a few chicken breasts over the weekend can significantly reduce meal prep throughout the week.

That chicken can be warmed mid-week and used:

as a main dish,
in fajitas,
on a salad,
in a sandwich…

A slow or pressure cooker can be used throughout the day to cook delicious foods while a family’s at work and school.

Pay ahead

Another way to reduce expenses is to pay ahead instead of paying monthly.

Auto insurance companies often offer significant discounts for paying six months or a year in advance. For instance, Progressive advertises up to a 15% paid in full discount. That’s a solid return on cash for six months!

Similar discounts may be available for paying a full year of private school tuition. It’s worth checking all major monthly expenses to see whether they offer a discount for early payment.

Hidden investment fees

The expense I probably like the least is hidden investment fees. Although they’re not itemized on account statements, they slowly eat into the investment.

Expenses can come to 1% or more of the investment every year. Because investments tend to rise over time, many people never notice. Worse, the expenses also tend to rise!

Here’s a pro tip: calculate your own investment expenses:

Review your latest statements to determine how much you have invested in any funds
Google search each fund’s ticker and then “expense ratio”
Record the expense ratio as an annual percentage
Multiply the investment’s expense ratio by the value invested in that fund
The result is how much you currently pay each year for the privilege to hold that investment

What - precisely - is the company doing to earn those expenses? Does that activity add any value above average market performance?

Forecast

While I feel budgeting is overrated, I view forecasting as critical.

What upcoming expenses do you expect? Vacations, gifts, meals out, activities, insurance, home maintenance/repair, and other irregular expenses are often missed.

Planning ahead can help avoid surprises and consumer interest charges.

Connect with a deeper why

Having a clear vision of the life you want to live can help you achieve it. If you don’t know where you’re going, any road will get you there.

An exercise called the 5 Whys may help. It’s a process to get to the root cause of an issue.

If someone has a tentative or superficial image of what they want to accomplish, it may make sense to ask “why” five times.

I want to own several real estate properties.

Why? (1)

Because I want to have passive income.

Why? (2)

Because I want to replace my current income.

Why? (3)

Because my work is sucking my soul out of me!

Why? (4)

Because I’m working long hours doing things I dislike.

Why? (5)

I guess because I don’t know anything else. It’s what I’ve always done and I’m paid well.

Now, THAT’S an insight!

This person yearns to explore. They want to do something new and different - perhaps multiple things.

Instead of buying a second job, that time might be spent exploring and developing new passions. I generally recommend people try a new lifestyle before they commit themselves to it full-time.

Without a clear why, the whats get in the way.

Zero based budget

My wife recently called me out on my “no budget” stance.

You do budget. It’s just a zero-based budget.

Instead of looking at our past expenses and assuming they’ll continue with some minor adjustments, we treat our “budget” as zero and then add back what we value.

Doing so allows us to challenge each expense. If an expense doesn’t add enough value, we cut it. We also consider alternatives.

Of course, my wife is right. I tend to follow the mantra:

Use it up, wear it out, or do without.

Hedonic adaptation

We humans are amazing at adapting to our circumstances.

Think back to the last vehicle you bought. How did it make you feel?

Great, initially - am I right? You loved exploring those new (to you) features.

What happened next?

That initial excitement probably faded over time. That’s hedonic adaptation!

The reverse is also true. Have you ever gone camping, to summer camp, or to college?

We initially miss luxuries. After a while, we get used to the new normal.

If you want to save a lot initially, pull back spending until it hurts. Then let the reins out… a little.

Just realize this approach may cause your spending to yo-yo!

Hey, thanks for reading my post on whether you need a budget.

Just a reminder, I share a lot of resources that can help you.

Is Your Cash Starving?

Kevin Estes — Thu, 14 Dec 2023 18:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to an emergency and opportunity fund in a moment.

But first - here are some links you may want to save for later.

Do You Even Need a Budget?

What to do with $100k

Now, let's get on to the blog! 😀

Cash is king

You’ve heard it before.

Just consider the negotiation positions of two families bidding on the same house:

Can barely make a 10% down payment.
Will pay cash for the entire purchase.

The questions isn’t whether the seller will accept less for the all-cash offer. It’s how much.

Deprived

I often meet people who keep way too little cash.

They have great incomes - $100,000, $300,000, $500,000 a year, or more!

They may even have lots of assets - a nice car, big home, fancy truck, fast boat…

However, they feel poor because they:

have high interest debt,
pay late fees and penalties, and
must constantly move money around to pay bills.

Filing taxes is particularly painful:

Taxes are killing me!
I feel like I’m being raked over the coals.

Their stress levels are high. They lose sleep. They worry - which is even worse than a waste of time. It’s counter-productive!

Our animal brain takes over. It’s fight or flight.

Decisions focus on the short-term, with predictably disastrous outcomes.

Every bump in the road hurts. Things feel out of control. A scarcity mindset sets in.

Vicious cycle

It becomes a downward spiral:

less cash creates
more expenses and
higher interest charges which
lowers cash and repeats the cycle.

In the extreme, their mental health, relationships, and physical health could all suffer.

May hold the solution

Fortunately, many of them have significant investments. Those may be from a work stock plan like:

Incentive Stock Options (ISOs),
Restricted Stock Units (RSUs). or
Restricted Stock Awards (RSAs).

I view these the way the IRS does. When they vest, they’re income!

Take Restricted Stock Units. Once they vest, some of the shares are automatically sold and sent to the U.S. government to cover taxes. If someone were to sell the shares right away, they would incur no additional tax expense!

From a tax perspective, choosing to hold these company shares is identical to taking money out of their checking account to buy more company stock! Is that what they want to do?

Worse, a single stock is higher risk than the overall market. That company could:

have a competitor enter the market,
make or poor strategic decision, or
have someone cook the books.

We all love our employers. That’s why we work there!

On average, they’re average. We should expect market returns.

Above market risk + market returns = a poor investment

Consistently selling shares can improve someone’s cash flow and is often the right move for their portfolio. Of course, it depends on their specific situation.

How much cash?

How much cash someone needs depends on their situation. It’s driven by their average monthly expense.

I generally recommend three to six months’ of expenses:

$5,000 monthly spend = $15,000 to $30,000
$20,000 monthly spend = $60,000 to $120,000

Of course, I’m not suggesting that goes in the mattress! A high-yield savings or money market account linked to a checking account would work just fine.

It makes sense to increase this emergency fund for those with:

a single income,
real estate investments,
highly variable compensation…

Stop the bleeding

Having enough cash is like having good shocks.

There are still bumps in the road. They just hurt less.

It’s alright. I have the cash to pay for that.

Someone can use these funds to pay:

bills on time - eliminating late payments and penalties,
down high interest debt - reducing finance charges, or
cash upfront - lowering overall expenses.

Insurance

Auto insurance companies often offer massive discounts if someone pays six months to a year in advance instead of paying monthly!

Having enough cash on hand means someone can pay for minor repairs. Increasing deductibles or removing unneeded insurance can significantly lower premiums.

Taxes

Once someone has a nice cash buffer, they may be able to increase their tax withholding. It’s as simple as updating their W-4 with their employer.

They might stop tipping the government with penalties, interest, or both!

Reverse the curse

The next step is to start taking advantage of opportunities.

People who complain about taxes rarely max out their traditional retirement plan contributions. These are plans like:

401(k)
403(b)
457(b)
Individual Retirement Arrangement (IRA)…

Contributions serve many functions. They might save for the future, receive company matching, lower taxes, and more!

Cash also unlocks opportunities like:

making extra payments to eliminate Private Mortgage Insurance (PMI),
contributing to the Employee Stock Purchase Plan (ESPP) - often to receive a 15% discount and possibly more with a lookback, and
investing in education for career advancement.

Setbacks hurt less. Things feel doable. An abundance mindset sets in.

Virtuous cycle

It becomes an upward spiral:

more cash tends to
lower expenses and drive
higher income which
raises cash and repeats the cycle.

Hey, thanks for reading my post on emergency and opportunity funds.

Just a reminder, I share a lot of resources that can help you.

No Tax on Investment Gains?

Kevin Estes — Mon, 11 Dec 2023 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to long-term capital gains in a moment.

But first - here are some links you may want to save for later.

Transactions in Retirement Accounts Aren't Taxed… Yet

Sammy Says! 13 Things the Tax Code Encourages

Now, let's get on to the blog! 😀

Selling for a gain might have no tax impact

According to the Internal Revenue Service (IRS), no tax is due on long term gains for the year if taxable income is:

less than or equal to $89,250 for married filing jointly or
less than or equal to $44,625 for a single taxpayer.*

Those capital gains are taxed at a 0% tax rate!

It may make sense for taxpayers with taxable income less than those thresholds to sell assets which have rising in value.

Selling those assets later when the couple or individual has more income could generate a 15%, 20%, or even higher taxes.

The challenge is knowing the definition of terms like:

capital gain,
long term,
and taxable income.

Capital gain

For the sale of an asset to have a capital gain, it must be:

a capital asset and
sold for a gain.

The IRS says:

Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments.

Great. Most of what we own is a capital asset.

What’s a gain?
That answer also comes from the IRS:

You have a capital gain if you sell the asset for more than your adjusted basis.

Unfortunately, the definition hinges on yet another IRS term.

Adjusted basis is normally what it cost someone to buy the asset.

Let’s say someone purchase share of stock for $100. However, they bought it 20 years ago and paid a $5 commission to purchase it.

Their adjusted basis is the $100 they paid for it plus the $5 commission.

Let’s say they sell the stock for $150. Their capital gain is $45:

$150 sale price - $105 basis = $45

Long term

How does the IRS define long term?

After all, 20 years seems like a long time. So does 3 years.

An investment which goes poorly can feel like it’s been owned a long time after only a few days!

The IRS defines long term as over a year. That means a year and a day.

If someone bought an investment on 12/11/2022, the gain or loss would generally be:

short term if it’s sold on 12/11/2023 or earlier and
long term if it’s sold on 12/12/2023 or later.

**Why does it matter?
**Short-term capital gains are taxed at higher rates than long-term capital gains. Short-term capital gains are usually taxed at someone’s (higher) marginal tax rate.

Taxable income

The definition of taxable income is what’s on the tax return.

Taxable income includes income from almost everything - wages, salaries, bonuses, business profits, investment income...

Fortunately, taxable income is also lowered by some contributions and deductions. For instance, it’s reduced by contributions to:

retirement plans like 401(k), 403(b), 457(b), and traditional Individual Retirement Arrangements (IRAs) as well as
cafeteria plans like Health Savings Accounts (HSAs) and dependent care Flexible Spending Accounts (FSAs).

Taxable income also excludes the standard or itemized deduction.

Itemized Deduction

Itemized deductions are expenses which are allowed to lower taxable income like:

state and local taxes,
home mortgage interest, and
charitable contributions.

There are limits to how much can be deducted on the tax return for these and other expenses.

Standard Deduction

The standard deduction reduces taxable income for everyone without higher itemized deductions. It allows people to earn a bit without being taxed, which is especially helpful for those with little income.

For 2023, the standard deductions are:

$27,700 for married couples filing jointly and
$13,850 for single filers.

The standard deduction makes it possible for taxpayers to pay $0 in capital gains taxes with total income of:

$116,950 for married filing jointly ($89,250 + $27,700)
$58,475 for single filers ($44,625 + $13,850).

It may be even higher with more itemized deductions.

Capital gains and related taxes

Capital gains tax

There are three capital gains tax rates based on taxable income:

The taxable income ranges for the 15% level are broad. For 2023, they’re:

$89,251 to $553,850 for married filing jointly and
$44,625 to $492,300 for single filers.

Above that, the 20% rate applies. Below that, the 0% rate applies. It’s common to pay a 15% capital gains tax rate.

**Why does the U.S. government have a different tax rate for capital gains than it does for ordinary income?
**It’s to encourage people to invest!

Net Investment Income Tax (NIIT)

There is another major tax which applies to investment - the Net Investment Income Tax, or NIIT.

This is an additional tax on investment income for higher earners.

The Net Investment Income Tax is 3.8% on the lesser of:

the net investment income, or
the excess of modified adjusted income over the following threshold amounts
- $250,000 for married filing jointly
- $200,000 for single filers.

Underpayment tax penalty

Something else which may apply to capital gains is the underpayment tax penalty.

It’s best practice to pay quarterly estimated payments on the sale of appreciated assets. If someone doesn’t pay enough throughout the year, they could be charge a penalty!

The penalty can generally be avoided if:

they owe less than $1,000 on their tax return, or
they paid at least 90% of the tax shown for the taxable year or 100% of the tax return on their previous year, whichever is lower

It depends on the situation

Whether it makes sense to sell an investment for a gain and potentially pay capital gains taxes depends on many factors, including:

diversification,
current taxes,
future lifetime taxes, and
taxes after death

Diversification

It’s not uncommon for someone to have a significant amount of employer stock due to compensation like:

Restricted Stock Units (RSUs),
Employee Stock Purchase Plans (ESPPs), and/or
Incentive Stock Options (ISOs).

Single stock exposure is a significant risk. Look at what happened to Enron, Arthur Andersen, and many other companies!

Don’t let the tax tail wag the investment dog. It’s important to diversify - especially considering the lower capital gains tax rate.

No-one wants to pay lower taxes because they waited too long and the value fell!

Current taxes

Someone’s current tax situation may impact the timing of a sale. Below are just a few considerations.

**Healthcare exchange subsidy
**Subsidies for healthcare exchange insurance premiums are based on income. Selling appreciated assets could drive up income and reduce someone’s subsidy.

Net Investment Income Tax (NIIT)
If someone is currently subject to the 3.8% additional tax, it may make sense to delay selling an appreciated asset. The opposite is true if they’re not currently subject to NIIT yet may be in the future.

State income tax
Each state taxes income differently. Some states like Washington and Texas don’t charge income taxes! Other states like California and Oregon charge relatively high income taxes.

If someone who lives in a state without an income tax is considering moving to a state with an income tax, it may make sense to sell appreciated assets before moving.

Charitable giving
If someone owns assets which have gone up in value and regularly donates to charity, it may not make sense to donate cash!

Nonprofit organizations do not pay taxes. If someone were to donate appreciated assets instead of cash:

the donor may receive a tax deduction for the full value,
the charitable organization could use the entire amount, and
the donor could avoid paying capital gains tax.

Selling appreciated stock to give cash could reduce how much the charity receives!

There are limits to how much can be deducted each year for charitable giving. Those limits are based on income and generally lower for donations of appreciated assets than for cash.

Also, a taxpayer typically needs to itemize their deductions to receive a tax benefit. If the standard deduction would otherwise save more taxes, initial donations may not result in any tax savings.

Alternative Minimum Tax (AMT)
There’s a separate, parallel tax system most never notice. It helps ensure higher income individuals do not avoid too much tax in certain situations. One of the most common ways the Alternative Minimum Tax (AMT) comes into play is with Incentive Stock Options (ISOs).

AMT impact is usually temporary. An extra tax one year will generally save tax sometime in the future.

Nonetheless, it may make sense to sell appreciated assets in a year subject to the Alternative Minimum Tax. Doing so might increase income for the year without increasing the tax expense - a win!

**Sequence of returns risk
**A major risk to retirement is sequence of returns risk.

Returns and inflation are volatile. The worst situation for a recent retiree is stagflation:

a falling (or stagnant) market plus
high inflation.

A retiree in that situation would have to pay substantially more for goods and services… with a smaller portfolio! They may be forced to sell depressed assets, putting pressure on their financial plan.

Taxes are one expense which might be delayed. Someone can hold off on selling appreciated assets.

Paying less in tax could reduce taxes in the critical first few years of retirement. That lower expense could help a portfolio absorb the impact of short-term inflation and/or recession.

Future lifetime taxes

As important as someone’s current tax situation is what will happen in the future.

Future income
Someone who expects to earn significantly less later may pay a lower capital gains rate than they would now. That income might also avoid NIIT.

