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Comprehensive Guide to 401(k)s: How to Plan for Retirement

What Is a 401(k)?

A 401(k) is an employer-provided retirement savings plan offering tax benefits to encourage long-term investment and savings for retirement. The plans are typically included in employee benefit packages.

Benefits of a 401(k)

One of the primary benefits of a 401(k) is the tax advantages offered. With a 401(k), your savings grow either tax-deferred in a traditional account or tax-free upon withdrawal in a Roth 401(k). This setup means that dividends and capital gains within the account are not taxed, allowing for more significant investment growth.

Another key benefit of the plans is employer contributions. Many employers provide a matching contribution, often up to between 3 percent and 6 percent of an employee’s salary. This match is essentially extra compensation, rewarding employees who are proactive about their retirement savings.

How 401(k)s Work

In a 401(k) retirement plan, employees contribute a portion of their income, often with the employer matching, and funds grow with tax advantages. Traditional 401(k) plans allow for pre-tax contributions, with taxes paid upon 401(k) withdrawals in retirement. Roth 401(k) plans involve after-tax contributions, but withdrawals are tax-free.

Eligibility Criteria

Eligibility for a 401(k) typically requires contributing a percentage of your income. Employers automatically deduct this amount from your paycheck and invest it in your chosen 401(k) plan. Your contributions are pre-tax with a traditional 401(k) or after-tax with a Roth 401(k), influencing your tax situation at the time of contribution and in retirement.

Contribution Limit

The IRS sets annual 401(k) contribution limits, which can change yearly based on inflation and other factors. For 2024, the limit is $23,000 with an additional “catch-up” contribution of $7,500 for those aged 50 and over.

Vesting

Vesting in a 401(k) refers to the extent to which employer contributions are owned by the employee. While your contributions are immediately vested, employer contributions may follow a schedule, typically ranging from one to six years. The employee enrolled in the plan must remain with the company for that period to receive the funds.

Employer Enrollment Process

To enroll in a 401(k) plan, employees often go through a simple process facilitated by their employer. This involves selecting a plan that aligns with their retirement goals and risk tolerance. The plans typically offer different investment options that are generally managed by financial services advisers.

401(k) Rollovers: Changing Jobs, Handling IRAs

A 401(k) rollover is a pivotal option when changing jobs or handling an IRA. There are various rollover choices, which include:

  1. Keeping your savings in your former employer’s 401(k) plan, provided they allow it. This option requires regular monitoring and updating of investment choices and beneficiaries to ensure alignment with your financial goals.
  2. Transferring your old 401(k) into your new employer’s plan. This option may offer lower fees or better investment options and simplify tracking by consolidating your retirement savings.
  3. Rolling over your old 401(k) into an Individual Retirement Account (IRA). This usually offers a broader range of investment options and potential savings on management fees, although different tax implications should be considered. You can also manage the investments of an IRA through online investment services.
  4. Taking a lump-sum distribution (“cash-out”) directly from the 401(k) plan. This option may involve the most significant tax implications along with penalties if the participant is under age 59 ½.

In handling an IRA during a 401(k) rollover, rolling over (converting) to a traditional IRA allows tax-deferred growth with no taxes due during the transfer. Taxes are paid only upon withdrawals. Additionally, there’s an option for a Roth conversion, where if eligible you can move all or part of your old 401(k) directly into a Roth IRA.

Types of 401(k) Plans Traditional 401(k)

A Traditional 401(k) involves contributions deducted from your paycheck before income taxes, effectively reducing your current taxable income. Plans typically offer investment options, often in mutual funds, to allow savings to grow over time. Withdrawals during retirement are taxed as ordinary income. This plan is advantageous for people seeking immediate tax relief and expecting to be in a lower tax bracket during retirement.

Roth 401(k)

Compared with the traditional 401(k), Roth 401(k) contributions are made with after-tax dollars, offering no immediate tax break. However, qualified distributions, such as those after age 59½ and five years since the first contribution, are tax-free. This plan is ideal for those anticipating higher tax rates in retirement, often making it attractive for young earners at lower income levels.

Solo 401(k): Self-Employed

Designed for self-employed individuals without employees (except for a spouse), the solo 401(k) offers high contribution limits, up to $69,000 in 2024, plus a $7,500 catch-up for those over 50. It allows pre-tax contributions (traditional) or after-tax (Roth) with tax-free qualified distributions for the Roth option. A solo 401(k) is beneficial for maximizing retirement savings for business owners without full-time employees.

