Retirement Success & Wealth Building

Posted on April 27, 2023 by TheWealthIncreaser.com

Learn the importance of successfully planning for your retirement years…

In the current market many soon-to-be retirees are feeling short-changed to a degree, as 2022 was not a good year for many in the financial markets. As a person who anticipates retiring and enjoying life abundantly in the future, it is imperative that you plan in advance to make a successful retirement a reality.

It is important that you realize that investment returns will go up and down from year to year but has historically averaged from 6% to 9%–which is more than you can get in most other places–relatively speaking.

In this discussion TheWealthIncreaser.com will focus on the importance of you choosing a portfolio that can lead you toward the goals that you desire–as you put a plan in place that will take you higher and higher–and lead to you reaching the retirement number that will not leave you in a quagmire.

Do the basics early so that you know where you stand

You must put yourself in position for a successful retirement by doing the basics or what you need to do on the front end. That includes creating a budget or cash flow statement, an income statement, a balance sheet and a net worth statement at the earliest time possible during your working years.

By doing so, you give yourself a helpful guide that can provide more direction as you formulate goals that are more precise and forward moving toward the lasting wealth building success that you need to achieve–and particularly your retirement planning success.

You want to at the earliest time possible contemplate the amount that it would take for you to feel confident about retiring and doing what brings you joy and happiness–consistently. There are a number of factors that you must consider (such as what your expenses will be) and unknowns (such as how long you’ll live) along with what you desire to do most during your retirement years.

You want to know the minimum number or baseline that you need to reach to pay your monthly expenses and live out the remainder of your life based on the life expectancy that you (or your financial planner) anticipate–based on sound analysis.

By using the 25x rule or other highly effective retirement planning formulas or techniques, you can get to your retirement funding in a manner that you can feel more comfortable as you approach your retirement.

The 25x rule, simply means that to stop earning new income (retire), you will want to have saved 25 times the amount you expect to need every year in retirement–as that should sufficiently fund your retirement for 25 years after you retire–and is generally a well planned life span for those who plan on retiring after age 60.

You can figure out what you’ll need for retirement using the 25x guideline by doing the following:

Your retirement calculation:

1. Start with your 25x number (25 times the amount you expect to need every year in retirement).

2. Subtract the savings you have today to get the savings you’ll need.

3. Estimate what your current savings may grow to by the time you reach, say, 62, by plugging that number into a compound interest calculator assuming a conservative 6%, 7%, 8% or 9% rate of growth.

4. Subtract that amount from your 25x number.

5. Divide the result by the amount you think you can save each year and you will have calculated the number of years you’ll need to get there.

Example:

1. Say your 25x number is $2,000,000. ($80,000 a year times 25)

2. Assume you’ve already saved $200,000. $2,000,000 – $200,000 = $1,800,000 (your target!)

3. If you’re 32 years old, by age 62 your $200,000 will be worth $1,522,451. (assuming 7% return compounded annually over 30 years)

4. $2,000,000 – $1,522,451 = $477,549 (subtract the amount from line 3 from your 25x number)

5. Say you can save $1,000 per month or $12,000 per year. (divide result from number 4 above by what you think you can save each year) $477,549 / $12,000 = 39.8 years

If you’re 32 now and have already saved $200,000, you could retire at 71 with 2 million in your account by saving $1,000 per month for roughly 40 years.

If you’re 32 now and have already saved $200,000 and you desire to retire at age 62 with 2 million, you would have to bump your monthly savings up to $1,333 per month or $16,000 annually ($477,549 / $16,000 = 29.8 years) for roughly 30 years.

Always remember that this is just an estimate, and there are more caveats (in addition to the ones above) as you must consider inflation and other factors that could eat into your savings–but your savings and investments may help offset that along the way if you attain the right return over time.

Always remember that investing always involves risk!

Although the stock market has traditionally averaged from 6% to 9% return on investments over a number of intervals–that does not mean your portfolio will meet that average as it could be higher or lower over your retirement savings interval.

Therefore, your assumed rate of return is not what may occur in actuality, and your rate of return over the years will depend on how you invest, save and allocate your money, including the level of risk in your portfolio and other political, regulatory, economic, societal, technological and legal happenings in your country!

The 6% to 9% return is a reasonable expectation based on the history of the S&P 500 Index–but their are periods where that average has been lower–and higher. You may want to consult a competent financial advisor if you want to be more precise in your calculations–and remember that financial markets don’t always act as they did in the past.

How Much Savings Will I Have When I Retire?

What will your portfolio numbers look like when you retire?

Here’s another way to figure it out!

The retirement calculation:

1. Think about how many years you plan to work.

2. Using an interest calculator, figure out what your current investments will be worth when you retire, assuming 6%, 7%, 8% or 9% annual growth.

3. Estimate your yearly savings.

4. Over ________ years, that regular contribution will get you to $________. (For comparison, if you just saved that money without investing it, you’d only have $__________).

5. Current Investment when you retire = $_________ + your yearly savings estimate over x number of years $___________ = $____________ or the amount you would have when you retired!

Note: You can also use a financial calculator if you are proficient in the use of one

Make adjustments as needed

You must not only have the commitment to do what you need to do–you must also continuously review, if you are sincere in making your dreams come true. That includes having a flexible mindset to make adjustments as adversity and life happenings that you did not or could not plan for–will occur.

Know what your retirement budget or monthly cash flow will look like

Retirement is a new era, but just like the rest of your life, it will all fall in place if you plan appropriately. In each stage of your life, your concerns, goals and budgets (cash flow) will vary–therefore effective planning is essential.

You may want to break down your retirement in intervals to help simplify your retirement.

● First 10 years of retirement. As you adjust to your new lifestyle, you’ll likely be in good health and excited by the transition into retirement and as long as you stick to your plan you can take vacations and enjoy life in a more bountiful manner. It is important that you don’t overdo it on spending, as you must withdraw your retirement savings accounts appropriately because those funds still have to last you a while!