All else equal, it may make sense to delay that income by holding the assets until later.

Required Minimum Distributions (RMDs)
Someone with balances in traditional retirement accounts like 401(k), 403(b), 457(b), and Individual Retirement Arrangements (IRAs) may be forced to withdraw funds annually - even if they’d prefer to keep the assets in the account!

These accounts defer income. Uncle Sam essentially gets impatient and demands some of that deferred income get taxed now.

The SECURE 2.0 Act raised the age someone must begin taking RMDs to age 73 for 2023.

How much someone must withdraw as taxable income depends on their age. The older they are, the higher the percentage they must withdraw!

Required Minimum Distributions are literally based on someone’s age and average life expectancy:

Amount to withdraw = account balance / life expectancy

Each taxpayer’s life expectancy falls by about 1 each year, increasing the percentage they must withdraw each year.

Required Minimum Distributions on large portfolios could result in high future income. It may make sense to sell highly appreciated assets before RMDs start.

Fortunately, Required Minimum Distributions do not apply to Roth or Health Savings Accounts.

**Donor Advised Fund (DAF)
**If someone with appreciated assets is charitably inclined, they might consider a Donor Advised Fund (DAF).

A DAF provides a way to make a charitable contribution now and determine which nonprofits receive a donation, how much they receive, and when they receive it later.

Some benefits of a Donor Advised Fund include:

results in a tax deduction in the year made,
allows the donor more flexibility, and
facilitates the use of funds for smaller nonprofits which may not have the resources to handle appreciated assets.

Better yet, donating appreciated assets into a Donor Advised Fund can combine the benefits of both strategies!

Taxes after death

What someone would like to do with their money after they pass can have a major impact on their lifetime tax strategy.

**Tax deferred bequests
**If someone gives a tax deferred retirement account to a family member or friend at their death, the recipient will have to pay income tax. Their heirs essentially pay the tax they didn’t pay during their lifetime.

Regular brokerage and Roth accounts do not generate this kind of taxable income.

Charitable bequests
Because nonprofits aren’t taxed, donating a tax deferred account may save taxes.

It may make sense to bequeath:

traditional retirement accounts to charities and
other appreciated assets to heirs.

Taxable bequests
Assets not in retirement or other tax-deferred accounts usually get a special tax treatment. They receive a step-up in basis.

Let’s say someone passed away and left their home their daughter.

The deceased initially paid $100,000 for a house now worth $1,000,000.

Their daughter received a step-up in basis to the full $1,000,000. She could sell it immediately and not have to pay any federal income taxes!

Federal estate tax. What happened to the $900,000?
The $900,000 effectively went through the federal combined gift and estate tax system. However, it likely didn’t result in any federal estate taxes!

For 2023, the exemption is $12.92 million for an individual. Someone could pass away this month with $12.92 million and pay no federal estate tax.

It gets a little technical. However, their spouse could use up their exemption as well and double the estate tax free amount to $25.84 million.

Very few people will leave an estate this large. If so, it might make sense to start giving up to $17,000 (in 2023) to select family members and friends annually. Gifts up to that level are excluded from the combined gift and estate tax calculation.

A charitably inclined individual might also give to nonprofits throughout their life to lower their federal estate tax.

State estate tax
Many states - including New York, Illinois, Washington, Oregon, and others - have a state estate tax.

Their thresholds are often much lower than the federal exemption.

For instance, the state of Washington’s exclusion is $2.193 million in 2023. Estates larger than that are taxed by the state.

Hey, thanks for reading my post on investment taxes.

Just a reminder, I share a lot of resources that can help you.

Are My Assets in the Right Location?

Kevin Estes — Mon, 04 Dec 2023 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to asset location in a moment.

But first - here are some links you may want to save for later.

17 Investment Signs You Need a Financial Plan

Now, let's get on to the blog! 😀

Diversified accounts

I often see portfolios where every account is “diversified”!

a target date fund, bond fund, and cash in a Roth IRA,
many sector funds and money market in a pre-tax 401(k), and
a dozen investments in a $10,000 Health Savings Account.

Such a portfolio is unnecessarily complex… and may not even be diversified although the investor thinks it is!

For instance, someone with a heavy concentration of employer stock may own even more of it in their many target date, S&P 500, and sector funds!

Worse, this complexity doesn’t take advantage of each account’s unique characteristics. It’s better to leverage the strength of each account type and diversify the overall portfolio.

As entertaining as it would be, symphonies aren’t full of members each playing several instruments simultaneously like Dick Van Dyke in Mary Poppins. Instead, they harmonize the sound of individual specialists each playing one instrument.

Good portfolios work the same way.

Match assets and accounts by timeline

When an account’s funds will be used determines the assets it houses.

Emergency fund: any moment
Taxable brokerage: intermediate-term
Traditional retirement: long-term
Roth retirement & HSAs: lifetime or beyond

On average, the longer an investment has to grow, the more volatility it can withstand. The noise of days, weeks, months or even years gets smoothed out over decades.

A Roth account someone plans to keep for the rest of their life can be invested much more aggressively than this weekend’s grocery money!

Emergency fund

Money in an emergency fund must be readily available at its full value. Earning anything is a bonus!

The problem with stocks and even bonds is that although they can be sold quickly, markets can move even faster. Emergency funds need to be invested conservatively.

Potential investments to hold in these accounts include:

high-yield savings,
money market, and
checking accounts.

High-Yield Savings Account (HYSA)

Money in high-yield savings accounts can be moved within days. They’re typically invested in low-risk investments like short-term U.S. government debt.

Although HYSAs are often linked to checking accounts, they’re usually run by companies focused on these account types. Traditional banks rarely pay interest rates competitive with high-yield savings account institutions.

Money Market Account (MMA)

Money market accounts are similar in many ways to high-yield savings accounts. They can be moved within days and are typically invested in very low-risk, short-term investments.

It’s less common for them to be offered by stand-alone companies. Instead, they’re often an investment option within a brokerage account. A money market account needs to be either directly accessible (credit card, debit card, checkbook…) or linked to an account which is.

Checking account

A checking account is how most access their money. It’s where their paychecks are deposited and how their bills are paid. Funds can be used almost immediately. It’s super convenient!

Unfortunately, that convenience comes at a cost. Checking accounts earn very little - if any - interest. As with cash stuffed in a mattress, inflation slowly erodes its value.

Many people routinely move money from a high-yield savings or money market to a checking account. They might do so whenever their checking balance dips below their comfort level - such as $5,000 or $10,000.

Account characteristics

These account types typically:

earn a little interest,
can be accessed within days,
and are insured by FDIC or NCUA up to $250,000.

Taxable brokerage

Regular brokerage accounts generate taxable income when:

investments earn interest,
dividends are received, or
investments are sold above their purchase price.

Retirement, Health Savings, and other tax-advantaged accounts are not taxable brokerage accounts. Unlike those accounts, funds in regular brokerage accounts can be accessed penalty free.

Fortunately, the investments themselves may receive favorable tax treatment!

Potential investments to hold in these accounts include:

individual stocks,
municipal bonds, and
index funds.

Individual stocks

This is not a recommendation to own individual stocks!

A single stock has more risk than the overall market.
Each stock should - on average - earn an average return.
An individual stock has higher risk for the same expected return.

However, there are reasons someone would own individual stocks. If they do, a regular taxable account is a good place!

Individual stocks are usually tax-deferred until they’re sold. Also, qualified dividends are taxed at a lower rate - often 15%.

Municipal bonds

Municipal bonds are debt issued by state and local government agencies:

short-term bonds are usually for one to three years while
long-term bonds are for decades.

Although they’re generally lower risk, they’re not risk-free! They’re also rarely insurable.

Interest on municipal bonds generally isn’t taxed by the federal government. It’s a special arrangement!

The benefit of that tax avoidance depends on the taxpayer’s marginal tax rate.

Consider two bonds of similar risk and length:

corporate bond yielding 7% interest
municipal bond yielding 5% interest

Someone in the 22% tax bracket would see:

corporate bond 7% interest * (1 - 0.22) = 5.46% after-tax yield
municipal bond 5% interest = 5.00% after-tax yield

They’d prefer the corporate bond.

However, someone in the 35% tax bracket would see:

corporate bond 7% interest * (1 - 0.35) = 4.55% after-tax yield
municipal bond 5% interest = 5.00% after-tax yield

They’d prefer the municipal bond!

Holding the municipal bond in a tax-advantaged account like a retirement or Health Savings Account is generally a terrible idea. It’d likely lose the tax-free benefit!

Municipal bonds almost always need to be held in a taxable account.

Index funds

The first index funds were mutual funds which tracked a specific index like the S&P 500 or Dow Jones Industrial Average (DJIA). The value of such funds are usually updated once a day after market close. That’s the purchase or redemption price for the day.

However, there are now Electronically Traded Funds (ETFs) which track indices. These can be traded throughout the day.

Index funds are often very low cost. The tax treatment is similar to holding an individual stock. Qualified dividends and long-term capital gains receive preferential tax treatment.

However, what the fund manager does within the index can have tax consequences. For instance, if a stock leaves an index, the mutual fund or ETF would need to sell the stock. That might trigger a capital gain or loss even though the investor holds the same shares!

This taxable income might be painful in someone’s peak earning years. However, it might have no tax impact on someone living off their investments with income below their standard income tax deduction.

Traditional retirement

These are pre-tax accounts like:

401(k),
403(b),
457(b), and
Individual Retirement Arrangements (IRAs).

They generally avoid federal income tax on the front end, grow tax-deferred, and are taxed when withdrawn.

The upfront tax savings is nice yet comes at a cost. Funds withdrawn before age 59.5 are taxed and incur an additional 10% penalty unless an exception is met. Younger savers may see their funds locked up for decades.

Required Minimum Distributions (RMDs) force someone to take taxable withdrawals later in life. If someone doesn’t withdraw all their funds from these accounts before they die, their heirs will usually have to pay the income taxes!

Potential investments to hold in these accounts include:

dividend stocks,
regular bonds, and
index funds.

Dividend Stocks

High-dividend stocks may be held in tax-deferred accounts even though they lose the qualified dividend tax rate.

People in their peak earning years may incur an extra 3.8% Net Investment Income Tax (NIIT). They might also have a tough time finding the cash flow to pay additional taxes.

Dividend stocks tend to grow more slowly and produce more income than other stocks. Holding them in a tax-deferred account can allow an investor to postpone income to a better time for them!

Regular Bonds

Retirement accounts may be ideal for regular (non-municipal) bonds. Corporate debt tends to pay higher interest than municipal debt because of the higher risk and taxes. Higher interest would drive up income taxes unless they’re in a tax-advantaged account.

Index Fund

This is perhaps the best location for a diversified, low-cost growth investment like an index fund. The account could have years or even decades to grow! Dividends might be automatically reinvested to hopefully compound growth.

Roth retirement & Health Savings Accounts

Roth

Roth accounts are funded with after-tax contributions. Someone pays taxes on their income and then contributes to something like a:

Roth Individual Retirement Arrangement (IRA) or
Roth 401(k).

The bad news? They’re taxed upfront.

The good news? They’re never taxed again if certain criteria are met!

That’s why they’re popular in estate planning. Heirs aren’t burdened with income taxes when they receive a Roth account.

Also, there’s some flexibility for withdrawals. Because they were already taxed, contributions can be withdrawn tax and penalty free.. even before age 59.5! Unfortunately, there’s some administrative burden to prove it.

For investors over age 59.5 (or meeting an exception), gains might be withdrawn tax-free if a couple five-year rules are met. The specifics of those rules are beyond the scope of this article.

Health Savings Account (HSA)

A Health Savings Account is triple tax advantaged in that contributions:

avoid tax initially,
grow tax-free, and
can be withdrawn tax-free if used for qualified medical expenses.

That is, they might avoid tax altogether!

Unfortunately, the estate treatment is less favorable for Health Savings Accounts than it is for Roth accounts. Fortunately, HSAs can be used to help pay for long-term care premiums and expenses.

Asset Types

Potential investments to hold in these accounts include:

small / mid cap,
foreign, and
index funds.

Because these accounts may be held for the rest of someone’s life, they may be good locations for someone’s higher risk investments. Companies which are smaller, outside the United States, or both could be higher risk. Higher risk might lead to higher returns. Holding these investments for decades could smooth out the volatility.

Higher risk for longer-term accounts

There’s no need to overcomplicate accounts with many investments.

A few or even one investment which takes full advantage of the account’s unique strengths can do wonders for a portfolio. The total portfolio needs to be diversified. Each account does not.

Hey, thanks for reading my post on asset location.

Just a reminder, I share a lot of resources that can help you.

5 Great Questions to Ask Yourself

Kevin Estes — Mon, 27 Nov 2023 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to the five great questions in a moment.

But first - here are some links you may want to save for later.

According to Harvard’s financial aid office:

Now, let's get on to the blog! 😀

Five great financial questions to ask Yourself

The following questions keep coming up in financial planning conversations:

What do I want my money to accomplish?
How do I minimize lifetime taxes?
What if I’m injured?
How can education costs be reasonable?
Are my assets in the right location?

1) What do I want my money to accomplish?

If you don’t know where you’re going,
any road will get you there.

Starting with the end in mind can be powerful.

A clear goal can simplify thousands of decisions. It also helps someone track progress toward their vision!

Below are some popular goals.

Pay off debt

The order of debt repayment is often:

consumer debt (credit cards),
student loans, and
home mortgage.

It’s functional yet uninspired. It might also not be the best use of someone’s limited cash flow!

Start a family

Major life changes are a paradox:

If you wait for the right time,
you’ll never do it.

That goes for getting married, moving in together, having or adopting children, etc. Each will feel like a stretch regardless of preparation!

People take leaps when conditions are alright - not ideal. It’s a growth opportunity.

Change careers or start a business

Similar to starting a family, there’s rarely a good time to switch careers or launch a company.

Big professional moves often require:

a time investment,
an increase in expenses,
a reduction in income,
or all of the above.

It’s important to have a long financial runway before heading off in a new direction.

Pay for education

Quality education is both important and subjective. A good education for one person could be terrible for someone else!

How you go
matters more than
where you go.

Some potential ways to reduce education expenses are discussed below.

Reach financial independence

The word retirement conjures up images of:

quilting,
shuffleboard, and
Bingo!

Financial independence is the ability to do what, when, and with whom you like.

Someone reaches financial independence when their lifestyle no longer depends on their earned income. If they work, it’s because they want to - not because they must.

Even within the financial independence community “next endeavor” gets a better reaction than “retirement.” The reason is likely because “retirement” - especially “early retirement” - sounds fundamentally anti-social. Early retirement could stop some of the most educated, resourced, and driven people from helping others!

However, that’s not usually how it plays out. People who reach financial independence:

take care of sick parents,
help out with their grandchildren,
volunteer,
organize local events,
change careers,
launch businesses, etc.

Travel internationally and enjoy vacations

Life begins and ends with limited mobility. Exploration peaks somewhere in-between.

Vacations and international travel could impact other life decisions.

Consider the following:

A ranch owner may struggle to travel. Livestock requires constant care and attention.
Someone who accepts an international assignment might use their new city as a home base to explore an entire continent.

Slow travel can be an especially economical way to explore the world. Multi-week rentals generally cost less nightly than hotel stays. Extended trips also make the most of expensive international flights.

Give to family and friends

Once people have covered their needs and enjoyed many experiences, they often consider giving to those close to them.

Charity begins at home.

At some point, spending becomes more about who than what.

Paying for someone’s medical or education expenses can avoid gift and estate taxes. Also, a limited amount can be given to an individual without incurring gift taxes. The thresholds for 20203 are:

$17,000 per person
$34,000 per married couple

Donate to causes

Beyond family and friends, people support causes which resonate with them. They could make nonprofit, political, religious, or other contributions.

2) How do I minimize lifetime taxes?