Investment Options

Mutual funds are a prevalent investment choice within 401(k) plans, offering a diversified mix of stocks, bonds, and other assets. These funds allow investors to pool their money together for managed investment, aligning with various investment strategies and risk profiles.

  • Risk Tolerance: Your risk tolerance is influenced by factors such as your age, investment goals, financial situation, and how you emotionally handle market fluctuations.
  • Managing Your 401(k): Effective 401(k) management involves regular and consistent contributions, rebalancing to maintain your desired asset allocation, and continuously monitoring and adjusting investments in response to changing market conditions and personal circumstances.

Withdrawals and Distributions

  • Early Withdrawals: Early withdrawals should be made only when necessary because of the significant financial consequences incurred, including a 10 percent penalty and taxation of the amount withdrawn as income.
  • Required Minimum Distributions (RMDs): Required Minimum Distributions RMDs are mandatory withdrawals that must begin from your 401(k) at a certain age, currently 73. Failing to take RMDs can result in hefty penalties.
  • Tax Implications: The tax implications of 401(k) contributions and withdrawals are significant aspects of retirement planning. Contributions to traditional 401(k)s are pre-tax, reducing taxable income, but withdrawals are taxed as income.

Common Mistakes to Avoid

When managing a 401(k) retirement plan, the following are some common mistakes to avoid, to optimize your retirement savings:

  1. Neglecting Employer Match: Not fully utilizing your employer’s match is an expensive missed opportunity. Contribute enough to receive the maximum match offered by your employer, as this is essentially free money that can substantially boost your retirement savings.
  2. Ignoring Investment Allocation: Failing to properly allocate investments within your 401(k) can impact the growth potential of your savings. Regularly review and adjust your investment choices to align with your retirement goals, risk tolerance, and investment horizon.
  3. Not Considering the Long-Term Impact of Loans: Borrowing from your 401(k) can have a lasting negative impact. While loans from your 401(k) may seem like a quick solution for financial needs, they reduce your invested balance, potentially missing out on compound growth.

Alternatives to 401(k)s for Retirement Savings

For those seeking alternatives to 401(k) retirement savings, there are several options:

  1. Individual Retirement Accounts (IRAs): IRAs are suitable for those without a 401(k), including the self-employed and small business owners. They offer tax advantages, varying between traditional and Roth IRAs.
  2.  SEP IRAs: Specifically for self-employed individuals and small business owners, Simplified Employee Pension Plans (SEP-IRAs) resemble traditional IRAs in terms of tax benefits and investment choices but allow for higher contribution limits.
  3. Cash-Balance Defined-Benefit Plan: This plan is akin to a traditional pension, offering a lifetime annuity. Each employee has an individual account with a specified lump sum. For 2023, the maximum annual benefit under such a plan is $275,000.

Advantages and Disadvantages of 401(k)s Compared with Other Retirement Savings Options

Pros of a 401(k) Plan Cons of a 401(k) Plan
You can automate contributions to a 401(k) annually, up to $23,000 in 2024, with an additional $7,500 for those 50 or older, increasing retirement savings. Starting with smaller contributions because of other financial commitments such as loans and house purchases might hinder your ability to save enough over time.
Many employers match a portion of your contributions, adding free money to your account. For example, a 50% match up to 5% of a $60,000 salary results in an additional $1,500 from the employer. Not all employers offer substantial matches. A smaller match, like 50% up to $500, may not significantly boost your retirement savings.
Investing in a 401(k) can be straightforward, with options like target-date funds that automatically adjust over time, simplifying retirement planning. 401(k) plans may come with management and recordkeeping fees, which can be opaque and eat into investment returns.
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Financial Planning

Tax Planning Strategies for Various Life Stages and Wealth Levels

Filing taxes is something we dread and fear each year, but with a little planning, taxes become less expensive and less bothersome. Tax planning not only aims to help save a bit of money, but also is important to avoid penalties, organize their documents, and prepare for the future. Failing to plan for taxes, conversely, is akin to throwing money down the drain.

Tax planning is especially crucial for people considering retirement. At this age, careers are winding down and families are preparing to rely on Social Security and retirement portfolios to support them for the next several decades. Depending on when someone retires, there may still be kids in college and mortgages to pay off. For these people, learning strategies that can lower taxes and protect assets is a must.