● Second ten years of retirement. Hopefully you’ve had some fun during the first ten years, and now you might be settling down a bit—as spending usually drops some for most who are over age 70. If you have downsized or paid off a mortgage and your housing costs are down you should be in great shape. Be alert for home improvement or accessibility costs going up if you need them as you age, as well as healthcare costs. If your investments have done better than expected and you need some extra cash you can utilize that cash if you have saved appropriately.

Third ten years of retirement. At this point, you may have a need to move into an assisted living facility or even needing long-term care. You will likely spend less on everyday necessities, but be prepared for increased healthcare costs, especially if you need assistance. As you slow down, you can increase your percentage of withdrawals further, though keep in mind how much you want to leave behind in your estate for your heirs.

Put a plan into action that will lead you to reach your “retirement number” that will position you to do what you desire during your retirement years

You must put effective forward moving plans in place if you are to reach your retirement goals. That consists of knowing what you need to save annually to reach your desired goals and live out your life in a more joyful manner.

The 25x formula mentioned above or another retirement savings formula that provides you a way of reaching the number that you need to reach, can lead to you reaching the number that allows you to pay your monthly utilities, entertainment, taxes, charitable giving–along with traveling at the level that you desire during your retirement years.

It is important that you know the age that you want to retire along with the age that you can retire! Their is no secret to your retirement success, you must save and manage your money consistently until you reach your retirement number!

While you can’t tell you how many grey hairs will be on your head by the time you are able to retire, you can help reduce stress in your life and estimate roughly when you’ll be financially ready to enter the “retirement zone” that you always aspired to reach by planning proactively and expecting success!

You have already assessed how much you’ve been able to set aside so far by doing the analysis above–and you now know what you can save moving forward (again based on the analysis that you did above)–therefore you must now do and review–as you already have the plan—to make your dreams come true–or you will soon have one!

Conclusion

Additionally, you want to know how much social security and other income that you and/or your household will receive, know when your required minimum distributions are required for your various retirement accounts and know the taxes that you will have to pay during your retirement years at the federal, state and local level (particularly your income taxes at the state and federal level, property and sales taxes in your area–along with any other taxes in your area that could be of a burdensome nature).

It is important that you get out in front of your retirement planning so that you can achieve greater success!

With many now living well into their 80s and 90s–it is important that you plan for the years after you stop working with the expectation that you too will live well into your 80s or 90s (or beyond) so that you can enjoy life in a more bountiful manner.

You also want to be on the lookout for financial fraud as scammers are highly adept at creating accounts using your identity and getting your retirement benefits–particularly utilizing phishing scams and setting up fraudulent social security accounts.

Whether you anticipate receiving traditional IRA income, ROTH IRA income, pension income, 401k income, 403b income, railroad retirement benefits, government thrift savings plan payments, social security or any other source, you want to proactively plan for what those payments will be (in total) at the earliest time possible–if possible (no pun intended).

The monthly retirement payments that you will receive must be clear in your mind and not vague or cloudy–or even worse not even in the ballpark of what you need to carry on with your life in the manner that you intended–as no one cares more about you–than you–and that is as it should be.

By making a “real effort” to reach your “retirement number” you can put yourself in position to have a more rewarding and enjoyable retirement.

By applying what you sincerely feel can help you achieve your retirement goals more efficiently you will be putting yourself and your family in a better position as you age–and it is the desire of TheWealthIncreaser.com–that you will do just that as a result of visiting this page.

May all of your retirement dreams come true, as you now know what you must do–therefore the retirement success that you desire is now up to you!

You want to know at the earliest time possible what you value as far as saving for a more rewarding retirement and you want to put plans in place for what will happen after you transition because there is a good chance that you will have assets when you transition–and “you” can decide where they go if you plan now.

It is important that you utilize the values that you have acquired over your lifetime that are positive and uplifting so that you can reach your “retirement number” and improve humanity while you are here on planet earth–and even after you transition?

Do you have the endurance that you need to lead or are you at this time “not ready” to succeed–as you more effectively plant your retirement seed?

All the best as you operate daily at a level that will lead to your retirement success…

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10 Questions you must ask prior to your retirement…

What will I receive from Social Security on a monthly basis…

Retirement Cautions

5 Common Mistakes to Avoid

20-30-40–plan for success–for those who are age 30 or less

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Retirement Planning & Wealth Building

Posted on January 23, 2022 by TheWealthIncreaser.com

Learn the importance of properly preparing for your retirement years so that you can build wealth more effectively…

It is important that you plan for a prosperous retirement at the earliest time possible. In addition to knowing your cash flow position at this time and how you can use financial statements to achieve more–you also need to have an awareness of your “financial retirement number” that you will need to reach at a later time so that you can live out your retirement years in a dignified manner.

Regardless of whether you contribute to a 401k, 403b, thrift plan, railroad retirement plan, social security, IRA’s or other retirement funding vehicles, you must have a target amount that you need to hit to make your retirement years enjoyable and more beneficial.

There are a number of retirement funding vehicles and strategies that you can use to reach your “retirement number” once you get a handle on what that number is!

If you are conservative, and you desire to create a diversified portfolio, you can use a United States total market index fund, a United States total market bond fund, and a broad-based international fund.

You can simplify your choices even more by selecting a balanced fund or target date funds to reach your goals. If you are more riskier, you can use Exchange Traded Funds, Mutual Funds, Stock Portfolios and other more exotic investment vehicles to reach your goals.

The key is you must have a plan at some level–and the sooner you get started–the better the odds are that you can reach your retirement number and live out your retirement years in the manner that is best for you and your family!

In this discussion TheWealthIncreaser.com will discuss the importance of planning appropriately for your retirement years so that you can “achieve your goals” and live out your retirement in the manner that you choose so that you can have more enjoyment during your golden years.

It is imperative that you have a basic understanding of retirement planning at a minimum and you have a willingness to learn more as you approach your retirement years.

Common Types of Income During Your Retirement Years

Social Security

In retirement you will have social security if you reside in the U.S. and worked and contributed at a level that allows you to collect benefits during your retirement years. You can generally start receiving social security in your mid 60’s and the payments would continue throughout your lifetime.