Everyone’s tax situation is different. Nonetheless, taxes could be someone’s biggest lifetime expense!

Taxes include:

income,
property,
sales, and
other taxes.

It’s worth considering how to minimize these expenses.

Income tax is usually someone’s largest annual tax expense. It’s also progressive:

The more you make,
the more they take.

Income tax rates rise with taxable income. According to the IRS, the 2023 federal tax rates for married individuals filing jointly are:

10% for $0 to $22,000 of taxable income,
12% for $22,001 to $89,450,
22% for $89,451 to $190,750,
24% for $190,751 to $364,200,
32% for $364,201 to $462,500,
35% for $462,501 to $693,750, and
37% for $693,751 and above.

Keep in mind that these tax rates are on income above the standard deduction. That deduction is $27,700 for married individuals filing jointly in 2023.

Fortunately, there are ways to reduce lifetime taxes!

Contribute to Health Savings Accounts

Health Savings Account contributions are triple tax advantaged since they:

reduce taxable income for the year they’re made,
grow tax-free, and
can be withdrawn tax-free for qualified medical expenses.

They even avoid Social Security, Medicare, and federal unemployment tax!

The biggest downside is that contributing to a Health Savings Account requires someone to be on a High Deductible Health Plan (HDHP). It’s important not to let the tax tail wag the healthcare dog.

Contribute to employer retirement accounts

Another way to reduce lifetime income is to move income from higher to lower income years. That’s one of the biggest benefits of contributing to workplace retirement accounts like a 401(k), 403(b), and 457(b). They’re named after their location in the federal tax code.

Employee contributions:

reduce taxable income for the year they’re made,
grow tax free, and
are taxed when withdrawn.

Unlike Health Savings Accounts (HSAs), they’re not triple tax advantaged. However, they might move income from a higher tax rate to a lower one. The money that would have been taxed initially also gets the opportunity to grow tax-free.

Also unlike HSAs, retirement plan contributions don’t avoid payroll taxes like Social Security, Medicare, and federal unemployment taxes.

Contribute to an Individual Retirement Arrangement (IRA)

Millions of workers don’t have access to an employer retirement plan. They might instead contribute to an income-reducing Individual Retirement Arrangement (IRA).

For instance, a spouse without earned income may be able to fund to their own IRA. Contributing could lower their married filing jointly income while saving for the participant’s future.

As with employer retirement plan contributions, funding an IRA could delay income from a time of higher income to one of lower income. The hope would be to lower the effective tax rate on that income.

Contribute or convert to a Roth IRA

It might make sense to fund a Roth Individual Retirement Arrangement (IRA) in a year with relatively light income.

Roth IRA contributions:

are taxed in the year they’re made,
grow tax-free, and
can be withdrawn tax-free if certain conditions are met.

It might even make sense to convert some funds from an employer retirement account or traditional IRA to a Roth IRA. Doing so deliberately increases taxable income in a low-income year.

Such income may incur very little tax because of the deductions (especially the standard deduction) and low tax rates. It may make sense to pay taxes now instead of at a higher rate later!

A Roth conversion may be especially helpful for people who were impacted by a layoff, started a business, or both.

Maximize deductions for charitable donations

The Tax Cuts and Jobs Act reduced how many people itemize their expenses. That reduced how many people receive tax benefits from nonprofit contributions.

Nonetheless, strategies can help maximize charitable tax deductions such as:

donating appreciated securities,
bunching donations into one year, and
establishing donor-advised funds (DAFs).

3) What if I’m injured?

It’s easy to consider cutting corners on insurance. After all, insurance companies are for profit! On average, premiums must exceed payouts.

Unfortunately, serious injury or even death can strike at any time.

Life insurance

From a financial perspective, death is the easier use case.

After someone dies, everything stops:

their earned income falls to zero and
they can no longer do what they were doing for their family.

A family with children may receive some Social Security benefits - usually until the youngest child turns 18. Widows/widowers with older children can begin receiving survivors’ benefits at age 60.

That leaves years without any benefits.

Take the following example: a 24 year-old with a newborn baby tragically loses her husband.

She and the typically abled baby would receive benefits for approximately 18 years until she’s 42 years old. Once the child graduates high school, all benefits stop. As long as the widow doesn’t remarry, she’d again be eligible for survivors’ benefits at age 60.

That might leave 18 years - age 42 to 60 - with no benefits!

Disability Insurance

Financially, disability is similar to death - except costs typically rise. Medical and other costs increase at the same time income falls.

The Social Security definition of disability is extremely limited. With some exceptions, someone usually only qualifies for Social Security disability insurance benefits if they’re unable to work any job.

Consider a surgeon who can no longer operate yet can still greet retail customers!

It’s important to consider what the family’s financial needs might be including things like additional childcare, care for the injured adult, and help around the house.

Having appropriate insurance might avoid financial disaster.

4) How can education costs be reasonable?

Education costs, especially college, can be expensive.

Cost of attendance

According to the National Center for Education Statistics, the cost varies significantly. Below is the average cost of attendance (tuition and fees) of a degree-granting institution for a first-time, full-time undergraduate student in 2021-22.

Two-year institution:

Public $3,970
Private nonprofit $17,735

Four-year institution:

Public $9,678
Private nonprofit $38,768

Attending a two-year public institution and then attending a four-year institution might cost $27,296:

Year 1: $3,970
Year 2: $3,970
Year 3: $9,678
Year 4: $9,678

That’s only about 70% of the tuition cost of a private nonprofit for a single year!

Attending a private nonprofit for four years might cost roughly $155,072. That’s nearly 6x the cost of the public 2-year to 4-year path.

Benefit of education

More educated people tend to earn more. Tapping another National Center for Education Statistics study, the median annual earnings of full-time, year-round workers ages 25-34 in 2021 was:

$32,500 for less than high school completion,
$39,700 for high school completion,
$41,000 for some college, no degree,
$45,000 for Associate’s (two year) degree,
$61,600 for Bachelor’s (four year) degree, and
$74,600 for Master’s or higher degree.

For many professions, how the student performs in their studies matters more than where they attend. If the student is planning to attend graduate school, grades and graduate admission test scores likely matter more than the prestige of their undergraduate institution.

What a graduating student studied - their major - often has more of an impact on their earnings than the prestige of the university they attended.

Risk

However, there’s more risk starting out at a 2-year public program. A student who performs poorly at a public 2-year program may not be accepted to a public 4-year program.

Colleges with higher prestige - on average - offer more career opportunities than less prestigious institutions. There’s also value in the social networks students build at nationally ranked universities.

Every situation is unique

It’s important to not only consider a school’s published tuition and fees but also what students actually pay. The difference may be significant, especially due to:

financial and
merit aid.

Financial aid

To become even more selective, many top universities now cover substantially all of the cost of attendance for low-income families.

24% of Harvard families pay nothing and
55% receive Harvard scholarship aid.

It may be less expensive for the student of a lower-income family to attend an Ivy League college than an in-state public university!

Many colleges now have a Net Price Calculator (NPC) on their website. These calculators give families a sense of how much it would cost for their student to attend before applying.

It’s important to fill out this information correctly and save the results. The results might be used to appeal a financial aid award if it’s substantially different than the NPC estimate!

Merit aid

While the most prestigious colleges may meet 100% of financial need, they don’t typically offer merit-based aid.

Merit aid includes scholarships and grants for exceptional students. They’re primarily based on:

high school or Associate degree Grade Point Average (GPA),
courses taken, and
standardized test scores.

The definition of “exceptional” is relative. An average student for one college might be exceptional for another.

This is a good reason to apply to a variety of schools - including “safety” schools. It’s possible a good school may offer so much merit-based aid that it becomes the best overall value.

It’s also possible to negotiate between schools. If a student prefers a school with a higher all-in cost of attendance than another, it may make sense to give the higher preference school an opportunity to match the offer!

Beware: merit aid may require students to maintain good grades. It’s not uncommon for a school to require a 3.5 GPA for merit scholarships knowing the college’s average GPA is a 3.0. Students who lose their merit-based aid due to lower grades may have few transfer options.

5) Are my assets in the right location?

Many people consider investment allocation. An asset allocation plan helps someone determine how to invest their overall portfolio based on factors like their:

risk capacity,
risk tolerance,
investment timeline, and
goals.

However, asset location is also important. Account types have different characteristics which may determine where assets are held.

Emergency Fund

Money in an emergency fund need to be readily accessible at the fair market value.

The problem with stocks and even bonds is that although they can be sold quickly, the markets can move even faster.

It’s important for emergency funds to be quite conservative. Potential investments include things like:

High-yield savings accounts,
Money market accounts, and
Certificates of Deposits (CDs).

The best investment will depend on the situation.

Taxable Brokerage Accounts

These accounts generate taxable income for the current tax year. However, these investments can usually be accessed penalty-free.

A taxable account is often a good place for individual stock shares. Such investments may be tax-deferred until they’re sold.

Dividends increase taxable income. However, qualified dividends are generally taxed at a lower rate - often 15%.

Another good investment for these accounts is a low-cost, broadly diversified index or mutual fund. The tax treatment is similar to holding individual stocks. However, the volatility is generally lower and dividends may be higher. The index or mutual fund may also generate capital gains based on turnover of the underlying investments. Active management could result in sales throughout the year which impact short-term and long-term capital gain taxes.

Taxable accounts could also be the ideal location for municipal bonds. Owning them there could help someone take full advantage of the federal tax-free income.

However, it depends on the situation. If someone has limited income and must live on their investment income, it may make sense to hold high-yield dividend or bonds in taxable accounts.

Traditional Retirement Accounts

These are accounts like 401(k), 403(b), 457(b), and the traditional Individual Retirement Arrangement (IRA).

These accounts are mixed bag:

Good: they don’t generate income until funds are withdrawn
Bad: they generate income once withdrawn

Retirement accounts may an ideal location for non-municipal bonds and high-yield dividend stocks. Such investments tend to grow more slowly and produce more income than other investments. Retirement accounts offer an opportunity to defer taxes on that income - especially during peak earning years.

Roth IRAs and Health Savings Accounts

These accounts continue to grow tax-free until withdrawn. If the funds are used in a qualified way, they may even avoid tax once withdrawn:

Roth IRA - if they meet the 5-year and minimum age rules
Health Savings Account - if withdrawn for qualified medical expenses

It may make sense for these accounts to house some of the more aggressive investments in the portfolio. Over the course of years or even decades, the higher risk may produce a higher return. Growing these accounts accounts could avoid taxes altogether.

Having large balances might also:

reduce taxes for those who inherit a Roth IRA and
fund long-term care with an HSA should the need arise.

Hey, thanks for reading my post on five great financial questions to ask yourself.

Just a reminder, I share a lot of resources that can help you.

Happy Thanksgiving!

Kevin Estes — Wed, 22 Nov 2023 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to Thanksgiving 2023 in a moment.

But first - here are some links you may want to save for later.

Thanksgiving 2024

2023 Year in Review

Now, let's get on to the blog! 😀

So Grateful 🦃

I have even more than usual to be thankful for this year:

Family
Health
Time
Clients
Support

Family 👨‍👩‍👧

My immediate family is incredible. Turns out, launching a business is a lot of work. 🤣 Thank you to my wife and daughter for your unwavering support!

Health 🏃‍♀️

Fortunately, we have our health! COVID-19 is starting to fade into history.

A health scare and full recovery in our extended family was top of mind this year. I'm especially grateful for the support of my sister-in-law, brother, and uncle for all their help!

Time ⏱

I'm so thankful for the flexibility my career change has given me. I've been able to take my daughter to multiple practices most weeks and attend her swim meets, band concerts, and other activities.

We also had the opportunity to go sailing for a week together in the San Juan Islands and earn our American Sailing Association certifications! My wife, daughter, and I each completed the Seafair Triathlon. 🏊‍♂️ 🚴‍♂️ 🏃‍♂️

Clients 🤝

I've been blessed to work with many clients since July. Our meetings and emails are almost always the highlights of my day. I'm inspired by the steps they're taking to build their futures!

Support 🏋‍♂️

I know I would miss thanking many wonderful people who've supported my family, me, and my business throughout the year.

Advisors and other amazingly supportive people have made this a year to remember! Thank you!

Hey, thanks for reading what I’m thankful for Thanksgiving 2023.

Just a reminder, I share a lot of resources that can help you.

Hierarchy of Expenses

Kevin Estes — Mon, 20 Nov 2023 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to a hierarchy of expenses in a moment.

But first - here are some links you may want to save for later.

Types of Spending

Own Like a Billionaire

Now, let's get on to the blog! 😀

Hierarchy of Needs

It’s been 80 years since Abraham Maslow developed his famous Hierarchy of Needs.

A simplified version of his categories are:

Physiological
Safety
Belonginess & love
Esteem
Self-actualization

Some of these needs map directly to expenses. Others don’t.

Hierarchy of Expenses

I believe there’s also a hierarchy of expenses:

Basic need
Required
Autonomy
Experience
Gift

Let’s explore each layer.

Basic Need

This expense category ties directly to the lowest levels of Maslow’s Hierarchy of Needs.

Physiological Need

These are basics like:

food,
water,
warmth, and
sleep.

Safety Need

Next comes safety and security. Protection - either ourselves or by society - keeps us from harm.

Physiological and safety needs are critical. Failing to meet them is life-threatening.

Required

Up next in the hierarchy are required expenses.

These are things like:

taxes,
alimony,
child support, and
minimum debt payments.

They’re legally binding. Failing to pay them likely wouldn’t be life threatening. However, they could restrict someone’s personal liberties due to repossession or incarceration!

Autonomy

This is the third and perhaps most inspiring expense category.

Someone can expand their opportunities by spending on:

education,
investments, and
debt repayment.

They give people more control over their lives.

Education

Education can take many forms, including:

degrees,
continuing education,
certifications, and
specializations.

They could be acquired by self-study, on the job (usually instead of compensation), or through formal education.

Education might be paid by the:

individual - an employee buys a business leadership book,
by a loved one - a parent pays for college, or
by an organization - an employer or government agency pays for cross-training in a related field.

Investments

Some investments aren’t considered expenses because there’s essentially no reduction in market value from a purchase. However, it could depend on how the investment’s used.

Take gold, for instance. How the price of one ounce (1 oz.) of gold changes over time determines whether the investment will generate income or a loss.

If that same gold was instead used to create a conductive wire for a product sold to a customer, it would be an expense.

Investments are made with the intent to generate income. It creates financial flexibility for the investor!

Business ownership is a particular type of investment. Someone can come to own part or all of their employer in many ways ranging

from stock grants at a huge tech company
to purchasing a sole proprietorship.

The first is a job perk. The second is buying a job!

The impact of business ownership on someone’s finances are extremely variable. An employee may only have a tax expense with vesting stock. Purchasing a law firm may come with significant ongoing funding requirements.

Debt Repayment

Paying down debt also increases flexibility by reducing interest expense. Paying it off altogether would also free up cash flow for other things.

However, debt repayment has an opportunity cost. What else could that capital have funded?

A common debt repayment preference for people is:

consumer debt,
student loans, and
mortgage.

Experience

According to the U.S. Bureau of Labor Statistics, over 80% of jobs in the U.S. were in service industries in 2022.

Just think of the service positions someone might encounter on a wedding trip:

security agent,
baggage claim attendant,
flight attendant,
pilot,
rental car agent,
hotel receptionist,
concierge,
event planner,
florist,
photographer,
officiant,
caterer,
bartender,
musician…

Some of our biggest lifestyle decisions are basically experiences: pets, children, education, etc.

Even goods have an experience element. Although a Rolex costs 100x a Timex, they both tell time.

The difference - besides the first three letters? The experience buying, wearing, and servicing the Rolex! (Though I wouldn’t know.)

Similar examples abound:

staging for a home sale,
generic vs. brand name pharmaceuticals, and
Nissan vs. BMW vehicles.

It’s telling that the BMW slogan is “sheer driving pleasure.”