Below are some of the strategies that can lower taxes for people with differing tax situations.

Tax planning for high-income earners 

Simply put, the more money you make, the more opportunities there may be to benefit from smart tax planning.

Fully fund tax-advantaged accounts. You can lower your taxable income and possibly your tax bracket by moving as much money as possible into traditional IRAs, Roth IRAs, and Health Savings Accounts (HSAs)

Roth IRA conversions. With Roth IRAs, you can make 100-percent tax-free distributions when you retire, but some high-income earners are not allowed to make direct contributions to Roth IRAs. However, they can convert traditional IRAs into Roth IRAs. Conversions can be expensive upfront, but worthwhile over time. Aiming to fill up current tax brackets at efficient tax rates is key.

Charitable donations. The IRS allows taxpayers to deduct charitable cash donations of up to 60 percent of their gross income and non-cash donations of up to 30 percent. As a result, charitable contributions are among the most popular and common strategies for lowering tax bills. There are a number of options in the types of donations possible.

Optimizing assets. Investments differ in their tax efficiency, and you can often lower your tax bill by reviewing and reorganizing your assets. For instance, keeping mutual funds and ETFs that produce qualified dividends in taxable investment accounts while allocating funds that produce ordinary dividends to IRAs can be an effective way to realize income at preferable tax rates.

There are a variety of investments that high-income earners can consider for tax efficiency, such as tax-exempt municipal bonds.

Take advantage of itemized deductions. Filers who itemize can deduct the interest paid on their mortgages, state and local taxes, medical expenses in excess of 7.5 percent of their adjusted gross income, and more.

Tax planning for small business owners

Small business owners face a different set of tax challenges, but also a new set of opportunities to save. Tax planning should be considered an integral part of managing any small business. Here are a few tactics.

Company structure and tax status. Be sure you have the most tax-efficient structure for your business: sole proprietor, partnership, LLC, S corporation or C corporation. A business’s structure affects how its owners file taxes. If your company has outgrown its structure, you may be able to switch to a structure that can save money on taxes.

Pass-through businesses—sole proprietorships, partnerships, LLCs, and S corporations—are not taxed as corporations (or on the business level), but instead are through the owners’ individual tax returns

Tax deductions. One of the most common small-business deductions is the home office deduction. Taxpayers are able to deduct expenses ranging from real estate taxes to utilities. The amounts are usually based on the square footage of the space used, space used regularly and exclusively for business. 

Many businesses can also take advantage of the qualified business income, or QBI, deduction, which allows small business owners to deduct up to 20 percent of their share in the company’s income.

These are just a few of the strategies available for small business owners. Other tactics include leveraging tax credits, deferring income, and setting up retirement accounts. As a small business grows, generally so do its tax challenges as well as tax opportunities.

Tax planning for real estate investors

Investing in real estate is traditionally the most popular way to build wealth, and locating tax-saving opportunities is as essential a part of real estate investing as locating the right properties. Employing the right strategies can save real estate investors thousands on their tax bills annually.

Tactics these investors should explore include minimizing capital gains taxes, taking full advantage of deductions, and deferring tax with tax incentives. These investors also have the ability to borrow against the equity they’ve built in their properties with cash-out refinances, which provide cash for new investments.

Again, employing tax strategies is an integral part of managing the investment, one that takes ongoing research as tax regulations constantly change.

Tax savings for families 

Managing a family is not unlike managing a small business, with tax planning playing a central role in financial success. It’s essential for parents to learn what deductions and exemptions are available, a situation that has been in flux over the past five years. Tax cuts for corporations passed in Congress in 2017 erased the personal exemption, though offered a higher standard deduction for some families. More changes came in the wake of the pandemic, with the American Rescue Plan in 2021 raising the maximum child tax credit.

Parents should also explore the earned income credit, the adoption credit, and other family tax options.

Tax planning strategies for retirement

Pre-retirement is arguably the most important stage for tax planning. Here, retirement accounts take center stage. Contributions to 401(k)’s, and both Traditional and Roth IRAs should be maximized. People planning to retire should learn how to manage and eventually come up with a distribution strategy from various accounts to improve the tax efficiency of retirement income.

This includes making catch-up contributions, taking advantage of the saver’s credit, and avoiding early withdrawal penalties. It’s also essential to time retirement account withdrawals on a year-to-year basis.