Pension

Although pensions are a distant memory and thing of the past for most, some companies still provide them and if you now receive one or are on track to receive pension income in the future you must know what to expect and when to expect this stream of income. There are also 401k ROTHs, Simplified Employee Pensions, solo 401ks and other retirement products on the market that may be appropriate for you–depending on your unique financial position.

401k, 403B, Thrift Plans and others

By contributing to retirement plans during your working years you can use pre-tax contributions to build your retirement nest egg in a more efficient manner. There may be an employer match component to the plan and if so, you can use effective investing to achieve your goals even more efficiently.

IRA’s

You may be able to contribute to IRA’s (Traditional or ROTH) if you qualify and build a sizable nest egg that you can have available to fund your living conditions during your retirement years if you contribute to the max “and” you have a decent rate of return and choose a fund with low management fees.

There are tax and compounding advantages of using these retirement vehicles and they are worth real consideration if you qualify.

Railroad Retirement Benefits

If you work for the railroad system in the United States you could be eligible for a retirement plan that is generally more generous than that of the social security system.

Home Sale, Refinance, Home Equity Loan or Reverse Mortgage

If you were to sell your personal residence and downsize you could possibly be eligible for a $250,000 exclusion on the gain if you were single and you otherwise qualified–or $500,000 if you were married and otherwise qualified. You can also refinance your personal residence (or your rental properties if you had any) to pull money out, get a home equity loan or home equity line of credit–or if your situation was dire (you failed to save appropriately during your working years) and you exhausted all other possibilities–possibly a reverse mortgage.

Keep in mind that when using any of the above approaches–you must do so strategically as your financial position is uniquely your own and what may be effective for others–may not be effective for you.

Investment Income

If you invested during your working years outside of your retirement accounts and reinvested you could have also possibly built a large nest egg that could be used during your retirement years to help fund your lifestyle.

Keep in mind an Exchange Traded Fund is more efficient for investing than a mutual fund when you are investing outside of your retirement as you will not have capital gains that would be taxable on an annual basis. Other investments held outside of your retirement accounts may or may not be taxable. Municipal bonds, individual stocks that are not sold may avoid or defer the payment of taxes.

Conclusion

You have the option of planning now for a more effective and rewarding retirement regardless of the life stage that you are now in. Whether you invest in a traditional manner or you invest in cryptocurrency and other more exotic investment vehicles–you must have a plan to reach a level of success that allows you to not outlive your income sources–but also live comfortably and possibly leave something behind for your heirs or other causes that are dear to your heart.

When investing for your retirement years there are a number of key concerns that you should be aware of and you want to avoid common mistakes that many have made in the past by being aware on the front end and not being complacent during your working years.

You particularly want to be aware of fees that you pay and you want to minimize those fees on the front end because at retirement time it would be too late! Look for no-load funds that don’t charge a percentage of your upfront investment. Also choose a fund with a low expense ratio, which includes management fees and other costs of running the fund.

You can generally find this information on the funds website or in advertising brochures.

It is not uncommon to see retirees who invest $100,000 over a 30-year period with high fees end up with tens of thousands less than those who invest in funds with a low expense ratio.

You can change the direction that you are now on to that of real success if you now decide to plan appropriately–and give it your best.

You must analyze the sale of your home and the tax consequences (basis, depreciation, exclusion from taxes on gain must be analyzed) prior to and after you retire on the front end to ensure that you make the best decision for the short and long run regardless of where you are now at in your life stage.

Even if you have to pay for good advice, the value will more than likely be greater than the cost as you can avoid costly mistakes at the wrong time that have held so many back as they were building wealth.

It is important that you do all that you can to fund your retirement so that you can reach your retirement number and live at a level of comfort that you desire or need to live at. Also keep in mind that with many retirement vehicles you will have mandatory withdrawals beginning at age 72.

If you project monthly income of $8,000 and monthly expenses of $5,000 and you are age 65 and you plan on living until at least age 95 you must hit the target number that will allow you to have “for a 30 year period” the $8,000 monthly income when all sources are added up. You also want to know the tax implications and the effects of inflation on your retirement income so that you are “not surprised” during your retirement years.

Isn’t it time you try a new informative, powerful, revolutionary and results oriented approach to wealth building as opposed to the same tired approach that has been presented by many others in the finance industry over the years?

When it comes to retirement planning and wealth building reaching your retirement number and having streams of income that are stable, reliable and predictable during your retirement years should be your primary goal.

When you combine your social security benefits, pension, other retirement income and all other sources of income during your retirement years, will it provide you with what you need to live out your retirement years in comfort?

By being particular, precise, clear and concise–about what you expect to happen during your retirement years–you set yourself up to avoid financial fears and eliminate financial tears during your golden years!

All the best to your retirement wellness and a lifetime of success as you are now in position to proactively give it your absolute best…

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Learn about the 3 Step Approach that was revealed in 2010 as it is the only system in existence that uses 7 words that allow you to have a comprehensive overview of what you need to do to comprehensively manage your finances throughout your lifetime…

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Early Retirement & Wealth Building

Posted on November 11, 2018 by TheWealthIncreaser.com

Learn how you can build wealth efficiently and retire early…

In 2003 the creator of TheWealthIncreaser.com came up with a strategy to help young adults and those graduating from college implement a new system for building wealth efficiently and possibly retire early if that was their goal.

After reading a most recent article in Kiplinger Magazine about Millennials who retire early (in their 30’s) TheWealthIncreaser.com found it quite inspiring to see young workers retire early and that inspiration brought to the surface the topic of early retirement in the current economy and how you can do so in a more efficient manner.

In the article they were called FIRE (Financially Independent Retire Early–a great acronym and financial success formula that TheWealthIncreaser.com did not create–however, TheWealthIncreaser.com did create FAM® that is assisting those who desire real financial success achieve more than just financial literacy) and they are a group that is growing as more individuals and families see real advantages of retiring early and living life on their terms.