Of course, there are the traditional experience expenses such as sporting events, concerts, and other live events. Taylor Swift’s Eras Tour is estimated to have had a $5.7 billion impact on the U.S. economy.

It’s an experience economy.

The issue is that all this spending limits how much is available for other things. People are prioritizing experiences over education, investments, and debt repayment. Hopefully no basic needs or required payments are deprioritized!

Gift

The final and smallest expense layer is giving. Some of the most popular recipients are:

Immediate family members,
Friends and extended family members, and
Nonprofits

Like when an airplane cabin depressurizes, it’s important to take care of yourself before assisting those around you!

Immediate Family Members

Charity begins at home.

Gifts to immediate family members might include a:

car,
medical bill,
college education,
down payment for a home…

Fortunately, medical and education bills are exempt from the combined gift and estate tax limits if paid directly to the institution. Other gifts can be more problematic.

Friends and Extended Family Members

As wealth grows beyond what someone needs to fund their lifestyle, the question quickly becomes “Who?” not “What?”

Who’ll receive gifts?

Who’ll be invited to once in a lifetime trip?

Who’ll have some of their living expenses paid?

Nonprofits

The Tax Cuts and Jobs Act reduced some of the tax benefits of charitable giving by:

increasing the standard deduction,
capping the state and local tax (SALT) deduction at $10,000, and
doubling the estate tax exemption.

Nonetheless, philanthropy can still significantly reduce the tax burden for higher earners. Each situation is different. However, some especially helpful techniques include:

donating highly appreciated securities,
bunching multiple years of charitable giving into one, and
contributing to a Donor Advised Fund (DAF).

These and other methods can help maximize the tax savings for charitable giving already planned.

Values Drive Priorities

Of course, none of this is to say how someone should spend their money!

No judgment. Just tradeoffs.

What someone would consider a gift, someone else would consider required. Take private elementary school, for instance.

Personal finance is deeply personal. Our expenses depend on our values, circumstances, skills, availability, and thousands of other things.

Hey, thanks for reading my post on the hierarchy of expenses.

Just a reminder, I share a lot of resources that can help you.

16 Ways to Build Wealth

Kevin Estes — Mon, 13 Nov 2023 17:28:43 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to ways to build wealth in a moment.

But first - here are some links you may want to save for later.

What to Do with $100k

Now, let's get on to the blog! 😀

Want to Build Wealth?

Let’s play four square!

There are thousands of ways to build wealth. This post focuses on 16 of them across four areas:

Income
Expenses
Protection
Goals

Income

Focus on Superpowers

Unique skills drive higher compensation. Strengths fuel success.

Weaknesses must be shored up with minimal effort:

hire solutions,
partner with teammates who have complementary skills,
develop new skills…

Focusing on weaknesses tends to yield linear results. Focusing on strengths may produce exponential results.

What do you do extraordinarily well? What can only you do? How could you do more of those?

Track results! What gets measured gets improved.

Documenting the impact also helps with:

performance reviews,
client conversations,
interviews, and
other important meetings!

Take Calculated Risks

Another key to driving income is to take appropriate risks. That might be with:

career opportunities,
projects,
investments, or
all three!

Risk and return are inherently linked. Consistently playing it safe on average results in predictable, yet lower, compensation.

Always making the safest choice can actually be risky! Staying inside a comfort zone restricts skill development and impact. In the private sector, a career which stalls is in trouble.

Catch Free Money

If someone’s going to throw money, catch it!

Opportunities include:

Stock options and grants
Company retirement plan match
Spending accounts which fall to zero at year end

Whether or not someone can take full advantage of opportunities depends on their specific situation.

Be a Lifelong Learner

Continuing to develop will help ensure skills never become obsolete.

Learning can also help someone:

connect seemingly unrelated dots,
discover new passions, and
meet great people.

Expenses

Own Long-Term

The annual cost of almost everything is lower with long-term ownership:

homes,
vehicles,
clothes,
investments…

Someone with a long-term ownership mentality takes different steps:

Conducting maintenance and making repairs proactively
Installing a phone case and screen protector
Using shoe trees and taking other measures to extend clothing life

A stitch in time saves nine.

Cut Hidden Costs

One of the quickest ways to reduce spending is to cut unused or unnecessary expenses.

Some examples include:

unused subscriptions,
financing charges,
investment expenses,
late fees, and
fraud.

Also, it rarely makes sense to finance a toy.

If someone can’t afford to pay cash for it, they usually can’t afford it.

Bring Lunch

My mom’s friend made lunch for her husband for over 30 years. She did it first thing in the morning - basically in her sleep!

Saving:

$5 a day,
200 days a year
over 30 years
invested at an 8% return…

would result in over $122,000 after 30 years!

While literal, “bring a lunch” is also a metaphor. It’s about taking a mindful approach to recurring expenses.

Be Intentional

Every dollar spent reduces financial flexibility for two reasons:

It lowers how much can be saved and
It reduces costs, thereby reducing how much someone needs to save to achieve financial independence.

Knowing expenses is crucial.

The next steps is to evaluate expenses to ensure they’re worth the hours required to work to pay for them:

Double down where they are
Cut back where they aren’t

This framework helps bring awareness to what may otherwise be subconscious decisions.

Protection

Have an Emergency Fund

I generally recommend having 3-6 months’ worth of living expenses saved into a readily accessible fund.

Factors which increase the number of months include:

a single income source,
variable compensation,
real estate investments, etc.

An emergency fund is readily available at its full value.

That can be investments, right? After all, stocks can be sold almost immediately.

No!

Although stocks can be sold quickly, markets can move even faster. Almost every day, at least one company’s stock price is cut in half or falls to zero.

Whole markets can drop substantially in a day. For instance, the Dow Jones Industrial Average dropped 22.6% on Black Monday on October 19, 1987.

Cash equivalents are liquid. The emergency fund doesn’t need to be in physical cash. A savings or money market account works well.

Stay Appropriately Insured

Unfortunately, I’m not aware of any insurance companies which operate as a not for profit. It’s in the best interest of regulators to ensure insurance companies earn a profit so they can pay claims!

Premiums received have to exceed payouts. On average, the house wins.

Unfortunately, we can’t predict our individual needs for potentially devastating expenses like:

car accidents,
medical care,
disability, and
death

Insurance protects against catastrophic loss. Underinsurance might sink someone’s finances faster than anything else.

That said, it’s important to only insure for what’s needed. Ways to reduce insurance expenses include:

increasing deductibles and
dropping coverage for manageable expenses.

The higher someone’s wealth, the less coverage they might need for things like:

disability,
life insurance, and
long-term care.

However, it’s imperative someone have adequate coverage until they become fully financially independent.

Nonetheless, reducing insurance costs with wealth can be a virtuous cycle for many types of insurance:

Not all insurance premiums fall with rising wealth. Liability and umbrella insurance needs - and therefore cost - tend to rise. Home and auto also rise with higher value

Shop Around

Unlike with credit, there isn’t a score which is negatively impacted by getting competing insurance quotes.

The biggest cost of shopping for a lower premium is time.

If an insurance provider:

offers the same or better insurance coverage
at the same premium
and has the same or better financial footing,

it’s likely a better deal.

The insurance coverage must be truly comparable. Comparing terms is hopefully straight-forward.

However, it can be tougher to evaluate things like:

claims speed,
likelihood of payment, and
customer service quality.

Be Kind

Kindness is not just the right thing to do. It also reduces the likelihood of being sued.

According to The New York Times:

… physicians sued less often are those more likely to spend time educating patients about their care, more likely to use humor and laugh with their patients and more likely to get their patients to to talk and express their opinions.

The greatest predictor isn’t:

where they studied medicine,
years of experience,
or even skill.

It’s bedside manners!

Accidents happen in all walks of life. However, people treated poorly are less likely to forgive and more likely to sue for damages.

Kind, honest, and clear communication can help reduce the risk of a lawsuit. Always be a little nicer than needed.

Goals

Plan Well Ahead

It’s important to plan ahead for expenses. It’s even more important to plan ahead for life.

If you don’t know where you’re going, any road will get you there.

Having a clear goal simplifies thousands of decisions. What might otherwise be murky tradeoff decisions become clear.

Develop Systems

James Clear - the author of Atomic Habits - says:

You do not rise to the level of your goals.
You fall to the level of your systems.

Examples of how systems can improve financial outcomes include:

creating repeatable work processes,
automating bill payment & saving, and
developing a method to identify & invest excess cash.

Support Others

What makes humans special is our ability to help each other. Compensation is the result of helping others.

Helping others is also key for personal relationships. The right time to meet your neighbors isn’t when your house is on fire!

If you’d prefer to think in terms of dollars and cents, consider the following. Over the long-term:

Value added = # people helped * amount of help per person

Value added = goodwill + compensation

Goodwill attracts more people to help!

Want to earn more consistently higher income?

Help more people,
Help people more thoroughly, or
Both.

Be Ready

Life’s like surfing.

You don’t know when a great wave will come along
When it does, you need to jump on it right away
You have some influence - yet never full control - of where you go
All good things come to an end

The image below is… not me! 🤣

Hey, thanks for reading my post on 16 ways to build wealth.

Just a reminder, I share a lot of resources that can help you.

Benefit from Inertia

Kevin Estes — Mon, 06 Nov 2023 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to the benefits of inertia in a moment.

But first - here are some links you may want to save for later.

Could Waiting a Year Cost $140,000?

Now, let's get on to the blog! 😀

Physics!

Want to know a secret?

I ❤️ Physics!

AP Physics C

I scored 5’s on my calculus-based AP Physics exams:

Mechanics and
Electricity & Magnetism

Thanks, Mr. B!

Hobbies

A big part of why I love sailing, bicycling, and Ultimate Frisbee is the physics involved.

I’ve also spent an embarrassing amount of time watching MythBusters, Mark Rober, and Sci-Fi.

Think That’s Embarrassing?

Try misspelling the word. Thrice.

Emberassing
Embarassing
Embarrasing

The last two were after I Googled it. [sigh]

Physical Forces

Newton’s First

According to NASA, Newton’s First Law is:

An object at rest remains at rest, and an object in motion remains in motion at constant speed and in a straight line unless acted upon by an unbalanced force."

If I could just get it started…

Static vs. Kinetic

Static friction is a force that keeps an object at rest.

Think of sliding a couch across the room. It takes a lot of effort just to get it moving! After that, it’s easier to slide.

That is:

static friction - the force on an object holding it still
kinetic friction - the force on the object as it’s moving

Paid Time Off

This concept applies to finance. Consider Paid Time Off (PTO).

There are a couple ways to schedule it:

Wait to see whether the upcoming week will be busy and then try to book time off
Reserve the time early and cancel if needed

Door #1 “Wait & See”

Doesn’t support travel,
Limits the people who can join in the fun,
Raises costs with last-minute bookings, and
Might not be feasible (meeting schedule, team coverage, rental availability, etc.)

Have you ever had to respond to an invite like this?

I’d love to but I have an important meeting that day.

Companies offer Paid Time Off in part because it helps workers perform better over the long-term. That’s especially true for those of us who create for a living!

Almost everything will work again if we unplug it for a while.
Including ourselves.

Many years from now - on your deathbed - will you say…

I wish I’d spent more time in the office.

Door #2 “Book It”

Supports travel,
Expands the list of people who can join in the fun,
Lowers costs due to booking early, and
Maximizes options.

In the unlikely event you have to work a day you’ve scheduled for PTO, you’ll get extra credit with your leader / manager / teammate.

Booking PTO makes it the most likely outcome. Static friction takes hold!

Consider the Cost

If none of this resonates, consider the value of your time:

Most people get at least two weeks of holidays / Paid Time Off
There are 2,000 hours in a standard work year (50 weeks * 40 hours)
Someone who earns $100,000 a year would make $50+ per hour

The cost of forfeiting:

One week = 40 hours * $50 = $2,000
Two weeks = 80 hours * $50 = $4,000
Three weeks = 120 hours * $50 = $6,000

We all like where we work! (If not, we need to talk./)

However, would you hand your company’s investors $2,000 to $6,000 in $50 bills?

Schedule and take your Paid Time Off! 🙏

Good Decisions by Default

Each of us makes decisions based on our circumstances.

How we design our options - or have them designed for us - influences the choices we make.

On Autopilot

According to a Vanguard study, auto-enrollment triples defined contribution plan participation rates for new employees:

91% participating under auto-enrollment
28% under voluntary enrollment

Let’s try that again, Take 2! 🎬

Consider a 401(k) plan. The study found:

If new employees are automatically signed up to contribute, more than 9 out of 10 of them will save for their retirement.
Without being automatically signed up to contribute, fewer than 3 out of 10 of them will save for their retirement.

The difference is MASSIVE! 😉

Results are similar with auto-increases, such as defaulting to contribute:

3% the first year,
increasing 1% each year

For instance:

3% the first year,
4% the second,
5% the third, etc.

Autosaving can change the trajectory of an entire family.

Grandparents Saved Half Their Raises!

Part of the reason I’m so keen on saving systems is that I saw how it helped my grandmother.

She insisted that whenever she or my grandfather received a raise, they’d automatically save half of it. It never felt like a sacrifice because they still increased their spending!

They did that throughout the 1970s and 1980s. Annual inflation for 1974-1982 was between 6% and 13%!

Their real spending likely fell. They made do,

My grandmother wound up with a tidy sum.

Compound Interest

Fortunately, the laws of Finance are even more favorable than the laws of Physics.

An investment with a consistent growth rate doesn’t continue in a perfectly straight line. It compounds!

Let’s say someone saves $10,000 at the beginning of each year and earns an 8% annual return.

Year 1

At the end of the first year, they wouldn’t just have $10,000.

They’d have $10,000 + 8% * $10,000, or $10,800.

That’s an $800 growth from the investment!

Year 2

At the end of the second year, they’d have:

$10,000 saved from the beginning of the year,
$10,600 from the previous year, and
$1,664 in growth ($20,600 * 8%)

Importantly, the investment return is $64 more than $800 * 2. The $800 interest earned the first year earned 8% interest the second!

They’d end the year with $22,464.

Year 3

In the third year, they’d:

earn $2,597 and
end the year with $35,061.

That’s $5,061 more than the $30,000 they contributed! 🎉

Year 40

At a constant annual rate, the gap between what they contribute and have would grow exponentially.

After 40 years of saving $10,000 and earning 8% each year, the balance would grow to almost $2.8 million.

The investor would only have contributed 40 * $10,000, or $400,000!

The other $2.4 million would come from investment growth. 🤯

The First $10,000

It’s also helpful to track the original $10,000 investment.

Year 1

The value at the end of year 1 = $10,800,

$10,000 + $10,000 * 8%

Year 2

The value at the end of year 2 = $11,664,

$10,800 + $10,800 * 8%

Simpler Calculation

Each year, the ending value is:
Beginning value + beginning value * annual return

The math’s the same as:
Beginning value * (1 + annual return)

A decimal can represent the annual return: 8% = .08

In this case,
Ending value = beginning value * 1.08

Using this simpler calculation:

End of Year 1 = $10,000 * 1.08 = $10,800
End of Year 2 = $10,000 * 1.08 * 1.08 = $11,664
End of Year 3 = $10,000 * 1.08 * 1.08 * 1.08 = $12,597…

Exponential Growth

Someone got sick of multiplying by 1.08 and invented exponents.

Here, I use the ^ sign because that’s how most spreadsheets and calculators compute exponents. Another way to show it is superscripts.

1.08^2 is an 8% annual growth for two years
1.08^3 is an 8% annual growth for three years
1.08^40 is an 8% annual growth for 40 years

Multiplying by the starting value estimates each year’s ending value:

End of Year 2 = $10,000 * 1.08^2 = $11,664
End of Year 3 = $10,000 * 1.08^3 = $12,597…
End of Year 40 = $10,000 * 1.08^40 = $217,245!

That is, $10,000 invested at an 8% return would grow to more than $217,000 over 40 years!