Federal employee retirement tax planning

Federal employees need to look at additional considerations. With the exception of tax-free accounts such as Roth accounts, retirement income is still taxed. This includes income from the Federal Employees Retirement System (FERS), the Thrift Savings Plan (TSP), and Social Security—which are taxed differently depending on your income, location, and other factors.

These retirement income sources have their own specific tax rules. For instance, the part of FERS benefits based on your own contributions are not taxed, while the part based on government contributions and interest are. As for Social Security, up to 85 percent of benefits may be taxed depending on your income.

Federal employees must also consider TSP contributions, IRA and Roth conversions, and health savings accounts.

Conclusion

Two things are certain in life: taxes, and constant changes in tax laws. This makes consulting with a tax professional beneficial, especially for people with multiple income sources, people who plan to move to a different state or country, and people who want to leave a legacy for their heirs. Taking deliberate steps to manage your taxes now, and in the future, can potentially allow you and your loved ones to keep more of what you’ve worked hard to earn.

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Financial Planning

How To Find The Right Financial Advisor Near You?

When it comes to choosing a financial advisory firm, a well-thought-out and systematic approach is crucial. A financial advisor providing guidance for financial planning in your state should be well-versed in the laws, regulations, and practices related to these areas.

Before searching for a financial advisor, it’s important to have a clear understanding of what you want to achieve financially.

Whether you need help with retirement planning, investment management, estate planning, or different financial matters, identifying your specific goals will help you find an advisor with the right expertise.

When searching for the right financial advisor in near you, it is crucial to consider their background and areas of expertise.

Key Considerations for Choosing a Financial Advisor Near You:

By considering key factors such as Assets Under Management (AUM), client count, fee structure, firm age, and clients per advisor, you can make an informed decision that aligns with your financial goals and preferences.

Some of the specific areas of knowledge that a financial advisor in your neighbourhood should possess include:

1. State Tax Laws: Understanding states’ tax laws, including income tax, property tax, and sales tax allows firms to provide clients with relevant tax planning strategies.

2. Estate Planning Laws: Familiarity with estate planning laws, including wills, trusts, probate, and inheritance taxes, to offer compliant estate planning guidance.

3. State Specific Retirement Accounts: Knowledge of state-specific rules for retirement accounts like IRAs and 401(k) plans, helping clients optimize their retirement savings.

4. State Programs and Incentives: Awareness of state programs and incentives related to tax planning and real estate investments, advising clients on how to utilize these opportunities.

5. Networking and Professional Connections: Having strong local connections within the financial and legal community in the region to collaborate with other professionals, such as tax and estate planning attorneys, who possess specific knowledge of state laws and regulations.

To Find The Right Financial Advisor, Near You, Follow These Steps:

1. Check for Locally Registered  & Certified Investment Advisors:

Look for financial advisors who are registered either with the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA).

These organizations provide databases where you can search for registered advisors in your area.

Additionally, you can confirm an advisor’s certification by visiting the Certified Financial Planner (CFP) Board’s website. Other reputable resources to explore include the National Association of Personal Financial Advisors (NAPFA), local Chambers of Commerce, and the Financial Planning Association (FPA).

Ensure they don’t have any disciplinary actions or complaints against them by checking with the SEC, FINRA, or state regulatory agencies.

2. Financial Directories:

Consider local financial directories such as SmartAdvisor Match by SmartAssetTM, WiserAdvisor, FPA Planner Search etc to find top financial advisors near you.

If you’re specifically looking for fee-only or fee-first financial advisors, you can explore directories like Garrett Planning Network, Fee-Only Network, XY Planning Network etc.

3. Search Engine Maps

Use mapping services like Google Maps, Bing Maps, and others. Enter keywords such as “financial advisor near me” or “portfolio management firm near me” to conduct local searches.

Pay attention to ratings and reviews to assess the quality and reputation of financial advisors or firms in your area.

Financial Advisor Near Me On Google Maps

Additionally, reading online testimonials and recommendations from past clients can provide valuable insights into an advisor’s performance and client satisfaction.

For individuals with specific financial goals like real estate investments and tax planning, it is recommended to review their websites, brochures, or LinkedIn profiles to understand their areas of specialization and experience.

Explore our service areas near Maryland and Virginia :

Finding the Most Suitable Financial Advisory Firm Near You For Your Needs.