Regardless of your age you can retire early or achieve your goals more efficiently during your lifetime by understanding “your life stages” and determining the path that you will take toward making what you desire most during your lifetime–occur!

You must also have an expectation of success and a real knowledge within that you truly want to pursue early retirement or reach your goals in a more efficient manner.

You can achieve success more effectively and efficiently by doing the following on a consistent basis:

1) Have a real understanding of the X Factors…

Experience, expertise, exercise and excellence must be a part of your make-up if you are to achieve at your highest level.

Your past experiences helped shape where you are now at and you must use that experience to your advantage. You must also determine what you are good at or what you desire to be good at and pursue toward that with zeal and expertise will follow.

You must ensure that you are around to enjoy your early retirement or any retirement by ensuring that you exercise regularly, eat healthier and you feed your mind with the right information that can move you forward in a manner that works with your mind.

Lastly, you must have a mindset of excelling in all that you do. You then develop the habit of consistency that you need to have to achieve at your highest level throughout your lifetime.

2) Have high standards throughout your lifetime…

You must set lofty goals whether they be financial or otherwise. However, setting lofty goals is only the starting point!

You must have every intention on achieving the goals that you set and you must visualize yourself achieving what you see.

You want to do your absolute best toward reaching your goals and you must be fully committed and have a high level of determination to reach or exceed the standards that you set.

3) Have a mindset that is geared for success…

You must not let worry, anxiety, fear and frustration direct your life as it will in many cases lead to you not putting in the effort that is necessary to achieve at an optimal level and reach your financial goals in an efficient manner.

Although uncertainty at some level resides inside all of us—you must have an outlook of your future that is clear to you and doable by you (within your mind) if you put in the effort and stick to your plan.

Your ability to focus on what is important along with having the success qualities that are needed for consistent success will help direct your mind on a daily basis in the direction where success lives–and you will increase your odds of achieving your goals exponentially.

Conclusion

Early retirement or having the option to retire early is a lofty goal and many are pursuing that path in the current economy.

If you are one who would like to position yourself for early retirement you can do so by gaining the required knowledge and skills that are needed to do so at the earliest time possible.

For those of you who would like to continue working, you can put yourself in position to have an “early retirement” as a real option by planning now and doing so with a realistic picture of what it will take to get you there.

You must pursue your retirement goals in a righteous manner and in a manner that is in alignment with your core values.

You must ask and answer the right questions at the right time in your life so that you can repair, improve, or avoid that which serves against your early retirement ambitions.

You can go to the following links to learn more about early retirement and retirement in general and really make the goal of early retirement happen for you and/or your family:

Young Investors & Personal Finance

9 Tips for Retiring Early

College Graduates & Wealth Building

Wealth Building Now

Mr. Money Mustache Blog

Retirement Basics

All About Retirement

Compounding & How You Can Benefit

Life Stages of Financial Planning

Understanding the Various Types of Income

Invest like Warren Buffett

FIRE (Financial Independence, Retire Early) is a lifestyle, also referred to as a movement, aimed at reducing expenditures and increasing investing in order to quickly gain financial independence and the possibility of retirement at an early age.

All the best to your early retirement and lifelong success…

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Financial Security & Wealth Building

Posted on February 4, 2018 by TheWealthIncreaser.com

Learn why planning, discipline and patience is critical for your financial success…

After recently returning from Las Vegas, Nevada and having a great time, the creator of TheWealthIncreaser.com thought that the topic of not gambling on your future was a timely topic. Although investing in the financial markets are somewhat of a gamble, it is important that you plan for long-term success or any success in an appropriate manner.

In this discussion TheWealthIncreaser.com will discuss why planning for your future, having the required discipline–and patience are the cornerstone for you to attain financial success in your future.

You Must Plan for Success

You must plan for your future and that includes knowing where you now stand as far as your finances are concerned. A monthly cash flow statement will put you in position to know just that. In addition, you must know how your credit score is calculated whether it is your FICO score by Fair Isaac & Company or your Vantagescore by the 3 credit bureaus.

Your financial success also depends on you obtaining the financial knowledge and preparation that is needed on the front end–not “after” you encounter financial difficulty. It is imperative that you obtain a financially alert mind and not just “financial literacy” at this time if you desire to achieve at your highest levels throughout your lifetime.

You Must Have a Disciplined Approach Toward the Success that You Desire

You must understand that it is your responsibility to do what needs to be done financially throughout your lifetime.

By consistently doing what you need to do you will achieve your goals more efficiently and you will be rewarded for your discipline in the future by having your investments grow and also be able to enjoy life on your terms along the way. You can reach your “retirement number” and achieve other goals along the way as long as you remain focused and disciplined on a consistent basis.

Above All You Must Have Patience

It is important that you realize that many of your goals will not occur overnight as they will often take time to reach. This is where your patience will come in as you must use the planning stage to determine the time frame on when your various goals will be reached. Whether you have short-term, intermediate or long-term goals, you must prepare your mind mentally for the time period that it will take to reach your various goals.

You must not do like others who give up to soon, or lack the mental fortitude to stick it out and make their dreams come true. By having patience and knowing inside that you will truly reach your goals if you stick to your written plan–you bring comfort, peace of mind and joy–inside of your heart and mind.

Conclusion

By planning for your future, showing discipline on a consistent basis and having the needed patience to reach your various goals you put yourself in a much better position for reaching the success that you desire or the success that you need to attain throughout your lifetime. You are displaying a serious commitment to improve the living conditions for yourself and your family and you are showing that you are accountable for your future.

In short, you are approaching your future with the attitude of a winner and joy will be in your heart in an everlasting way as you will see success in all that you do. Will there be setbacks? Absolutely! However, by taking initiative at this time by planning for your future, showing discipline on a consistent basis and having the needed patience to reach your various goals–success lies in the horizon.

By doing so you are gravitating toward the goals that you see as opposed to remaining where you are, moving slowly toward your goals or worse of all–moving away from what you desire.

In the end (and beginning) you must realize that achieving financial security and effectively building wealth in large part depends on your current and future mindset being in the place where success lives.