We mortals are primarily limited by our age and lifespan. 😉

By the way, the exponential calculation is my favorite way to quickly estimate future values!

Congratulations on making it through that Math Obstacle Course!

Auto-Increases AND Compound Interest

Here’s where it gets especially fun. Let’s combine:

automatic saving increases and
compound interest.

Grow Savings at 3% Annually

Extending the previous example, someone:

saves $10,000 a year and
earns an 8% return annually for 40 years.

However, instead of saving a fixed $10,000 each year, they save 3% more each year.

That small change has a big impact!

Instead of:

Saving $400,000 and having almost $2.8 million, they’d
Save about $754,000 and have nearly $4.0 million at the end of 40 years.

How might that be achieved? By setting a high, yet achievable, retirement plan contribution percentage and letting raises do the rest.

Thanks, grandma! Rest in peace.

Laziness, a Virtue?

Yes! Laziness is a virtue. Someone got sick of carrying heavy stuff and invented the wheel. 😉

As James Clear - author of Atomic Habits - says:

You do not rise to the level of your goals,
you fall to the level of your systems.

Creating a saving system can make all the difference.

P.S. Nudge

If you’d like to devour a great book on the subject, check out:
Nudge: Improving Decisions About Wealth, Health, and Happiness

It’s written by:

Richard Thaler, winner of the Nobel Prize in Economics and
Cass Sunstein, winner of the Holberg Prize.

I’d suggest the book to anyone looking to make better decisions.

I consider it a must read for financial planners.

Hey, thanks for reading my post on how to benefit from inertia.

Just a reminder, I share a lot of resources that can help you.

Pros and Cons of a Health Savings Account

Kevin Estes — Mon, 30 Oct 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to Health Savings Accounts in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Open Enrollment HSA

It’s fall and you know what that means. It’s open enrollment season!

With open enrollment comes questions about the Health Savings Account, or HSA.

What is a Health Savings Account?

An HSA is a tax-advantaged way to save money for qualified medical expenses. Funds can be invested an grow for the future.

The key word in Health Savings Account is savings.

Healthcare Flexible Spending Account (FSA)

With a healthcare Flexible Spending Account - or FSA - someone might lose unused funds at the end of the year.

At the end of 2023, only $610 can be carried over to the next year with a healthcare FSA.

It’d likely make sense for someone about to lose funds to pay for qualifying medical expenses before year end! HINT HINT!

Health Reimbursement Arrangement (HRA)

Employees might also lose funds in a Health Reimbursement Arrangement (HRA) account.

Employers may cap how much an employee can carry over from year to year. Balances above that limit may be lost forever.
Employers might also decide employees forfeit unused HRA funds when they leave the company.

Health Savings Accounts Are Portable

Unlike a healthcare Flexible Spending Account (FSA) and a Health Reimbursement Account (HRA), a Health Savings Account (HSA) is portable.

An HSA isn’t use it or lose it!

Someone who leaves an employer can take their Health Savings Account with them instead of losing it in a corporate version of Finders, Keepers.

The funds could also be used right away to pay for qualified medical expenses, though that often isn’t the best move.

HSA Triple Tax Advantage

The biggest advantage of a Health Savings Account is its triple tax advantage. It:

avoids taxes on the front-end,
grows tax-free, and
can be withdrawn tax-free if used for qualified medical expenses.

That is, it might olé the taxman altogether!

Biggest Drawback: High Deductible Health Plan

The biggest drawback is that to contribute to an HSA, someone needs to be on a High Deductible Health Plan - or HDHP.

How much someone must pay out of pocket before the insurance company pays anything – the deductible – is at least:

$1,500 for an individual and
$3,000 for a family.

Fortunately, there’s a maximum of:

$7,500 for individuals and
$15,000 for a family.

However, someone’s out of pocket medical expenses could be quite high with a high deductible plan. It’s a risk.

First, Evaluate the HDHP

It’s important not to let the tax tail wag the health insurance dog.

If the High Deductible Health Plan is the right call without the tax benefits, sign up!
Then consider contributing to a Health Savings Account.

2023 HSA Contribution Limits

The most that can be contributed to an HSA in 2023 is:

$3,850 for an individual or
$7,750 for a family.

That doesn’t seem like much until you consider the average American only saves about $5,000 a year – total.

Those age 55 and wiser can contribute an extra $1,000 with a catch-up contribution.

However, once someone goes on Medicare, they can no longer contribute to a Health Savings Account.

It’s Uncle Sam’s way of saying:

I want YOU to save EARLY.

Last Month Rule

There’s also a sweet “last month rule” for Health Savings Accounts.

In most cases, if someone is on a qualifying high deductible plan by December 1st, they can make the full-year HSA contribution.

Someone who goes on a qualifying plan in November can contribute the full:

$3,850 on individual or
$7,750 on family coverage.

However, there’s a catch.

They would need to stay on the high deductible plan for over a year - specifically through December 31st of the following year.

If they were to leave the plan before then, they’d have to pay income taxes PLUS a 10% penalty.

Qualified Medical Expenses for HSAs

Qualified medical expenses need to be for the:

insured individual,
their spouse, or
their dependents.

Fortunately, the list of qualifying medical expenses is as long as a Christmas list and includes:

preventative care,
insurance premiums, and
ongoing expenses.

Preventative Care

Covered preventative care expenses include:

physical exams,
immunizations,
tobacco cessation,
weight loss programs, and
screening services for cancer, heart disease, mental health, vision, and hearing disorders.

Ah, the joys of aging.

Insurance Premiums

Covered insurance premiums include long term care insurance premiums and healthcare premiums when:

unemployed,
on COBRA, or
on Medicare.

Let's run that back.

Even though someone can no longer contribute to an HSA once they go on Medicare, they can use the HSA funds to pay Medicare premiums.

Ongoing Expenses

There's also a whole host of covered care expenses:

prescription drugs,
dental treatments,
chiropractic, and
physical / speech therapy.

Also covered are pregnancy tests, infertility treatments, and - in case somebody wants to go the other way - birth control and vasectomies.

Reduces Payroll Taxes

Another tax benefit is that unlike most retirement plan contributions, contributions to a Health Savings Account reduce payroll taxes.

They're not subject to:

Medicare,
Social Security, and
federal unemployment tax.

No Income Limits

Health Savings Accounts also don't have an income limit like IRAs do, making HSAs popular with higher income taxpayers.

There's not even a requirement to have earned income to contribute to an HSA. Someone who has only investment income - such as an early retiree - might reduce their tax bill by contributing to a Health Savings Account.

Adult Child HSA

The Affordable Care Act enabled children to remain on their parents insurance until they turn 26. Someone can't be a dependent of another taxpayer and contribute to a Health Savings Account.

However, an adult child who's moved out of the basement and works full time might no longer be a dependent.

The parents may be able to contribute $9,750 to their Health Savings Account:

$7,750 family contribution +
each of their $1,000 catch-ups

The adult child, technically an independent taxpayer on a qualifying family High Deductible Health Plan, may also be able to contribute $7,750 to their Health Savings Account.

The parents might even make the contribution for their independent adult child, lowering the child’s taxes while helping them save for the future.

Heath Savings Account Downsides

We already explored the biggest downside of a Health Savings Account, the high deductible.

Contributing to an HSA also reduces how much cash is available for everything else. If funding's needed for ongoing expenses or to pay down high interest debt, contributing may not make sense.

None of this is financial advice, but pay your bills.

Keeping the lights on takes priority!

May Not Be Appropriate for Lower Tax Brackets

Contributing to a Health Savings Account may not be appropriate for those in lower tax brackets.

The cost of locking the money up for years or decades may be higher than the tax savings.

May Not Be Appropriate for Lower Tax Brackets

Another drawback is that whatever an employer adds to an HSA reduces how much the employee can contribute.

Mike is a single 27 year old.
His employer added $1,000 to his HSA.
The most he can contribute to the plan in 2023 is therefore $2,850 ($3,850 - $1,000).

It's an HSA teeter totter. That's not how it works for retirement plans, where employer contributions generally don't limit employee contributions.

Check Other Employer Plans

It's worth checking the employer contribution to the other healthcare plans.

A Flexible Spending Account (FSA) or Health Reimbursement Arrangement (HRA) might receive more employer contributions. After all, corporate might keep the leftovers!

I often suggest people catch money when it's thrown at them.

Possible Limits for Highly Compensated Employees

Some employers also have a history which limits how much high income employees can contribute to a Health Savings Account.

There are tests to ensure highly compensated employees aren't the only ones who benefit from these plans.

High Deductible Plan Only

Finally, if someone has a High Deductible Health Plan, they generally can't have any other health coverage and contribute to a Health Savings Account.

This is more of an issue for dual income couples, who each have health care coverage through work.

HSA Not Like a Retirement Plan

A Health Savings Account doesn't work quite like a retirement plan.

Employer contributions typically don't reduce employee contributions with a 401(k), like they do with an HSA.
The minimum age for catch up contributions is 50 for a 401(k), and 55 for an HSA.
Instead of a 10% penalty for non qualified withdrawals with a 401(k), it's 20% for a Health Savings Account...
and instead of being waived at age 59.5, as with the 401(k), the golden age is 65 for an HSA.
Typically, all funds in a 401(k) can be invested. However, HSA custodians often require a minimum amount of cash, such as $2,000. Funds in cash also often receive limited interest.
Finally, someone on Medicare can continue to save into a 401(k). However, that's not the case for an HSA: Uncle Sam cuts us off.

Can Wait to Submit for Reimbursement

A neat feature of the Health Savings Account is that someone doesn't have to submit for reimbursements right away.

They can instead save their detailed receipts in a safe digital place and then submit them as needed.

Withdrawing money from an HSA is a bit like taking contributions out of a Roth IRA. Just because it CAN be done doesn't mean it SHOULD.

Instead, someone could pay for those expenses out of pocket and let the HSA investments grow tax free for decades.

That said, it's nice to have those receipts handy should the need arise!

Hope This Helps

I hope this helps for you to better understand HSAs before your open enrollment deadline.

This article leveraged IRS Publication 969. It’s a great resource if you’re looking to explore further!

Hey, thanks for taking time to learn more about the pros and cons of a Health Savings Account.

Just a reminder, I share a lot of resources that can help you.

How Disability Insurance Works

Kevin Estes — Wed, 18 Oct 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to disability insurance in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

Career Stage Influences Insurance Need

Those of us who work trade time for money.

We typically start out with an ability to work decades. As we age, the years we can work falls.

Ideally, we save and invest along the way. Working also qualifies us for Social Security and, less often, pensions.

The way this plays out has major implications for insurance.

Role of Insurance

Insurance is a way to protect against mostly random bad events. Rare and expensive risks are ideal for insurance:

a medical emergency,
automobile accident,
natural disaster, et cetera.

Disability Insurance Is Critical Early

Disability insurance is critical early in careers.

After all, that's when we have the most future earnings to lose!

May Pay 40-70% of Income

Insurance is intended to help replace what someone had before a loss. That's why disability insurance is usually based on a percentage of income.

60% is somewhat standard. However, it can range from 40 to 70%.

There's often a cap, which may cause higher earners to receive less than half their regular income.

Why Are Benefits Less Than 100%?

First, benefits will be tax free if the worker pays the premiums. Those in high income tax states might see similar take home payments.

Second, the insurance companies and employers, who often pay for disability insurance, have an incentive for workers to return to work. Someone may be less dedicated to rehabilitation if they're paid as much on disability as they are working.

Third, employees are hopefully saving at least some of their income. Partial disability income replacement is yet another reason to keep expenses well below income.

Short-Term Disability

Short-term benefits typically last three to six months. After that, the worker may qualify for long-term disability benefits.

Short-term disability is usually for the worker's own occupation - or own occ. They typically receive benefits if they're unable to perform their regular responsibilities.

Long-Term Disability

The definition of long-term disability is much more variable and crucial. Many plans only offer any occupation - or any occ - coverage.

That means someone may receive little or no long-term benefits if they're able to work at all.

Importance of Own Occupation

Think of a surgeon who can no longer perform surgeries, yet can greet retail customers. For the surgeon to receive benefits based on their medical training and skills, they would have needed an own occupation - or own occ - disability policy.

There are different types of own occupation disability insurance such as modified own occupation beyond the scope of this article.

Doesn’t Social Security Pay Disability Benefits?

It does, to some extent.

However, the Social Security definition of disability is extremely limited. It generally requires someone be unable to work in any capacity.

Beware that private disability insurance benefits are often reduced by any Social Security disability benefits received.

What About Workers’ Comp?

For workers compensation to apply, the cause of the disability must generally be work related and occur on the job.

The standard work week is 40 hours.
There are 168 hours in a week.
Holidays and vacations further reduce the number of hours at work.

Full time employees typically spend less than a quarter of their time on the job.

According to the Social Security Administration, only 36% of workplace disability occurs because of an accident, injury, or illness at work.

Even More Important for Families

While disability insurance is important for individuals, it's crucial for families.

With disability:

costs - especially medical - often rise
while income falls.

Employees may need disability insurance beyond an employer group plan.

Individual Policy May Be Ideal If Leaving

Individual disability may be especially important for those who plan to leave their employer. Employer disability insurance usually ends when someone leaves the company.

As an extreme example, someone who works a desk job and yearns to guide whitewater rafting trips full-time might be ahead to purchase individual disability insurance.

Rates and coverage may be much better with the desk job!

Virtuous Cycle

Fortunately, there's a bright side! Those who've saved and invested for years may already have many of their financial needs met.

All else equal, a higher net worth tends to decrease disability insurance needs. It may make sense to lower disability insurance as assets grow.

The same might be true for life insurance. Falling insurance costs are one of the many virtuous cycles with rising wealth.

Hey, thanks for reading my post on how disability insurance works.

Just a reminder, I share a lot of resources that can help you.

Happy National Boss’s Day!

Kevin Estes — Mon, 16 Oct 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to some great bosses in a moment.

But first - here are some links you may want to save for later.

Benefit from Stop, Start, Continue!

Now, let's get on to the blog! 😀

Best Bosses?

Who have some of your best managers been?

What made them great?

Some of my standout supervisors (in chronological order) include:

Tony Russo, ZS Associates

Tony was my first professional manager.

What I remember most about Tony was the feeling I had when meeting with him: calm.

I was nervous as a management consulting summer intern.
Tony always had a way to simplify things and put them in perspective. 🙂

Gary Austin, AutoZone

Gary was my first full-time professional manager.

I loved working with him! He genuinely cared about each of his employees and is seriously funny.

Our team accomplished a lot… though it rarely felt like it.

Thushan Wijesinghe, T-Mobile

As my hiring manager at T-Mobile, the first thing Thushan did was allow me time to learn the culture and systems.

He gave me copies of recent PowerPoint presentations and reports to review: “Let me know if you have any questions.”

Did I ever! He answered them all.

Thushan was always patient, thoughtful, and kind.
He worked hard to ensure his teams were as well.

Orna Samuelly, T-Mobile

Orna is truly one of a kind!

The metaphorical elephant in the room? She calls it out with humor:

"Look at the funny hat on that elephant!”

She’s a master of challenging people without upsetting them.

Orna put her team first, pivoted when something didn’t work, and prioritized wonderful team events.

Thank You, All!

Thank you Tony, Gary, Thushan, and Orna for your wonderful leadership.

I still get the opportunity to connect with almost all of them… which is remarkable since each of us moved on from those employers years - or even decades - ago!

Situations change. Feelings, stories, and relationships endure.

What About You?

Have you had a great manager? Do you currently?

If so, let them know!

Hey, thanks for reading about National Boss’s Day!

Just a reminder, I share a lot of resources that can help you.

Could an All In One Mortgage Cost an Extra $270,000?

Kevin Estes — Thu, 12 Oct 2023 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to All In One mortgages in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

First-Time Homebuyer Example

A first-time homebuyer I met was excited about an all in one mortgage.