1. Check Credentials and Licenses:

Verify that the financial advisors you are considering hold the necessary licenses and certifications. Look for certifications such as Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC), as they demonstrate the advisor’s qualifications and expertise.

Additionally, ensure that your chosen advisor is a fiduciary, as this guarantees that they are legally obligated to act in your best interests.

2. Evaluate Disclosures and Negative Records:

As you narrow down your options, thoroughly evaluate any disclosures or negative records associated with the firms. It is essential to choose firms with clean records to provide you with peace of mind and confidence in their services.

3. Clients Per Advisor:

Prefer firms with a lower ratio of clients per financial advisor. A lower client-to-advisor ratio means that the advisor can provide personalized recommendations and tailored financial strategies that align with your unique situation.

Consider whether the firms primarily serve individual investors and have financial planners on staff.

Some major well known firms may prioritize serving corporate or institutional clients, which could impact the level of emphasis on individual investor needs.

4. Account Minimums:

Take note of the account minimums set by the advisors. Some firms may have no set minimums, while others may require a significant investment. Understanding these minimums will give you an idea of the types of investors the advisors typically serve.

5. Consider Fees and Compensation Structure:

Financial advisors may charge fees in different ways, such as hourly fees, flat fees, or a percentage of assets under management. Make sure you have a clear understanding of their fee structure and how it aligns with your budget and financial goals.

Pay close attention to the fee structure of each firm. Fee-only advisors, who earn money solely from client fees rather than commissions, tend to have fewer conflicts of interest.

Understanding how advisors earn money will help you determine if their fee structure aligns with your financial situation and goals.

6. Consider Firm History and Longevity:

Consider the history and longevity of each firm. Firms with a longer track record often offer a greater depth of experience and stability, which can be advantageous in managing your financial affairs.

7. Interview Multiple Advisors:

Lastly, schedule initial consultations or interviews with several financial advisors. During these meetings, ask questions about their experience, investment philosophy, fees, and how they will work with you to achieve your goals.

Pay attention to their communication style, willingness to listen, and their ability to explain complex financial concepts in a way that you understand.

By taking these factors into account and conducting thorough research, you can find the financial advisory firm that best suits your needs and goals.

Use our guide of questions that are essential to ask an advisor before you hire them.

20 Questions to Ask a Financial Advisor

Don’t make a mistake by working with the wrong financial advisor. Ask the right questions to determine if a financial advisor is right for you.

The Bottom Line

Some financial advisory services are much more hands-on and personal than others. When it comes to getting help with your financial situation, including managing your budget, making important financial decisions, and understanding your overall financial health, it’s important to find a financial advisor who will take the time to really get to know you.

This might involve meeting in person to talk about more complicated or sensitive topics that require a deeper level of understanding and trust.

On the other hand, if you just need someone to keep an eye on and make occasional adjustments to your conservative, long-term investment portfolio, you may not need as much personal interaction.

This type of oversight can often be done without a lot of in-depth conversations or face-to-face meetings.

Ultimately, choose a financial advisor whom you feel comfortable with and trust to handle your financial matters. It’s important to have a good rapport and open communication with your advisor, as you will be working together to achieve your financial goals.

We are a fee-only, fiduciary wealth management firm in Rockville, Maryland. Offering a range of services from investment management to personal financial planning, retirement planning, and everything in between.

If you have any questions about our firm, our services, or how our expert fiduciary advisors can help you achieve your financial goals, call us today at ​301-670-0994.

Schedule Your Free 3o Min. Consultation Today!

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Investment Decisions

Investment Guide to DFA Mutual Funds

DFA Mutual Funds Explained

Dimensional Fund Advisors, is an investment management company that takes a unique approach to the mutual fund investment strategy.

As with traditional mutual funds, DFA allows investors the opportunity to pool their funds with other investors to buy blocks of securities, but the strategy behind selecting assets for a DFA mutual funds differs significantly.

The techniques used to select assets are guided through academic research that follows the science of investing rather than simply making predictions based on past market performance or the success or failure of certain companies.

Dimensional Investment Philosophy: Utilizing Academic Research and Empirical Evidence

Dimensional Fund Advisors (DFA) was founded by David G. Booth and Rex Sinquefield in 1981. David Booth, a professor at the University of Chicago’s Booth School of Business, played a significant role in developing DFA’s investment philosophy.