All the best as you plan for success in a disciplined and highly effective way as you now have the ability to change your mindset (and future) in a highly beneficial way…

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Learn how you can achieve credit and financial success in 3 comprehensive steps…

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Financial Ratios & Wealth Building

Posted on December 27, 2017 by TheWealthIncreaser.com

Learn how you “CAN” use financial ratios to build wealth by taking Conscious Action Now…

In this discussion TheWealthIncreaser.com will look at a myriad of financial ratios that can lead you closer to the success that you desire. With 2017 coming to an end and a new year only days away, it is the desire of TheWealthIncreaser.com that this page will serve as an inspiration for you to do more in 2018. OK, here we go–hopefully TheWealthIncreaser.com won’t bore you too much and you can use the following paragraphs to achieve more in 2018 and beyond!

Rule of 72 Ratio:

Dollar Amount Invested/ Interest Rate

1,000 / 7% = 14.3 or just over 14 years to turn $1,000 into $2,000

1,000 / 14% = 7.1 or just over 7 years to turn $1,000 into $2,000

Relevance:

The ‘Rule of 72‘ is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors (you) can get a rough estimate of how many years it will take for the initial investment to duplicate itself or double.

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If you were invested in the stock market over the past several years and you had a total stock market investment you could have possibly doubled your money in the past 5 years (1000/.20 = 5.0 or exactly 5 years), or if you had a million dollars to play with after all of your living expenses and retirement goals were set in place you could have turned that million dollars into two million dollars with virtually no effort on your part other than having the ability (and willingness) to do so–and not suffering much in case the market went the other way (and you were to suffer losses) due to you knowing your risk tolerance level up-front as well as the goals that you had in place.

Liquidity Ratio:

Liquid Assets / Total Assets

30,000 / 140,000 = .2142 or 21%

Relevance:

Lets you know what percentage of your assets are liquid (cash, certificates of deposits, money market etc versus stocks, bonds, mutual funds, home equity etc.) so that you can plan your lifestyle accordingly.

Credit Ratio:

Credit Owed / Available Credit or Credit Balance ÷ Credit Limit = Credit Ratio, for example

500/40,000 = .0125 or 1.25% very low ratio–good

30,000 / 40,000 .75 or 75% very high ratio–bad

To further drive it home, if you had a $5,000 credit limit and held a $2,000 balance, your credit ratio would look like this for one creditor:

2,000 ÷ 5,000 = .4, or 40%

If you had a $25,000 credit limit with all of your credit cards and monthly installment payments and held a $12,000 balance, your credit ratio would look like this for all of your creditors:

12,000 ÷ 25,000 = .48 or 48%

Relevance: The lower your credit ratio the better as lenders use the credit ratio to grant you more credit or provide you credit at the best rates based in large part on how you use credit and your payment history. See the chart below to determine your current risk level!

Credit Ratio Risk
< 30%   Low (ideal)
30-49%   Medium
50-75%                                              High
76% or more     Very High

The types of credit available include: Revolving Credit, Installment Loans and Open Credit.

Finance Company Accounts and Mortgage Loans will fall in the above categories, however realize that some lenders categorize them separately as well.

Debt to Income Ratio:

Total Debt / Total Income

Also called Front End Ratio

Let’s say you have $10,000 in Gross Monthly Income (your income before any taxes or other deductions are taken out – your actual paycheck will likely be much less).

What can you afford as far as your home purchase is concerned?

x / 10,000 = .28

2,800 / 10,000 = .28 which is the maximum debt you could have on the front end (excludes housing payment)

X = 2,800 max on front end

You may not be approved for a mortgage loan in which the PITI payment exceeds $800 per month if you maxed out your front end ratio of 28 percent. On the flip side, if you had zero outstanding balance you could possibly qualify for a loan up to $3,600 per month!

On the back end your maximum debt would be $3,600 calculated as follows:

x / 10,000

3,600 / 10,000 = .36 which is the maximum debt you could have on the back end (includes housing payment)

If you maxed out your credit on the front end (bills totaling $2,800 per month) you would only have $800 available for housing payment (includes principal, interest, taxes and insurance or PITI). If you had bills greater than 10 months averaging $400 per month you would qualify for a loan up to $3,200 per month.

What that means in purchasing power or how much home you can afford based on this ratio depends on the current interest rates, the local property tax rate, the amount of your down payment, mortgage insurance, and homeowners insurance. In other words, how you manage your finances and your particular market are the key factors that can lead to you purchasing the home of your dream.

The amount that you will be approved for will vary over time and across different locations as the market interest and where you are will play a factor. However, always realize that high debt on the front end will bring down the amount of house you can afford based on the conventional ratio breakdown of 28% on the front end and 36% on the back end.

To further drive it home let’s look at another example, monthly debt in excess of one year divided by gross monthly income is your debt to income ratio or front end ratio! If you earned 3,600 per month and had credit card and car payment totaling $800 your front end ratio would look like the following:

800/3,600 = .22.22 or 22% on the front end for conventional–good

1,300 / 3,600 = .36 or 36% which only leaves $500 per month available for housing payment on the back end for conventional–probably not enough for quality housing in most markets

Relevance:

The front end and back end ratios provides you the ratio that you need to determine the level of debt that you are carrying in relationship to your monthly income. You don’t want to overextend yourself with debt and make life more difficult and painful while here on earth. You must know how to manage your credit wisely and pay your debt in a timely manner.

You also don’t want to put yourself in position where you are house and/or car rich and cash poor–your life will be a bore! Use these very telling and powerful ratios to make life as enjoyable as possible for you and your family while you are here on planet earth.

Housing and Debt to Income ratio:

Also called the back end ratio

Monthly debt in excess of one year plus expected housing payment (PITI) divided by gross monthly income, for example

1,200/3,600 = .33 or 33%

To further drive it home, the back end ratio is the total debt to income ratio, which includes your housing debt AND other debt owed for at least the next 10 months or so, by you the borrower.

Back End Ratios may not exceed 36% in most cases.