I hadn’t heard about it so I asked for more information and did some research.

What Is an All In One Mortgage?

An all in one mortgage combines elements of a:

checking account,
mortgage, and
Home Equity Line of Credit (HELOC)

Payments are applied to the mortgage principal and interest yet still available for withdrawal.

How much a borrower can have outstanding decreases over time. The credit amounts available at different years looks like a traditional amortization schedule.

To qualify, a borrower typically needs a large downpayment and very high credit score.

Convenience as the Primary Benefit

It’s certainly appealing to be able to borrow more money for a home without:

applying for a Home Equity Line of Credit (HELOC),
getting an appraisal, or
incurring additional fees.

That convenience comes at a cost. Products are more expensive at the neighborhood convenience store than the big box retailer!

The lender quoted the homebuyer 30-year interest rates of about:

9% for the all in one versus
7% for the traditional mortgage.

Paying Less Interest?

An all in one lender makes the claim that the entire payment reduces the principal balance and therefore reduces interest expense.

That initially sounds compelling.

However, it’s similar to how traditional mortgage amortization works. Reducing the balance and charging interest monthly is mathematically similar to paying interest with the payment.

Paying It Off Earlier?

Another claim an all in one lender makes is that borrowers can pay the mortgage off earlier.

That feature’s also available with traditional mortgages!

Prepayment penalties are rare for mortgages. In the event there is a prepayment penalty, it might only apply if someone pays off the entire balance early in the life of the loan.

Additional payments made on a traditional mortgage typically reduce the principal balance one for one.

Lenders often don’t care. Banks commonly sell mortgages soon after issuing them. That’s part of why conforming loans typically have lower interest rates - they’re easier to sell!

Flexibility, a Double-Edged Sword

A lender selling all in one mortgages claims borrowers can access equity with the ease of a checking account. That may be helpful for people with inconsistent income or temporary needs!

However, making it easy for borrowers to borrow runs counter to paying the loan off early.

Expensive Credit

That may also be an expensive funding option.

9% is higher than I like to see personal credit card interest rates!

Emergency Fund

An emergency fund is a more time-tested approach.

People with variable income or expenses may be ahead to maintain larger emergency funds. These balances might currently earn up to a 5% interest in a high-yield savings account.

Compare Apples to Apples

I object to how the all in one and traditional mortgage options were presented to the first-time homebuyer:

The traditional mortgage quote included property taxes and insurance in the monthly payment estimate.
The all in one mortgage quote did not.

There was a note that the all in one loan doesn’t allow property taxes or insurance accruals to be combined with the monthly payment. Those must be paid by the borrower separately. Calling it “all in one” seems like a stretch!

In my opinion, quoting one monthly payment with property taxes and insurance and another without is misleading.

It’s like comparing apples and orangutans!

An Extra $270,000

Estimating the total amount paid for loans of the same length is the great equalizer:

Start with the downpayment
Multiply the monthly payment by the number of months
Add the two and compare the total cash out of pocket

In this case, the downpayments were about:

$240,000 for the all in one
$200,000 for the traditional mortgage

The principal and interest payments were about:

$5,500 for the all in one
$4,850 for the traditional mortgage

All together, the all in one mortgage was scheduled to cost the homebuyer $1.98 million compared with $1.75 million for the traditional mortgage.

It was > $270,000 more for 30 years. That’s nearly $10,000 extra a year!

Assets Under Management

The lender went so far as to suggest all in one loans are good for advisors who manage assets. Apparently, the equity in the home can be used in advisors’ fee calculations.

However, that’s a potential conflict of interest. In my opinion, a fiduciary advisor who’s required to do the best thing for the client at all times would need to disclose and manage that conflict.

All In One May Be Appropriate

That’s not to say that an all in one mortgage is never the right solution. I was genuinely excited by the convenience of the product. In this case, it seemed expensive.

Hey, thanks for reading my post about all in one mortgages.

Just a reminder, I share a lot of resources that can help you.

Charge Market Rent!

Kevin Estes — Wed, 11 Oct 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to charging market rent in a moment

But first - here are some links you may want to save for later.

Raise Rent on Parents?

Now, let's get on to the blog! 😀

Renting for Less Than Market

Many clients who own investment real estate undercharge for rent.

Few things can improve profitability and cash flow like a reasonable price increase. A change may lift profitability for as long as someone owns the home. It also raises the value of the property for investors looking to buy.

Several states and cities control how much rent can rise. Failing to charge market rent can depress income for years - even decades - especially in a time of high inflation.

Impact of Pricing Appropriately

An additional $200 a month is an extra $2,400 a year.

Invested at an 8% annual return, $200 a month could grow to almost $119,000 over 20 years!

Pricing a rental right may have lifelong benefits.

Could Impact Keep vs. Sell

A couple I recently met rents to their parents. They were shocked when I showed them how much under market their rent is.

You see, their cost for the rental hasn't changed much, although the market has. Between appreciation and higher interest rates, the monthly expense of buying a home in their area has skyrocketed.

Those higher costs have driven up rents.

The couple was planning to sell their rental soon. Now, they're reconsidering.

Not Helping Tenants Long-Term

Charging below market isn't doing tenants any long-term favors. By charging market rent, an owner has more funding and accountability to maintain the property.

When it inevitably comes time to either remodel or sell the property, tenants will probably need to move.

They could be in for a nasty surprise on how expensive rent is.

Could Impact Life Decisions

We decided not to buy a home because of our great housing deal.

Unfortunately, our landlords got divorced - hopefully not over our rent!

The husband needed to move into "our" home as soon as possible.

We didn't have time to buy and wound up renting another home.

1. Determine Market Rent

What is the market rent?

Rental estimates on websites like Redfin and Zillow are good places to start.
Another source is local listings.
Asking people who live nearby their opinion can be invaluable.

2. Plan the Adjustment

The next step is to plan how much to adjust rents. Check state and local laws for any caps on how much rent can rise.

At the very least, owners are required to give tenants enough time to have options. It's the right thing to do.

3. Meet with Tenant(s)

Finally, meet with the tenants.
Bring facts and a lot of empathy.

Mention property taxes have risen.
If needed, show tenants comparable rental listings.

Then, price appropriately.

Hey, thanks for learning more about charging market rent.

Just a reminder, I share a lot of resources that can help you.

Schedule Your PTO ASAP

Kevin Estes — Mon, 09 Oct 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to Paid Time Off in a moment.

But first - here are some links you may want to save for later.

We Rode in a Self-Driving Vehicle

Now, let's get on to the blog! 😀

PTO ASAP

Now is a wonderful time to book your Paid Time Off (PTO) through the rest of the calendar year!

Vacation rentals begin to book.
Flight prices start to rise.
Calendars get full.

Call Dibs

It’s not just the calendars of your friends and family members. You also have to worry about your coworkers’!

Holiday coverage can be a struggle for many teams. People who schedule late may have limited say in which days they can take off. 😯

Claim the days which work best for you and your family now!

Use It Or Lose It

Many companies - T-Mobile included - limit how many hours can be rolled over. Hours above the limit are forfeited / lost / involuntarily donated to the company.

Full time employees can usually roll over two weeks (80 hours) at the end of the year.

However, during my tenure with T-Mobile, it:

shrank to as little as 1 week (40 hours) and
grew to as much as 3 weeks (120 hours).

Avoid the drama. 🎭 Schedule your Paid Time Off (PTO) through the rest of the year now!

How About You?

I’m always on the lookout for great vacations.
If you have a good one planned, let me know!

Hey, thanks for reading my post on taking Paid Time Off (PTO).

Just a reminder, I share a lot of resources that can help you.

Are Employee Stock Purchase Plans Underrated?

Kevin Estes — Wed, 04 Oct 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to whether ESPPs are underrated in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

What Is an Employee Stock Purchase Plan?

An Employee Stock Purchase Plan is a way to potentially leverage employer stock with less risk.

Here's how the plan worked at a couple of my employers: each company offered a 15% discount and a six month lookback.

That meant the price I paid was 15% off the lower of the price at the beginning and end of six months.

ESPP Example with a Rising Share Price

Let's say that on April 1st the stock price was $100.

It was a good six months! The stock rose to $110 by September 30th. The lookback took the lower of the two prices, so $100.

15% off that is an $85 purchase price.

Without trading restrictions, the shares can be sold immediately for $110. That's a $25 per share, or 29%, gain.

The employee may have hardly owned the stock! Remember, the underlying stock grew just 10% over the six months.

ESPP Example with a Flat Share Price

If instead the price had stayed at $100, the purchase price would still have been $85. However, the shares would only be worth $100.

That's a $15 (or 18%) gain for a very short time owned. Not bad, considering the underlying stock was flat for six months!

Mechanics of Purchasing Discounted Stock

To participate, someone would need to sign up at least a few weeks before the offering period begins.

They'd choose a percent of their income to contribute, up to 15%. For higher earners, there's also a contribution cap of $25,000 each year.

Once the six month offering period starts, after-tax dollars would drip into an account later used to buy shares at a discount on the purchase date. To fund the purchase plan, less cash would be deposited into the employee's checking account each payday.

Complexities

Employee Stock Purchase Plans don't all work the same.

Participating in a stock purchase plan isn't for everyone, especially those without the cash flow to swing it. Also, some employees may have trading restrictions which add risk to participating in the ESPP.

If someone can participate, selling soon after purchase might fund the next round of contributions.

Form 3922 to Report Taxes Correctly

Some of the most popular tax software programs default to give no credit for the after-tax dollars used to buy the shares. Without entering the information in correctly, they might treat the whole sale as taxable.

At the beginning of each year, participants receive a Form 3922 which can be used to fill out the tax forms correctly and avoid double taxation.

Be sure to keep these forms until after the shares are sold. That information will be used to file accurate tax returns.

Hey, thanks for learning more about Employee Stock Purchase Plans.

Just a reminder, I share a lot of resources that can help you.

92% Prefer Remote or Hybrid

Kevin Estes — Mon, 02 Oct 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to hybrid and remote work in a moment.

But first - here are some links you may want to save for later.

The average one-way commute in 2019 was 27.6 minutes.

Now, let's get on to the blog! 😀

Recent Poll Results

The results of a recent LinkedIn poll were fascinating! 😲

What’s the best way to work?
32% Remote
60% Hybrid
8% In Person
0% Not sure

Hot Takes

No-one - 0 out of 119 voters - was uncertain about their response! (The survey ran for a week: 9/15-9/22/2023.)

These were the most responses I’ve received on a LinkedIn poll to date. This poll struck a nerve!

That only 8% of respondents felt in person was the best way to work floored me (no pun intended).

4x voted for remote than in person
7.5x voted for hybrid than in person

Who Responded

Some context may help:

A plurality of voters were T-Mobile employees.
The sample included essentially no front-line workers such as healthcare professionals or retail store employees.
The median title was manager.

Why the Response?

My hunch is that people like the following about working remotely:

Schedule flexibility
Cost savings
Additional time
Improved focus
Health benefits

Schedule Flexibility

People like the flexibility to:

let the contractor into their home,
drop off / pick up the kids from school,
let the dog out,
take out the trash…

Cost Savings

Different studies on the annual cost of commuting range from $3,000 to $9,000. Given the rise in automobile and fuel prices since the pandemic, it may be on the higher side.

Also, being forced to work from home taught many of us that previous estimates based on cost per mile may have been low.

For many families, it’s not just the cost of driving. It’s the cost of owning a second auto! 🚘

Additional Time

Multiplying by two comes to nearly an hour getting to and from work each day. ⏱

Improved Focus

The office work environment can be distracting!

Coworkers often have questions they could answer themselves

Can I Google that for you?

Supervisors discuss opportunities before thinking them through.
Don’t get me started on meeting about meetings. 🤣

There’s a reason so many people wear oversized headsets that the office can look like a silent disco!

Health Benefits

There are also health benefits of working remotely:

Someone can reduce how much time they sit on their duff in traffic.
Tough meetings are easier to shake off with a chance to take a breathe.
Someone can do quick workouts throughout the day… which would be awkward in the office.
There are opportunities to pet the cat 😸 or go for a walk around the block to destress.

People Still Want In-Person Interaction

Nearly twice as many respondents preferred hybrid to remote.

Respondents appreciate connecting in person…
just not all the time!

For many, having some workdays that are social and others that are focused seems to strike a wonderful balance.

What’s Do You Think?

Do you have a different interpretation of these poll results?
If so, please let me know!

Hey, thanks for reading my post about remote and hybrid work.

Just a reminder, I share a lot of resources that can help you.

Is It Worth Holding Employer Stock?

Kevin Estes — Wed, 27 Sep 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to employer stock in a moment.

But first - here are some links you may want to save for later.

Where We Focus vs. What Sinks Us

Now, let's get on to the vlog! 😀

Understandable to Want to Keep It

I've always felt a connection to the work I do!

That's why I chose to work at T-Mobile, Amazon, and other companies. I felt real ownership.

There’s also some internal marketing:

Company restricted stock and stock purchase emails are super positive.
All-employee meetings often highlight the stock performance… when it’s risen.

However, there are three primary reasons holding employer stock might be less than ideal.

1. Already a Lot Riding on the Company

Employment is often the biggest driver of wealth creation.

Unfortunately, it only takes one person, someone’s supervisor, to decide they're not performing and they're out of a job.

Their position may also be eliminated if their team or department is laid off.

Public companies also have an outsized impact on the local economy. The value of real estate and small businesses depend on the health of these big local employers.

The Contagion Effect

Being overextended in a company stock could cause a quadruple whammy:

the stock price may fall,
the employee might lose their job,
their home value may drop, and
their spouse might also lose their job.

Unfortunately, I saw it happen.

A billion dollar retailer went out of business in a town of less than 10,000 people.

To say it impacted the local economy is putting it mildly.

I call this the Contagion Effect.

2. Employer Stock Has More Risk

Employer stock has greater risk than the overall market.

Single stock risk is the chance something will happen to one company:

a major competitor enters their space,
a key executive retires or performs poorly,
someone cooks the books, etc.

These risks are reduced by holding a bunch of smaller investments instead of one huge one.

That’s diversification!

But MY Company’s Different!

I've worked with coworkers and clients at many companies.
Employees always seem to think their company is special.

On average, they're average.

Someone can reasonably expect average returns for their company. An investment with an average return and above average risk is a poor investment.

3. Employees Are Already Rewarded

Finally, employees are often rewarded for company performance through:

bonuses,
restricted stock units,
stock options,
stock grants,
discounted stock purchases, and the like.

These programs offer significant upside if the company does well.

Hey, thanks for learning more about the costs and benefits of holding employer stock.

Just a reminder, I share a lot of resources that can help you.

Big Takeaways from XYPN Live 2023!

Kevin Estes — Mon, 25 Sep 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to my take on XYPN Live 2023 in a moment.

But first - here are some links you may want to save for later.

XYPN Live 2024

[92% Prefer Remote or Hybrid](<https://92% Prefer Remote or Hybrid

)

Now, let's get on to the blog! 😀

As a member of the XY Planning Network, I had the fortune to attend XYPN Live in Atlanta, Georgia last week.

Michael Kitces asked me about my big takeaways from the conference. They were all about mindset!

Biggest Takeaways

Stephanie Bogan’s challenge to think bigger
Michael Kitces’ closing keynote on scaling
Adam Cmejla’s perspectives on growth and automation

Funny Moments

A keynote presenter discounting the importance of "why" and then repeatedly referring to the network as "XPN"... without the Y!
Cecil Staton and Kyle Newell’s instant classic on Georgia and Florida football!
Alan Moore correcting someone about the spelling of his name on stage… and someone spoofing him in the Q&A chat as “Allen Moore”!
Zach Teutsch and Danika Waddell wearing matching plaid shirts the last night! #twinning

Met Some Influencers

I met many who were instrumental to me becoming a financial planner:

Alan Moore, Michael Kitces, and Maddy Roche opened the door to this world with their outstanding podcasts
Zach Teutsch was the first advisor to encourage me to launch my firm
Meg Bartelt shares innumerable insights about successfully launching and building a financial advisory
Andy Panko inspires me and hundreds of others to build communities
Valerie Rivera helps me set boundaries

Other Great Conversations

Mike Zung raising the efficiency bar
Jenn Steliga building the firm you envision
Holly Davis niching intentionally
Jason Howell learning from XY exhibitors
Maggie Klokkenga making meetings an experience
Patrick King committing to video
Daniel Kopp extraordinary impact
Jamie Clark systematizing everything
Brian Thorp website domain authority
Jay Zigmont launching an SEC registered firm
Joe Petry radical generosity
Lisa Eaton conference takeaways and marketing

Thank you all… and more!