DFA’s investment philosophy is data-driven and relies on empirical evidence rather than speculation. This is influenced by groundbreaking research in finance, including the efficient market hypothesis and studies on factor-based investing such as the three-factor model developed by Eugene Fama and Kenneth French.

DFA takes the emotion out of the equation to deliver reliable results. It has shown over time that it is possible to seek higher expected market returns through the use of science without having to outguess the market.

Over the past several decades this data-driven philosophy has proven successful and has become a preferred mutual fund strategy for investors who share in the belief that success is not arbitrary.

How DFA Mutual Funds are Different

DFA follows a philosophy that uses empirical evidence to arrive at carefully determined “premiums,” or factors, to guide the investment strategy.

Rather than simply looking at past performance and market trends, they take into account these select premium attributes which include relative price, company size, and profitability, all of which aim to have an impact on the fund’s end results and the investor’s bottom line.

DFA’s Factor-Based Approach: Targeting the “Premiums”

1. Company Size: The size factor refers to the historical evidence that smaller companies tend to outperform larger companies over the long term.

In practice, a factor-based strategy might involve overweighting or investing in small-cap stocks compared to their market capitalization weights. This approach aims to capture the potential excess returns associated with the size factor.

2. Relative Price (Value): Stocks with lower valuation metrics, such as low price-to-earnings (P/E) or price-to-book (P/B) ratios, tend to outperform stocks with higher valuations.

Implementing the value factor could involve constructing a portfolio that emphasizes stocks with attractive value metrics relative to their peers.

3. Profitability: Companies with higher profitability, as measured by metrics like return on equity (ROE) or operating margins, tend to deliver better long-term performance.

A factor-based strategy might involve directing the portfolio towards stocks with strong profitability characteristics.

DFA’s investment strategy revolves around carefully selecting securities that demonstrate these factors, aiming to capture systematic sources of risk and long-term market returns within a modern investment framework.

How Dimensional Mutual Funds Differ from Index Mutual Funds

DFA mutual funds and index mutual funds share the same purpose of building wealth with pooled investments, but there are some key differences in their approach:

Dimensional Funds  Index Funds
Accessible through authorized advisors Direct access for individual investors
Managed by individuals who meet DFA’s high standards No specific requirements for advisors
Philosophy based on following the science of investing Reflects current market trends and past performance
Favors small-sized companies with long-term outperformance potential No specific bias towards company size
Considers value in comparison to growth No specific focus on value or growth
Emphasizes profitability as a determinant of long-term performance No specific emphasis on profitability

Benefits of Investing in DFA Mutual Funds

1. Lower costs and fees

  1. DFA does not pay advisors commissions to recommend their funds to investors. This practice tends to deter fee-based advisors who may trade fund assets based on emotions, trends, and performance markets, passing those trade fees along to the client.
  2. It attracts advisors who embrace a passive investment strategy and value their role of educating and providing guidance for their clients.
  3. DFA employs disciplined trading practices, such as patient trading and minimizing market impact. This approach aims to reduce transaction costs and prevent negative impacts on portfolio performance.

2. Diversification and risk management

DFA’s mutual fund strategy employs several market strategies to emphasize diversification across different market segments, providing investors with a robust risk management mechanism.

DFA aims to provide investors with exposure to a wide range of market segments, including domestic and international equities, fixed income securities, and alternative asset classes. A few notable strategies include:

  1. Broad Market Exposure
  2. Factor-Based Investing
  3. Structured Portfolios
  4. Efficient Trading

3. Focus on long-term investing

DFA encourages investors to adopt a long-term perspective and resist short-term market timing or reacting to market fluctuations. This patient approach allows investors to benefit from the long-term performance of the market segments they are invested in.

4. Strong performance track record

The company’s commitment to rigorous research, data-driven methodologies, and a long-term investment perspective has contributed to its strong performance track record.

It’s important to note that past performance is not indicative of future results, and investing involves risks. Factors such as economic conditions, market volatility, and specific company or industry risks can impact investment outcomes.

Therefore, it’s crucial for individuals to conduct a thorough assessment of their financial goals, risk tolerance, and time horizon before making any investment decisions.

Consulting with financial professionals, such as fiduciary advisors or certified financial planners CFP®, can help assess risk profiles, develop appropriate investment strategies, and provide ongoing monitoring and adjustments as needed.

How to Invest in DFA Mutual Funds

Unlike index mutual funds, DFA mutual funds are not readily available to the general public. Investors can only access them through select financial advisors who have undergone a rigorous and lengthy selection process.