Some Qualified Mortgages (FHA) may let the Back End Ratio be as high as 43%.

If you the buyer have $1,000 worth of other debt and monthly income of $4,800 (car loan, student loan, credit card, etc.), how much can you afford?

1,000 / 4,800 = 21.7%–Good on the front end ratio for conventional

2,000 / 4,800 = 41.6%–Not good on the back end for conventional but some lenders could possibly still make it happen for you

As far as FHA goes, you would qualify with both the front end ratio 31% and the back end ratio 43% because both of your ratios are lower than those percentages (21.7% and 41.6% respectively).

When your other debt is taken into consideration, you the buyer(s) can afford a home with a PITI payment of $1,000 using and FHA loan and you would not qualify for a conventional loan according to the financial ratio guidelines. However, you could possibly qualify for a conventional loan even with those ratios if a conventional lender worked with you to make it happen.

If you are like most buyers, going up to a 36% debt to income ratio is not comfortable!

A 43% back end ratio is even more difficult to handle, even for the most frugal purchaser(s).

However, a better school district and/or being closer to your job or family members may well be worth the trade off! It all depends on what you value and your ability and willingness to put into place a process that allows you to know your cash flow position up front so that you can better plan for your living conditions in the future.

Do you have an adequate emergency fund and have you planned for your future in a comprehensive way? By answering these questions you can get on a path toward making the best decision for you and your family.

If you like to eat out, entertain and save abundantly for your future you might determine that a 43% ratio is too high a price to pay at this time and you might postpone your home purchase until you could get more income coming in on a monthly basis or you paid off certain debt. Your lifestyle and plans for your future will play A LARGE PART IN DETERMINING THE BEST APPROACH TO TAKE.

The temptation may be great and you may want to go for a 43% back end ratio. What would that look like with our current example?

You still would only qualify for a loan of $1,060 (2,160/4,800) unless FHA decided to allow you to go higher or you paid off some debt or increased your monthly income.

NOTE: When you decide to purchase your home where you will seek a loan, remember that Lenders will pull your credit reports and ask for 2-3 months of your past bank statements.

If there is a sudden, large amount of money added to any of your bank accounts, or if your credit card balances or car loan are paid off just prior to applying for a loan, this sends up a red flag and some lenders will be hesitant to offer you a loan without a reasonable explanation of why you took those actions.

Lenders may ask for a gift letter, indicating that the money does not have to be paid back, and may request a larger down payment, such as 10% instead of 3.5% or 5%.

It is wise for any buyer to get their financial accounts in shape “well before” applying for a mortgage loan so that they will not be disappointed!

The critical back end ratio shows your ability to take on more debt (your new housing payment).

Mortgage lenders generally will not lend more than what would constitute 28% of a person’s monthly gross income before adding their monthly home payment to the back end.

If there is other debt, mortgage lenders will generally not originate a loan that causes a borrower’s total debt to income ratio to exceed 36% (mortgage plus other debt).

Conventional 28% front end and 36% back end, or

FHA 31% front end and 43% back end

Certain circumstances allow lenders to go higher…

Sales Price to List Price Ratio:

Sales price of a home divided by what the property listed for, for example

290,000 / 310,000 = .9355 or 94%

Relevance:

By calculating the ratio of sales price to list price of recent sales in your target market (the area where you plan on buying your home or listing your home for sale) you can get a better feel of what you should offer as purchase price, or if you are selling—the listing price:

Is it 90%? 95%? 103%?

By knowing that ratio you put yourself in position for a more realistic purchase price offer or sales price listing.

Loan to Value Ratio:

Loan amount / purchase price or refinance value

For example,

288,000 / 360,000 = .80 or 80%

You may also see CLTV or combined loan to value which simply means all of your outstanding loans (2^nd mortgage, home equity loan etc.) divided by purchase price or refinance value

Relevance:

By knowing your loan to value ratio you understand immediately how much debt you are taking on from a percentage standpoint. When you get to a certain equity position you may also be able to eliminate PMI or MIP from your monthly housing payment so it is important to know this number.

Investor Ratios

Return on Investment with Appreciation Ratio:

Cash Flow before Tax + Principal Reduction + Tax Saved + Appreciation / Cash Invested

6,000 + 3,000 + 3,500 + 5,000 / 85,000 = 20.59%

Return on Investment without Appreciation Ratio:

Cash Flow before Tax + Principal Reduction + Tax Saved / Cash Invested

6,000 +3,000 + 3,500 / 85,000 = 14.7%

The following ratios are used to Value Real Estate & the Relative Value Depends on Your Particular Market, therefore what is acceptable in one area may not be acceptable in another area, use with caution in mind.

Capitalization Rate Ratio:

Net Operating Income (from Schedule E or elsewhere) / Purchase Cost

30,000 / 390,000 = 7.7%

Limitation: does not take into account financing

Cash on Cash Ratio:

Cash Flow before Tax / Cash Invested

6,000 / 85,000 = 7.1%

Is the strongest Method, it does take into account income, expenses and financing

Price per Square Foot Ratio:

Cost / Number of Square Feet = price per square feet

300,000 / 3,000 = $100 per square feet

Limitation: does not take into account income, expenses and financing

Price per Unit Ratio:

Cost / Number of Units = price per unit

300,000 / 4 unit quadplex = $75,000 per unit

Limitation: does not take into account income, expenses and financing

Gross Multiplier Ratio:

Cost / Gross Operating Income

300,000 / 50,000 = 6%

Limitation: does not take into account expenses and financing

NOTE: the above numbers are rounded for illustrative purposes

Relevance:

For those who invest in rental property it is imperative that they understand the amount of CASH FLOW that they will receive (be sure to look at schedule E of the seller(s) tax return prior to purchase), they estimate the APPRECIATION that is expected or projected, they know the amount of PRINCIPAL REDUCTION that is expected at various intervals of the loan and they know the amount of DEPRECIATION (and how to break down the various elements of depreciation for their greatest benefit). Always remember that you cannot depreciate land on rental properties.