Hey, thanks for reading my post about the XY Planning Network Live 2023 conference.

Just a reminder, I share a lot of resources that can help you.

Do You Have the 3 T’s to Manage Finances Well?

Kevin Estes — Wed, 20 Sep 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to time, training, and temperament in a moment.

But first - here are some links you may want to save for later.

12 Emotional Signs You Need a Financial Plan

17 Investment Signs You Need a Financial Plan

Now, let's get on to the vlog! 😀

3 T’s

The 3 T’s of managing personal finances are:

Time,
Training, and
Temperament.

Goal

The intent of this video is to create space for honest self-assessment.

What you’ve done in the past may be the best predictor of what you’ll do in the future.

Time: ⏱

How often do you or your spouse move money around to pay bills?
Do your finances run smoothly, or are things sometimes missed?
How much time do you spend reviewing your finances, checking account balances, and evaluating investments?

Training:🎓

How often are you confused or surprised by your finances?
What proactive steps are you taking to minimize your lifetime taxes?
Is your money working as hard as you, or do you sense it could do more - you just don’t know what?

Temperament:😎

Does thinking about money keep you up at night?
How confident are you that your goals will be funded?
Did you make any investment changes during the Great Recessions of 2008 to 2009?
If so, what?
What about at the beginning of the COVID-19 pandemic?

Hey, thanks for learning more about the time, training, and temperament of managing your finances well.

Just a reminder, I share a lot of resources that can help you.

Are You Less Behind Than You Think?

Kevin Estes — Mon, 18 Sep 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll consider where you are financially in a moment.

But first - here are some links you may want to save for later.

Are You Ignorning $900,000?

Now, let's get on to the vlog! 😀

Feeling Discouraged

Some people feel discouraged with their finances.

However, it’s not all doom and gloom!

Let’s say someone is 40 years old and has $200,000 saved for retirement.

Here’s where the “rule” of 72 comes in handy.

“Rule” of 72

It’s a way to determine about how long it takes an investment to double, given an annual growth rate.

Here’s how it works:

Divide 72 by the annual growth percentage.
The result is about how many years it takes to double.

Exponential Growth

This is why saving early is so incredibly powerful.

However, exponential growth is notoriously difficult for us to get our heads wrapped around.

The “rule” of 72 helps us understand its power.

Guideline, Not Rule

However, the “rule” of 72 is more like a guideline than an actual rule. It’s a rough estimate and more accurate at 6-9% annual growth rates.

Consider an investment which had the great fortune to double in a year:

It didn’t take 0.72 years - that is, 72 / 100.
It took the whole year to double.

That’s almost a 39% error!

When It’s Most Accurate

The “rule” of 72’s error rate is lowest around 8% annual growth.

Above 19% annual growth, the error rate is over 5%.

Limitations

Like many financial heuristics, the “rule” of 72 has real limitations.

I find it best to take the time to model growth accurately.

Thanks for learning more about compound growth.

Just a reminder, I share a lot of resources that can help you.

Could Waiting a Year Cost $140,000?

Kevin Estes — Thu, 14 Sep 2023 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to the compound benefit of improvements in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the vlog! 😀

Optimizing Finances Early

Many people put of financial planning.

That’s understandable! Life gets busy.

However, optimizing finances early can be impactful.

Let’s Look at an Example

A family is making progress. They own a home, have seen steady income growth, and save consistently.

Let’s say they make a series of changes:

minimize lifetime taxes,
maximize retirement plan contributions,
make the most of their stock compensation,
contribute to Roth and spousal Individual Retirement Arrangements (IRAs),
reduce investment fees,
pay down high interest debt,
and maximize real estate and business cash flow.

Impact Depends on Time

Each of these impacts their financial trajectory.

Here’s how much impact the improvement has over 5 and 40 years:

The longer these changes have to take effect, the bigger the impact.

Hypothetical Example: Save $500 a Month

Let's say that through a combination of maximizing income and minimizing costs, a family is able to save and invest an extra $500 a month.

With an 8% annual return (compounded monthly), $500 a month turns into about:

$37,000 in five years,
$91,000 in 10 years,
$295,000 in 20 years,
$745,000 in 30 years, and
$1.75 million in 40 years.

Impact of One Year

By the way, what’s the value of the last year?

Almost $140,000.

Waiting a year to optimize finances might cost $140,000 over the course of 40 years!

Hey, thanks for learning more about the impact of waiting a year to improve your finances.

Just a reminder, I share a lot of resources that can help you.

5 Ways to Lower Taxes Besides Donations

Kevin Estes — Wed, 13 Sep 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to several ways to lower taxes in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the vlog! 😀

Viewer Requested

A T-Mobile employee recently asked:

What kind of tools do people use to lower their taxable income and thus reduce their tax burden?

1. Pre-Tax Retirement Accounts

These are odd numbered accounts like 401(k), 403(b), and 457.

Contributions by employees reduce taxable income and grow tax deferred. The funds are taxed when withdrawn.

In addition to lowering taxable income, these contributions are often partially matched by the employer. That's like free money!

2. Health Savings Account (HSA)

HSAs are an increasingly popular tax savings tool.

They're special because they're triple tax advantaged. Contributions:

are excluded from income the year they're made,
grow tax-free, and
can be used tax-free for qualified medical expenses.

That is, they might avoid taxes altogether!

3. Spousal Individual Retirement Arrangement (IRA)

This is an often overlooked way to reduce taxes.

Let's say someone works full-time. Their spouse manages the household and cares for the children.

The stay at home parent will likely be able to contribute to a traditional Individual Retirement Arrangement account.

They don't actually need to earn any money to contribute as long as their spouse has enough income to cover them both!

4. Tax Loss Harvesting

Investment losses up to $3,000 may reduce taxable income for the year.

If someone has assets which have fallen in value, they may be able to sell them for a tax benefit.

There are many limitations, so care is required!

5. Sell Specific Shares

Investments held at least a year and a day are generally taxed at a lower rate than if they’re held for a year or less.

Many custodians default to selling the last shares purchased. Ouch.

Unfortunately, the tax impact of equity compensation is all over the board!

Hey, thanks for learning about five ways to lower taxes besides donations.

Just a reminder, I share a lot of resources that can help you.

Can Volunteering Save Your Life?

Kevin Estes — Mon, 11 Sep 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to this incredible story in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the vlog! 😀

Why So Long

I've been hesitant to share this story because I didn't know how it was going to end.

Clothing Ministry

As I was launching my business, my mom was doing her normal thing - including clothing ministry. Once a week, she'd help home insecure people get clothes.

She wanted to do some more advanced volunteering. Doing so required a physical exam.

Her fellow volunteer is a physician and offered:
"Just come on in. I'll give you a physical and fill out your form."

What She Found

She found a lump.

My mom went in for a biopsy.

Cancer.

It had grown quite large and spread to her lymph nodes.

Don’t Give Up

She underwent six rounds of chemotherapy. It was tough.

She was sick for days after chemo. Her mouth was full of sores. Getting her to eat anything was - at times - challenging.

Next came surgery. She had a lumpectomy and three nodes removed.

Results

We just found out that she's cancer free!

Chemotherapy worked perfectly.

So Many Thanks

Thanks to her friends and many others who were always there to help and often lifted her spirits.

She found it uncanny that whenever she started to feel down, someone called. It meant the world to her.

Above all, thank you to her friend and physician who convinced her to get the physical, found the growth, and did everything she could to give my mom the best care imaginable.

Volunteer

Who says volunteering doesn’t pay?

It likely just saved my mom.

Let’s End Breast Cancer

Thank you for helping end breast cancer with:
Susan G. Komen for the Cure

Hey, thanks for engaging with the story about how volunteering may have saved my mother’s life.

Just a reminder, I share a lot of resources that can help you.

Are You Ignoring $900,000?

Kevin Estes — Wed, 06 Sep 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to the importance of Social Security benefits in a moment.

But first - here are some links you may want to save for later.

What Percent of Workers Max Social Security?

Now, let's get on to the vlog! 😀

Viewer Requested

Someone who recently left T-Mobile and whose spouse still works with the company asked me the following:

Is it best practice to ignore Social Security benefits when planning for retirement?

No!

Social Security benefits are a big deal.

Assume a household will receive $3,000 per month in after-tax Social Security benefits.

Replacing that income might require a $900,000 portfolio!

1. Ignoring Them Can Reduce Benefits

Knowing how Social Security works may help a couple decide who works when.

2. Understanding Them Can Help Optimize Timing

Starting Social Security benefits at age 62 instead of age 67 could result in up to a 30% reduction in benefits every year for life.

Delaying Social Security benefits beyond the full retirement age increases the monthly benefits 8% each year delayed (up to age 70).

3. Ignoring Them Can Cause Someone to Work Longer Than Needed

It could take years or even decades to save the $900,000.

If someone dislikes their job, including the benefits in their financial plan might give them the flexibility to change their life.

4. Changing Them Rarely Happens and Takes Years

Simply increasing the full retirement age from 65 to 67 is scheduled to take 44 years!

Hey, thanks for learning more about Social Security benefits.

Just a reminder, I share a lot of resources that can help you.

Buying a Car

Kevin Estes — Wed, 30 Aug 2023 16:11:09 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to how to buy a vehicle in a moment.

But first - here are some links you may want to save for later.

Never Finance a Toy

Now, let's get on to the vlog! 😀

Viewer Requested

A few people have recently asked me my thoughts on car buying.

It's also coming up on the 11th anniversary of when our family last purchased a vehicle.

1. Always Know Your Best Alternative

If you don't have one, get one!

Having two good options gives you leverage.

Knowing your best alternative also helps you know when to walk away.

2. Negotiate Financing as Well

Identify how else you could pay for the vehicle, including cash and other credit.

Have a backup lender, just in case.

3. Come Prepared

Know what the vehicle has been selling for in your area.

Have strong credit scores and cash positions for a down payment.

4. Take Care of Yourself

Don't let them literally wear you down!

Take breaks. Eat snacks. Leave if you need.

You hold all the cards.

5. Get a Newspaper

That is, check out promotions in every form.

Try several media types.

Hey, thanks for learning more about how to buy a vehicle.

Just a reminder, I share a lot of resources that can help you.

Vacation + Disaster = Adventure

Kevin Estes — Mon, 28 Aug 2023 17:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to our overly exciting vacation in a moment.

But first - here are some links you may want to save for later.

We Rode in a Self-Driving Vehicle

Now, let's get on to the blog! 😀

Vacation

We recently visited Sandpoint, ID!

Here's a pic from Schweitzer Mountain overlooking the town.

I took it on a spontaneous hike which led to a beautiful waterfall.

Wildfires

We'd planned to go on a long hike the next day.
However, something impacted our plans.

You can actually see the trouble across the bottom of the photo.

Change in Circumstances

The first day was great!
We went hiking, had lunch, and went ziplining on Schweitzer.
That afternoon, we cooled off with a swim in the lake.

Then the wind shifted and brought heavy smoke from Canada, forcing us indoors.

Vacationers cancelled, replaced by evacuees at our hotel.

Pivot!

We adapted.

Instead of swimming in the lake, we swam in the indoor pool.

We still ate food from our favorite local restaurants even though it was takeout eaten in the hotel.

At one point, the manager of the supposedly dog friendly hotel asked me to remove our dog from the common area.
He didn't help his cause by thinking she was a friend who wanted to play!

Outdoor activities were replaced by watching reruns, reading books, and playing cards.

That led to a precious moment with our dog laying on top of his crate while we played a card game around him!

Reroute

Our trip home was impacted by the Interstate 90 closure around Medical Lake due to the Gray Fire.

Traffic was bad on the rural highways.

We stopped at a small town hamburger joint to use a restroom which didn't work well.

However, we shared what may have been the biggest - and tastiest - huckleberry milkshake ever!

Lessons

Someone once said:

Vacation plus disaster equals adventure.

So true!

I wonder how I might apply that to everyday life:

What can I do today that I might not be able to do later?
What if I gave myself - and others - as much grace throughout the year as I do on vacation?
How much more grateful would I be if I reminded myself how good I have it?

Vacationing while others were evacuating at the same hotel provided a vivid reminder of that reality.

My heart goes out to everyone who’s been impacted by the many wildfires. Thank you firefighters for everything you’re doing to contain the flames, save lives, and protect homes.

Hey, thanks for reading my post on a vacation adventure.

Just a reminder, I share a lot of resources that can help you.

Never Finance a Toy

Kevin Estes — Wed, 23 Aug 2023 16:09:26 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to financing luxuries in a moment.

But first - here are some links you may want to save for later.

Buying a Car

Now, let's get on to the vlog! 😀

What have you learned in odd places?

On a Boat!

A group of us friends were out on a boat in Northern Idaho.

Joe and Amber were trying to convince Kyle to buy a boat together.

They mentioned how low the monthly payment would be.

Who

We were all in our late 20’s.

Joe, Amber, and Kyle were - and still are - highly successful and seriously cool.

Joe and Amber were married and had moved cross country together.
Kyle was single.
Kyle’s father was the Chief Financial Officer of a thriving local business.

Decision

Kyle declined using four words I’ll never forget:

“Never finance a toy.”

What Happened Next

Joe and Amber divorced within three years:

Joe moved to California.
Amber threw herself into her horse passion.

Kyle would’ve been left holding both the boat and the loan.

He made the right call.

Oversimplified

As with every money heuristic, “never finance a toy” may not be appropriate for every situation.

Nonetheless, it’s a powerful framework I use often and thought you might appreciate.

Hey, thanks for considering whether it makes sense to finance a toy.

Just a reminder, I share a lot of resources that can help you.

Types of Spending

Kevin Estes — Mon, 21 Aug 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to different types of spending in a moment.

But first - here are some links you may want to save for later.

Buying a Car

Now, let's get on to the blog! 😀

Someone recently said:

I’ve decided spending is basically a hobby. It’s not about fulfilling needs really. It’s a way to occupy our time.

However, expenses are more nuanced.

What Current Spending Isn’t

Current spending is not:

debt repayment (past spending) or
investment (future spending)

Four Categories of Spending

The major spending categories are:

Needs
Entertainment
Societal
Addiction

1. Needs

A base level of spending is needed to meet most basic needs like food, clothing, and shelter.

Some people devoted to a religion full-time might get by without money. The rest of us generally cannot.

Spending on basic needs has a high physical benefit and a low psychological benefit.

2. Entertainment

The extreme opposite from basic needs is pure entertainment.

It’s spending for enjoyment, which includes things like hobbies, shows, and events.

Spending on pure entertainment has a high psychological benefit and a low physical benefit.

3. Societal

Next come expenses due to societal expectations. That’s the spending driven by what those around us expect or require.

We all need shelter but not necessarily a five bed, three bath house with a three car garage.

Taxes fall in this category as well.

At their best, societal expenses provide both physical and psychological benefits.

4. Addiction

The last major spending category is insidious.

Addictions can be physical like drugs and alcohol or psychological like gambling and extreme retail therapy.

They often cause long-term physical and psychological harm. All told, addiction is terribly expensive.

Multiple Categories

Many expenses includes elements of different spending types.