This ensures that those advisors managing investor accounts understand and respect DFA’s philosophy of investing based on academic research and the science of investing.

1. Selecting an Approved Financial Advisor

  1. When you are ready to invest in DFA mutual funds, start by selecting a financial advisor that has been approved to offer DFA mutual funds to their clients.
  2. They are not likely to make drastic changes to the assets held within a mutual fund on a whim or for their own benefit, thus potentially affecting the portfolios of investors in a negative way.
  3. Not only are they well-versed in selecting the funds that will provide optimal results based on size, value, and profitability, but these advisors work to educate and provide sound, reliable advice rather than chase trends and try to predict market outcomes.
  4. Fiduciary advisors working with Dimensional Funds (DFA) are ideal resources due to their obligation to act in clients’ best interests and their expertise in DFA’s unique investment strategies, providing access to well-diversified portfolios and ongoing guidance.

2. Building Your Portfolio

  1. Once you have selected an approved DFA fund advisor, open a brokerage account to fund your investment.
  2. By opening a brokerage account, clients gain access to a range of investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other securities.
  3. The brokerage account facilitates transparency and accountability, as clients can view their portfolio holdings, track performance, and receive regular statements and reports detailing their investment activity and account balances.
  4. The next step is selecting the appropriate mutual funds that meet your investment goals.
  5. Fiduciary approved mutual fund advisors are the ideal resource to help with this step of building your portfolio.

3. Managing Advisor Fees

  1. DFA does not pay commissions to approved financial advisors.
  2. Fees based on service rather than account size result in a rewarding advisor-investor relationship that is fair to both parties. Learn more about fee-only advisors.

DFA & Ferguson-Johnson Wealth Management.

Ferguson-Johnson Wealth Management collaborates with DFA by providing expertise and guidance to clients interested in investing in DFA funds.

As a fee-only fiduciary with more than 40 years of experience, our firm is well-versed in various investment styles, including those aligned with DFA’s philosophy of investing based on academic research and the science of investing.

We work closely with clients to understand their investment goals and leverage our knowledge of DFA funds to build diversified portfolios that align with their objectives.

By incorporating DFA funds into our tailored investment strategies, we aim to maximize profitability and provide our clients with the benefits of DFA’s approach to investing.

Categories
Retirement Solutions

Complete Guide To Maximizing Your Social Security Benefits

As the primary retirement program in the United States, Social Security currently benefits 66 million people, 51 million of them retirees and dependents.

It also serves 8 million workers with disabilities and 5 million survivors of deceased workers.

The program began with the Social Security Act in 1935, part of President Franklin Roosevelt’s “New Deal” response to the Great Depression.

It is administered by the Social Security Administration (SSA), an independent federal agency that operates through 1,200 field offices nationwide, as well as its website and 37 Teleservice Centers.

How Social Security Benefits Work

Social Security is not a pension plan, but rather an insurance plan to supplement a retired worker’s pension and savings. In 2022, about 182 million workers contributed to the program through Social Security taxes.

Most of those taxes are paid through employers’ payroll withholding, while self-employed workers pay Social Security taxes when filing their federal income tax returns.

The amount retirees receive depends on their pre-retirement income and the age at which they choose to begin receiving benefits.

To be eligible for Social Security, workers must have earned 40 credits. One credit is earned for earnings of $1,640 in 2023, with a maximum of four credits for earnings of $6,560 available per year. Thus a person who earns four credits per year for 10 years is eligible for Social Security.

The amount of your Social Security benefit is based on your highest 35 years of earnings. Workers with fewer than 35 years of earnings will receive lower benefit amounts because years without work represent zeroes in benefit calculations.

How Social Security Benefits are Calculated

To compute your benefit, Social Security indexes your actual earnings using the national wage indexing series. The goal is to make future benefits reflect the changing standard of living during the person’s lifetime.

Social Security then takes your average indexed monthly earnings from your highest 35 years of work and applies a formula to determine the benefit you will receive at your full retirement age (FRA), currently between 66 and 67 depending on your year of birth.

Your actual benefit changes depending on when you begin to start them. Turning benefits on before your full retirement age will lower the benefit amount while turning them on after the full retirement age will raise them.

The Maximum Social Security Benefit

For people who begin taking Social Security retirement benefits at the full retirement age in 2023, the maximum benefit amount is $3,637 per month.