By properly analyzing the rental property that you plan on purchasing and utilizing the appropriate ratios you CAN get a better appreciation (no pun intended) of the returns that you will or potentially can achieve based off of your purchase.

You can then know in the future if selling your property, refinancing your property, continuing to hold your property or doing a 1031 exchange will serve your best interest. You also want to have an awareness of the tax implications at the time of purchase or preferably before you purchase so that you will have no future surprises.

Will you be taxed at ordinary income or capital gain rates? What is your basis and what will you pay taxes on after depreciation. You must understand that depreciation recapture will occur whether you take the depreciation—or you fail to do so. Will you plan to avoid taxes in the future or will you just jump into your real estate investing career with no real plan of action as it relates to your tax implications that you will face at the time of your purchase, yearly and when and if you sell in the future?

Do you know about form 3115 and how you could possibly amend your tax return to get the depreciation that you overlooked if you currently own investment property and you failed to claim the depreciation? By claiming the depreciation that you were entitled to you in essence put cash back in your pocket in a real way! These are just some of the more pressing questions that you must ask–and answer on the front end if you are to maximize your rental property purchase.

Even if you purchase and quick turn properties for short term gains, you must realize that there will be tax implications (ordinary income rates if sold in less than a year and capital gain rates if sold after a year). Whether you quick turn for a profit or buy and hold for cash flow and appreciation you must consider the combined tax implications at the federal as well as at the state level.

CONCLUSION

It is important that you use financial ratios (where and when appropriate) so that you can maximize your returns and minimize your mistakes during your lifetime. By utilizing the above ratios among others–you can put yourself and your family on a positive path toward building wealth.

Always realize that there are many other financial ratios available at the corporate as well as personal level that may also be of benefit to you and your family. In short, you don’t want to stop with what you have learned on this page. Continue to pursue better ways that can lead you toward success in a more timely manner and use financial ratios where appropriate to help along the way.

All the best to applying financial ratios in a manner that will fill up your nest…

By taking Conscious Action Now–this page and site will show you how…

You CAN achieve lasting success–if you at this time make a conscious decision to give it your best…

By using the ratios appropriately you CAN put procrastination to rest…

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SEP-IRA versus SOLO 401k

Posted on July 23, 2017 by TheWealthIncreaser.com

Learn what the best choice is for your retirement future if you are a single employee at your company or you are a small company considering whether an SEP-IRA or a SOLO 401k is your best choice …

If you operate a small company or you are a single person owner–you may be deciding among a number of retirement plans to stash away money for your retirement years. Trying to decide the best option can be a daunting task for those who are new at facing retirement options or have recently opened a business for the first time.

In this discussion TheWealthIncreaser.com will present ways that you can make this sometimes grueling decision—less grueling and help put you on a path to enjoying your retirement in the manner that you desire and provide you with more clarity so that anxiety will not play a role in your life as you build wealth for yourself and your family.

It is the desire of TheWealthIncreaser.com that you will use this page as a guide so that you can experience joy on the inside that will lead to your retirement portfolio and your conscience experiencing a smoother ride!

Retirement Plan Options:

Depending on your line of work there could be many retirement options available to you.

Some of the more common include IRA’s (many versions), 401k’s, 403b’s, SIMPLE IRA Plans (Savings Incentive Match Plans for Employees), SEP Plans (Simplified Employee Pension), SARSEP Plans (Salary Reduction Simplified Employee Pension), Payroll Deduction IRAs, Thrift Plans, RRB Plan (Railroad retirement Benefits Plan), Traditional Pension such as Defined Benefit Plans, Money Purchase Plans, ESOPs (Employee Stock Ownership Plans), Government Plans, 457 Plans, 409A Non-qualified Deferred Compensation Plans and other profit sharing options.

If you desire a more in-depth understanding of the various retirement types or you feel that a SEP-IRA or a SOLO 401k is not right for you—consider going to the following links to learn more about the retirement account that may be a better choice for you.

https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans-1

http://www.realty-1-strategic-advisors.com/retirement-and-personal finance

If you are a small operator, depending on your yearly income—you could be choosing among a number of options but in the end the choice of which “Retirement Plan Option” is best for most and possibly you as well—normally comes down to the choice between an SEP-IRA versus SOLO 401k as they both allow you to maximize your contribution limits and control your investment options better than other plans.

However, as a practical matter it is important that you look at and appropriately analyze all options available to you and not just base your decision on how you feel or think or based on what others are doing.

You must analyze all retirement options to see where you will benefit most from a revenue, savings, tax and goal oriented perspective. After thorough analysis (and possible professional advice) you can select a retirement vehicle that serves your future goals and allow you to maximize your savings and tax advantages on an annual basis.

SEP-IRA

A SEP-IRA allows you to make contributions that are capped at 25% of your income after a reduction for self-employment taxes. A SEP-IRA is used by those who have a small firm and solo entrepreneurs as well.

SEP IRA contributions for sole proprietors, on the other hand, are limited to 20% of your net self-employment income (business income minus half of your self-employment tax), up to a maximum contribution of $54,000 for 2017.

SEP Contribution Limits (including grandfathered SARSEPs) controls what an employer can contribute to an employee’s SEP–IRA. The amount cannot exceed the lesser of 25% of the employee’s compensation, or $53,000 (for 2015 and 2016, $54,000 for 2017).

Example: Lets say you are 52 years old and earned $60,000 in income after receiving your w-2 from your Limited Liability Corporation business in 2017.

Your total contributions would be capped at $15,000 for 2017!

If you earned $144,000 your contributions would be capped at $36,000.

If you earned the maximum income for the year $270,000, your contributions to the SEP-IRA would be capped at $54,000. The reason being that you have exceeded the contribution limit.

Can I make catch-up contributions to my SEP-IRA?

Because SEP IRA’s are funded by employer contributions only, catch up contributions usually don’t apply because you as an owner (employer) would be making the contributions.

Catch-up contributions apply only to employee elective deferrals.

However, if you are permitted to make traditional IRA contributions to your SEP-IRA account, you may be able to make catch-up IRA contributions.