A nice dinner out offers nourishment, entertainment, and social connection.
In addition to providing physical shelter, a home supports entertainment and gatherings.
Food, drink, and dance at a concert provide physical benefits in addition to the live music.

Hey, thanks for reading my post on different types of spending.

Just a reminder, I share a lot of resources that can help you.

My Goal? Help People Reach Financial Independence!

Kevin Estes — Wed, 16 Aug 2023 16:04:54 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to helping people become work optional in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the vlog! 😀

My goal is to help as many people as possible reach financial independence.

If anyone chooses to work, it should be because they want to - not because they have to.

Pre-Launch

Before launching Scaled Finance, I invested months to develop a complimentary financial independence course.

Post-Launch

Since launching, I’ve settled into a social media routine:

Mondays usually focus on images I create, which I hope you find insightful, inspirational, or both.
Wednesdays are generally financial education videos.
Fridays are normally polls.

I repost helpful content on other days.
Those reposts are sometimes articles which include quotes I provided the author.

Thank You!

Thank you all who’ve checked out and engaged with my posts!

I hope you like them.

Next Steps

I’m actively working to develop the content you suggest!

I also prioritize themes I see in working with financial planning clients.

Creating and sharing content is one way I save clients money.
My hope is that doing so helps others as well.

Please keep your great questions and suggestions coming!

Hey, thanks for learning more about my goal to help as many people as possible reach financial independence.

Just a reminder, I share a lot of resources that can help you.

Combining Finances is Like a Dimmer Switch

Kevin Estes — Mon, 14 Aug 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to how a couple manages money in a moment.

But first - here are some links you may want to save for later.

Ignoring the Spousal IRA?

Now, let's get on to the blog! 😀

Are you in a committed relationship?

If so, combining finances can be hard!

Not All or Nothing

Many people believe integrating finances is all or nothing.

That’s not the case!
There are infinite ways to combine finances.

It’s not a binary light switch.
It’s more like a dimmer switch.

My Parents

Take my parents, for example. They initially spent what they wanted. Unfortunately, they realized they were spending too much.

They decided to pivot to a cash-based envelope system with three envelopes:

His
Hers
Pot

My mom is super religious - Wednesday small group, Sunday service, ministry, etc. She even helped plant a church! She and my dad were - and still are - very anti-drug.

Hilariously, they called the money they spent together “pot” money.

They each received an equal amount of cash at the beginning of each week:

She could spend her money how she wanted… such as painting supplies.
He could spend his money how he wanted… such as golfing.

The could each save whatever they didn’t spend toward something bigger.

Allocating funds significantly reduced their total spending! The autonomy to spend their fun money how they liked helped reduce their total expenses.

Wife and I

My wife and I have been together 15 years and still haven’t fully combined our accounts.

There are accounts in her name only and other accounts in my name.

We’ve added each other as joint account holders for many of our accounts. However, we still treat them separately. We pay different bills from our “individual” accounts.

Part of the reason is psychological. It works for us!

Friend’s Postnuptial

Without her knowledge, a friend’s husband had been sending money to his family members.

Unfortunately, he got cancer.

When he was sick, his family started reaching out to her for money. She knew that if she didn’t act, they’d sue her for his money.

She and her husband didn’t have a prenup, so they created a postnuptial agreement. She leveraged the legal system to put more financial distance between him and his family.

His estate remained intact. When he passed, his money went where he - not his family - wished.

Do You

It’s critical that you and your significant other do what works best for you!

Thinking about finances as either fully combined or totally separate is overly simplistic. There are millions of options!

Consider going slowly. You and your partner will hopefully have a lifetime to figure it out!

Hey, thanks for reading my post on how combining finances is more like a dimmer switch with infinite possibilities than a binary light switch.

Just a reminder, I share a lot of resources that can help you.

How Are Restricted Stock Units Taxed?

Kevin Estes — Wed, 09 Aug 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to RSU taxation in a moment.

But first - here are some links you may want to save for later.

Frequent Restricted Stock Unit Vests May Be Win-Win-Win

Now, let's get on to the vlog! 😀

Today’s question comes from a current T-Mobile employee:

What are the tax implications and capital gains when selling Restricted Stock Units?

Great question! Thank you for asking.

Let’s start with the basics.

Restricted Stock Units (RSUs) Defined

Restricted Stock Units are grants given to employees to help retain them and align their incentives with the company’s.

If the employee stays employed with the company through a certain date, they’ll receive company shares related to the number of Restricted Stock Units.

That’s called vesting.

After vesting, the employee owns and can usually sell the shares right away.

Accept Restricted Stock Unit (RSU) Grants!

Please accept your grants.

For T-Mobile employees, they’re usually made available in late February.

If they’re going to throw money at you, catch it.

Restricted Stock Unit (RSU) Grant Details

Say someone is granted and accepts 150 Restricted Stock Units on 2/25/2023. The units vest over three years:

50 units on 2/25/2024
50 units on 2/25/2025
50 units on 2/26/2026

Different companies have different vesting schedules.

At the time of the grant, the stock price was $100. Therefore, the total grant value was $15,000.

Restricted Stock Unit (RSU) Vest

Now, let’s pretend it’s 2/26/2024.

Good news! The employee still works with the company.

50 units vested yesterday!

Restricted Stock Unit (RSU) Tax Withholding

Unfortunately, the employee didn’t receive all 50 shares.

Some of the shares were sold to cover taxes.

Let’s assume 15 of the 50 shares were withheld for federal taxes, Social Security, and Medicare.

For T-Mobile, the withholding percentage is set for the employee by the company and communicated to Fidelity.

Instead of the full 50 shares, the employee received 35 shares.

Restricted Stock Unit (RSU) Income Tax

The value of the 50 shares is treated as taxable income.

Let’s say the stock price rose from $100 to $110 over the course of the year.

The employee is taxed on the value of the shares when they vested on 2/25/2024.

In this case, that’s 50 shares times $110 share price, or $5,500.

(50 shares * $110 share price = $5,500)

The full $5,500 is treated as income.

The 15 shares sold and withheld for taxes are worth 15 shares times $110, or $1,650.

(15 shares * $110 share price = $1,650)

Both the income of $5,500 and the tax withholding of $1,650 will be reported on the 2024 tax Form W-2.

Restricted Stock Unit (RSU) Shares Received

The remaining 35 shares are worth 35 times $110, or $3,850.

(35 shares * $110 share price = $3,850)

The employee receives 35 shares worth $3,850.

Here’s where people get confused!

The basis of the stock is equal to the value at the time the units vested.

The employee gets credit for having “paid” $3,850 for the 35 shares.

Unless subject to trading restrictions, the employee could sell the stock right after it vests for $110 and pay no additional taxes!

If the employee chooses to keep the stock, it’s like they use money in their checking account to buy it.

Is that what they want to do?

Restricted Stock Unit (RSU) Taxation After Vest

After vest, shares are treated as if the employee bought the stock for the share price on the vest date.

In this example, the shares are then treated as if the employee bought 35 shares for $110 on 2/25/2024.

Restricted Stock Unit (RSU) Short Term Gain

If they sell the stock on or before 2/25/2025, the gain or loss will be short-term.

Let’s say the price rises from $110 to $120 and the employee decides to sell it on 9/9/2024.

Because that’s less than a year after “purchase”, the gain will be taxed as a short-term capital gain - usually at the employee’s ordinary income tax rate.

Let’s say the employee is at the 24% federal marginal income tax bracket and they live in Washington, which doesn’t have a state income tax.

They’ll be taxed on the $10 gain for the 35 shares they sold.

$10 gain times 35 shares times 24% tax rate equals a tax of $84.

($10 gain * 35 shares * 24% tax rate = $84 tax)

Restricted Stock Unit (RSU) Long Term Gain

If they instead sell the stock on or after 2/26/2025, the gain or loss will be long-term.

Say they held onto the stock and sold it on 3/1/2025.

It’s been a meh few months and the stock is still worth $120.

Since they held onto the stock for at least a year and a day, they’re taxed their lower long-term capital gains rate of 15%.

$10 gain times 35 shares times 15% tax rate equals a tax of $52.50.

($10 gain * 35 shares * 15% tax rate = $52.50 tax)

Restricted Stock Unit (RSU) Long Term Tax Benefit

Holding onto the shares for over a year results in a slight tax benefit. Instead of paying $84 in taxes, they pay $52.50.

That’s nearly six months of risk for $31.50 in tax savings.

Restricted Stock Unit (RSU) Example Applicability

This is an admittedly simple example. However, the general principles apply to larger Restricted Stock Unit vests.

Hey, thanks for learning about how Restricted Stock Units are taxed.

Just a reminder, I share a lot of resources that can help you.

What Worked in the Past May Not Work in the Future

Kevin Estes — Mon, 07 Aug 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to what may need to change in a moment.

But first - here are some links you may want to save for later.

Where We Focus vs. What Sinks Us

Now, let's get on to the blog! 😀

Growth is required for future success.

Current of Change

For better or for worse, everything changes:

Companies grow or shrink
Finances expand or contract
People move into new personal or professional roles

Change is like a current.

Staying in place takes effort. Making progress takes even more.

New or New to You?

Most of life’s major changes occur daily:

Getting married
Buying a first home
Moving from individual contributor to manager
Becoming a parent
Transitioning from entrepreneur to CEO
Retiring

Each change requires new skills, tools, and perspectives.
However, people have developed, built, and gained them!

Seek Experts

Find individuals who made it from where you are to where you want to go.

Seek their counsel. Ask for resources and reference materials.

Heed their warnings. Perhaps the biggest benefit of a mentor is that they can help you identify blind spots.

Hey, thanks for reading my post on what worked in the past may not work in the future.

Just a reminder, I share a lot of resources that can help you.

How Does a Couple Reach Financial Independence?

Kevin Estes — Wed, 02 Aug 2023 16:24:50 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to how a couple becomes work optional in a moment.

But first - here are some links you may want to save for later.

Are You Less Behind Thank You Think?

Now, let's get on to the vlog! 😀

The math is relatively straightforward:

Estimate annual expenses
Subtract expected income
Multiply shortfall by 25

Step 1: Estimate Annual Expenses

The first step is to estimate annual expenses.

Expenses often fall after leaving full-time employment:

Taxes - including Social Security - drop significantly
Transportation costs also tend to fall
Housing costs my trend down as interest costs decrease with mortgage balances

Healthcare costs might rise, though it’s worth exploring costs on the state-based exchanges.

A good starting point is HealthCare.gov.

Step 2: Subtract Expected Income

Next, subtract any expected after-tax income: pensions, Social Security, part-time work, royalties, or other non-portfolio earnings.

Let’s say a couple:

expects to spend $100,000 a year once reaching financial independence
anticipates $50,000 a year in Social Security benefits after tax, and
has a $50,000 shortfall

Step 3: Multiply Shortfall by 25

How much would the couple need to fund that $50,000 a year?

Some diligent people studied past investment returns and inflation carefully. They concluded that a well diversified portfolio could fund withdrawals of about 4% a year, adjusted for inflation, for up to 30 years.

Take how much spending is needed every year - here it’s $50,000 a year - and divide by 4%. That’s the same as multiplying by 25.

$50,000 times 25 is equal to $1.25 million.

A couple who expects to spend $100,000 a year and anticipates Social Security of $50,000 a year after tax would theoretically need $1.25 million in a balanced portfolio.

Hey, thanks for learning more about how a couple reaches financial independence.

Just a reminder, I share a lot of resources that can help you.

What Percent of Workers Max Social Security?

Kevin Estes — Mon, 31 Jul 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to Social Security in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

I learned an amazing fact the other day.

6% Earn More Than the Social Security Max

Each year, only about 6% of covered workers earn more than the Social Security taxable maximum!

The maximum changes each year based on the growth in the national average wage. The limit is $160,200 for 2023.

Earned income above that avoids the Social Security tax.

What’s Included in Social Security Wages?

Social Security earnings includes:

base salary and wages
bonuses and commissions
Restricted Stock Unit (RSU) vests, etc.

Benefits of Reaching the Maximum

Tech workers often go weeks or even months without having to pay the Social Security portion of the FICA (Federal Insurance Contributions Act) tax each year. That 6.2% of gross pay instead goes to their checking account.

Hitting the Social Security maximum improves cash flow - which is especially helpful going into the holiday season!

However, these employees must still pay the Medicare portion of the FICA tax. There’s no limit on that 1.45% tax on earned income.

Did the 6% Surprise You?

I was shocked only 6% of covered workers reach the Social Security taxable maximum income each year.

How about you? Were you surprised?

Does knowing change your financial perspective?

Hey, thanks for reading my post on how rare it is for a worker to reach the Social Security income maximum.

Just a reminder, I share a lot of resources that can help you.

What Is Financial Independence?

Kevin Estes — Wed, 26 Jul 2023 16:18:46 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to financial independence in a moment.

But first - here are some links you may want to save for later.

Now, let’s get on to the vlog! 😀

When I tell people I’m part of the financial independence community, I get some funny looks.

Different for Everyone

That’s the beauty of financial independence.
Everyone’s definition is different.

At its core, it’s the ability to do:

what you like,
when you like, and
with whom you like

If you choose to work, it’s because you want to - not because you have to.

Chores Still

Let me be clear. There will always be elements of your life you won’t love:

errands to run,
groceries to get,
meals to prep

You can’t stop taking out the trash just because no longer go to work every day.

Retirement Is a Version

May people think of financial independence as retirement.
However, that word conjures up images of a life of leisure.

There’s only so much bridge and golf many of us can play.
Shuffleboard and Bingo aren’t yet fulfilling.

Life After Financial Independence

What people do when they no longer have to work can be amazing.

They might:

teach English to immigrants,
explore Europe,
mentor former coworkers,
train for a triathlon,
volunteer in local events,
start a nonprofit,
shift to a less stressful career,
found a business, etc.

How About You?

What do you want to do that you haven’t done?

Hey, thanks for learning more about financial independence.

Just a reminder, I share a lot of resources that can help you.

Permalink

Where We Focus vs. What Sinks Us

Kevin Estes — Mon, 24 Jul 2023 16:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to how we focus on strengths in a moment.

But first - here are some links you may want to save for later.

Now, let's get on to the blog! 😀

We tend to focus on what we know.
It’s specialization at its finest!

Unfortunately, this laser focus can create painful blind spots.

College Blank Check

One person retired early, manages their own investment portfolio, and uses the Rule of 55 to avoid the tax penalty for retirement withdrawals before age 59.5.

However, they uttered some expensive words:
”If you get in, we’ll figure it out.”

Their Senior applied Early Decision to an expensive private school… and were accepted!

Unfortunately, they hadn’t:

run the Net Price Calculator for the school,
completed the FAFSA, or
considered the CSS Profile

They’re paying full private school tuition even though their student would have had many good, affordable options.

It was like buying an 18-year-old a new Ferrari without checking the price tag.

Retirement, Uninvested

Someone else is saving aggressively.

They max out their 401(k) contributions, contribute to their Employee Stock Purchase Plan, own their home outright, and save into a Mega Roth.

How are their retirement funds invested?
Oh, they aren’t. They’re sitting in cash.

The person’s been waiting for a “good time” to jump back into the market.

Massive Conversion

A third person made good money, saved aggressively, and retired early.

They figured that since they had no earned income, it would be a good time to do Roth conversions.

So they did… about $500,000 of Roth conversions in a year!

Doing so would have pushed their income tax rate higher than it was when they worked.

Fortunately, they got the conversions reversed.

Break the Stigma

Money’s been a bit of a taboo topic.
As a result, personal finance blind spots seem to be widespread and significant.

Please discuss your financial decisions with trusted friends, family members, and/or professionals.

Hey, thanks for reading my post on where we focus versus what sinks us.

Just a reminder, I share a lot of resources that can help you.

Own Stock or Contribute to ESPP?

Kevin Estes — Tue, 18 Jul 2023 04:00:00 +0000

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to whether to own stock or contribute to an ESPP in a moment.

But first - here are some links you may want to save for later.