For those who start receiving Social Security this year at age 70, the maximum Social Security benefit is $4,555. Meanwhile, for 62-year-olds who begin benefits this year, the amount is $2,572.

Social Security Special Minimum Benefit

Stemming from legislation enacted in 1972, the Social Security special minimum benefit provides low-earning workers with a primary insurance amount (PIA).

For 2023, the lowest PIA available for at least 11 years of work is $49.40 per month. For workers retiring after 30 years of earnings, the PIA is $1,033.50 per month.

Unlike regular Social Security retirement benefits, special minimum benefits are calculated not on income but solely on the number of years worked.

People who turn on benefits early will receive a lower benefit. Those who retire late will not receive a higher benefit—unlike regular Social Security.

Full Retirement Age

For people born between 1943 and 1960, the full retirement age increases gradually up to age 67. People born in 1955 have already reached the full retirement age in 2023. Below is a chart showing the full retirement age for people born in this period.

Year of birth Full retirement age
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

 

Cost-of-living Adjustments (COLA)

Social Security retirement benefits increase as the cost of living rises. The increase is based on the Department of Labor’s Consumer Price Index (CPI-W). The goal is to keep benefits in line with inflation, offsetting a higher cost of goods and services with higher benefits.

In 2023, retirees received a large increase in their Social Security benefits of 8.7 percent, an average of $140 per month.

Determining the Best Age to File for Social Security Benefits

As noted above, retiring early lowers the benefit amount, while deferring retirement past the full retirement age raises it. The earliest you can begin receiving benefits is age 62, but the benefit amount is reduced by about 7 percent per year for each year prior to the full retirement age.

The chart below lists the percentages, with the full retirement age of 66. At age 62, a person receives 75 percent of the full benefit.

62 75%
63 80%
64 86.7%
65 93.3%
66 100%
67 108%
68 116%
69 124%
70 132%

The question is, if you turn on benefits at the earliest age, 62, at what age will you break even, or begin wishing you hadn’t retired early? In general, that age is between ages 78 and 82.

So among the questions people should ask is, what is their likely longevity in terms of health and longevity in their family history? For people with less-than-perfect health and parents who died before age 85, turning on benefits early might make sense.

Equally important are what other retirement assets the person has accumulated and what the person’s retirement plans are.

Another question is whether or not you plan to continue working. If you turn on benefits early, you face an “earned income penalty” if you earn over a certain amount, set by the SSA.

In determining whether or not to defer benefits past the full retirement age, or to increase the benefit amount, similar questions should be asked.

How to File for Social Security

Follow these simple steps to apply for Social Security retirement benefits.

  1. Make sure you want to apply at your current age.
  2. Check to make sure you are eligible.
  3. Collect the required documents.
  4. Complete the application.
  5. Monitor your status.

You can get all this started by calling the Social Security Administration at 1-800-772-1213 or by filing online at www.ssa.gov.

Social Security Planning

It is never too early to begin planning a Social Security strategy. In fact, delaying can be costly, a price that retirees will be stuck with for the rest of their lives. To navigate the complexities of retirement and Social Security, it’s best to consult an accounting professional.

Social Security FAQs

1. What are Social Security credits and how are they calculated?

The Social Security Administration uses a credit system to determine eligibility for Social Security benefits. For 2023, a person gets one credit for each $1,640 in earnings, up to a maximum of four credits, or $6,560.

To become eligible a person must have earned 40 credits. Thus a person must work for at least ten years to become eligible for retirement benefits.

2. Can I receive Social Security benefits while I’m still working?

Yes, you can receive Social Security retirement benefits and work at the same time. However, your benefit amount may be reduced if you earn above a limit set by the Social Security Administration.

3. What is the payout percentage difference between filing at full retirement age and minimum filing age?

The minimum filing age is 62, but the benefit amount is reduced by about 7 percent per year for each year prior to the full retirement age. The chart below lists the percentages of full retirement benefits by age of retirement, with the full retirement age at 66.

62 75%
63 80%
64 86.7%
65 93.3%
66 100%
67 108%
68 116%
69 124%
70 132%

4. Do I have to pay taxes on my social security benefit?

Possibly. You must pay taxes on up to 85 percent of your benefit if (a) you file your federal tax as an individual and your combined income is above $25,000, or (b) you file jointly with a spouse and your combined income exceeds $32,000.