Compensation doesn’t include amounts deferred under a Section 125 cafeteria plan.

Compensation is limited to $270,000 in 2017 and $265,000 in 2015 and 2016.

SOLO 401k

A SOLO 401k allows you to stash away up to $18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over.

In addition, you can also use SOLO 401k’s to make ROTH 401k deferrals of after-tax money that you can withdraw tax free during your retirement years.

A Solo 401(k), (also known as a Self Employed 401(k) or Individual 401(k)), is a 401(k) qualified retirement plan that was designed specifically for employers with no full-time employees other than the business owner(s) and their spouse(s).

A one-participant 401k also goes by other names, such as solo-k, Uni-k, one participant k and possibly other names as well as they are becoming more popular.

Although unknown by many in the general public a one-participant 401(k) has been around for a while (early 2000’s) and is basically a plan covering a business owner with no employees or just their spouse–and have the same rules and requirements of any 401(k) plan!

Contribution limits in a one-participant 401(k) plan

In a SOLO 401(k) plan the business owner (you) are both employee and employer.

You must always realize that contributions can be made to the plan in both capacities and you as the owner can contribute both:

Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit of $18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over; plus

Employer non-elective contributions up to 25% of compensation as defined by the plan

For self-employed individuals:

Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $54,000 (for 2017; $53,000 for 2016)

Example: Lets say you are 52 years old and earned $60,000 in W-2 wages from your S Corporation in 2017. You deferred $18,000 in regular elective deferrals plus $6,000 in catch-up contributions to the 401(k) plan.

Your business contributed 25% of your compensation to the plan, $15,000.

The total contributions to your plan for 2017 that would be allowed is $39,000 with your maximum contribution for the year being $60,000 “if” you earned $144,000 in 2017 ($144,000 * .25 plus $24,000).

This would be the maximum that you could contribute to the plan for Tax Year 2017.

If you had income from other sources and you participated in another 401(k) plan–your deductions would not be allowed and you would have to take corrective action. By reading this discussion you now know that your limits on elective deferrals are by person, not by plan–meaning once you reach the limit–that’s it!

In essence, you must consider “the limit” for “all elective deferrals that you makes during a year”–regardless of source to ensure that you don’t exceed the limits and have to take corrective action–that could get costly!

Contribution limits for self-employed individuals

You must make a special computation to figure the maximum amount of non elective (25% of your earned income) and elective ($18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over) contributions that you can make for yourself.

When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

one-half of your self-employment tax, and

contributions for yourself.

Testing in a one-participant 401(k) plan

A business owner with no common-law employees doesn’t need to perform nondiscrimination testing for the plan, since there are no employees who could have received disparate benefits.

The no-testing advantage vanishes if the employer hires employees. No matter what the 401(k) plan is called by a plan provider, it must meet the rules of the Internal Revenue Code.

If you hire employees and they meet the plan eligibility requirements, you “must include them in the plan” and their elective deferrals will be subject to nondiscrimination testing (unless the 401(k) plan is a safe harbor plan or other plan exempt from testing).

A one-participant 401(k) plan is generally required to file an annual report on Form 5500-SF if it has $250,000 or more in assets at the end of the year.

If you are a one-participant plan with fewer assets you may be exempt from the annual filing requirement.

Alternatives to a one-participant SOLO 401(k) plan and SEP-IRA

Other possible plans for a single business owner that might work for you depending on your business revenue and future goals include:

SEP

IRA

ROTH IRA

Conclusion

With a SOLO 401k you could contribute up to $54,000 for 2017 with a $6,000 catch-up provision if you are over age 50 (maximum contribution $60,000).

If you desire to establish a SOLO 401k you can go to: http://www.kiplinger.com/article/retirement/T001-C001-S003-set-up-a-solo-401k-with-low-fees.html

If you had annual income of $250,000 with a SEP-IRA you could contribute up to $54,000 for 2017.

If you desire to establish a SEP IRA you can go to: https://www.irs.gov/retirement-plans/establishing-a-sep

Be sure to consider other factors as well such as your years in business, when you plan to exit, tax ramifications now–and in your future, setup fees and administration fees, your anticipated future income, company growth and other factors that may be unique to you or the business that you operate.

You can choose to use an SEP IRA or SOLO IRA if you are a sole proprietor, LLC or Limited Liability Company, S Corporation and possibly other legal structures that meet the IRS guidelines.

As you might expect the SEP IRA was once cheaper to set up and administer, however that has now changed as many brokerage companies offer low cost SOLO-IRA setup and administering. In addition, you must look at more than just setup costs and the administrative fees as those are just a small piece in the overall puzzle toward your retirement goals.

Always keep in mind that SEP IRA contributions for sole proprietors, on the other hand, are limited to 20% of your net self-employment income (business income minus half of your self-employment tax), up to a maximum contribution of $54,000 for 2017.

You may have more investment choices with a SEP IRA as opposed to a SOLO 401k.

With a SOLO 401k you have the 25% employer contribution amount (non-elective deferral) based on your income minus the self-employment taxes–plus the elective deferrals and catch-up provision that would allow you to save more annually than a SEP IRA generally–depending on your income.

With both plans you would have to pay taxes on withdrawals, however at that time you might be in a lower tax bracket. Both plans allow you to use the power of compounding to help you reach your retirement number.

Early withdrawals or tapping into the account by you will result in serious tax penalties and vary depending on your age, years of contributions and whether an exception may apply.

Investments and Withdrawals basically follow the same guidelines that the IRS has set for IRA’s and 401k’s in general!

If you know that you will come out of the gate making $150,000 the decision as to the best choice will be much clearer for you. However, if you come out of the gates slow and steady with your income increasing steadily from a low amount such as $20,000 in year one–$40,000 in year two and a steady upward trend an IRA SEP may serve your best interests during your early years.

In the end “proper analysis” and not just going on what you hear or see others doing –or what you feel will work is the real key. It is the hope of TheWealthIncreaser.com that this discussion has at least provided you a starting point toward making your retirement dreams come true.

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25% of compensation as defined by the plan