Financial Management Insight flipbook 2024

Financial Management Insight Strategies to Help Build Your Future

Some people aspire to buy a dream home or travel the world after they retire. Others want to help their children pay for a college education. And when it comes down to it, many of us would love to accomplish all these worthy goals. Sound financial management is a process that begins with a person’s first paycheck and continues through each stage of life. Like the steps of building a sand castle, each decision you make about money today forms the foundation for your financial future. Cash Management Improving your financial position Protection Strategies Strengthening your “safety net”

Investing Fundamentals Building a portfolio Tax Issues Managing your tax burden Retirement Planning Funding a comfortable financial future Estate Matters Preserving wealth

Cash Management Improving Your Financial Position Start by taking control of your cash flow: 1. Assess your spending. You cannot make sound decisions about your money if you have no idea where it’s going. Once you see where you might be wasting money, you can put it to work more productively. 2. Build a cash reserve or emergency fund. This is the “rainy day” money you set aside for life’s surprises. 3. Pay down credit-card debt. Credit cards are a double-edged sword. Most people rely on them as a financial convenience, but credit cards have a “dark” side too, namely their relatively high rate of interest. Embrace the Household Budget Creating a budget involves allocating a set amount of money to spend on such items as housing, food, transportation, and entertainment — and to save for the future. A good first step is to keep a detailed record of all spending for at least 30 days. Every expense should be labeled, categorized, and subcategorized for tracking purposes. This may seem like a daunting task, but today’s technology could make it less tedious and possibly even fun. You can write down each expense or use computer software, online financial tools, or a mobile budgeting app. After 30 days, youmay notice that you tend to spend more than you thought on some types of items. Regardless of the budgeting method you prefer, the process can help you identify and curtail overspending. A budget doesn’t have to be overly restrictive to be effective, as long as it provides realistic spending guidelines that reflect your earnings and lifestyle. Of the 74% of Americans who say they have a monthly budget, only 32% track their spending on a regular basis. Source: Nerdwallet 2023 Consumer Budgeting Report

49% Spend less than they earn 19% Spend more than they earn 32% Break even (earnings/ spending) The Bottom Line Percentage of Americans who Source: Federal Reserve, 2023 (2022 data, most current available) Be Prepared for Life’s Surprises A sudden job loss — even unexpected expenses like a major car repair and medical bill — could be devastating if you don’t have an adequate cash cushion. To avoid racking up debt during tough times, youmay want to keep a cash reserve fund that is large enough to cover living expenses for at least three to six months. Emergency funds typically should be held in a bank money market or savings account where the cash would be readily accessible when needed. A review of your spending habits may reveal some relatively painless ways to cut back, leaving a little more to sock away eachmonth. Here are two more ways to build up your emergency fund. • Divert a portion of salary. Determine howmuch income you can afford to set aside and transfer that amount automatically from your paycheck to a separate account. • Make themost of a windfall. Resolve to save your tax refund, annual bonus check, monetary gifts, and other unplanned income.

Life’s Expensive Milestones How Debt Can Stand in the Way of Progress Here’s a hypothetical example that demonstrates the true cost of carrying a large amount of credit-card debt. For someone with $25,000 of credit-card debt (15% interest rate) who consistently makes $400monthly payments, it would take 10 years to pay off the balance — and add up to $23,938 of interest. On the other hand, if the same $400 was invested monthly in an account earning a hypothetical 7% rate of return, the account could grow to $69,232 over the same 10 years. The difference between these two results— the investment opportunity lost to credit-card debt — is a surprising $93,170. When you think about it that way, it might make more sense to pay off high-interest credit-card debt before youmake any other investment. This hypothetical example is used for illustrative purposes only and does not represent any specific investment or credit card. It assumes a 7% annual return on the investment and a 15% annual interest rate on the credit cards. It also assumes a 10-year repayment schedule for the credit-card debt with no new charges added. Actual results will vary. Investments with the potential for higher rates of return also carry a greater degree of risk of loss. $30,000 Average cost of a wedding (in 2022) $391,800 U.S. median home price (October 2023)

Sources: The Knot, 2023; National Association of Realtors, 2023; Brookings, 2022 (based on 2015 USDA data); College Board, 2023 Escape the Credit-Card Trap The average credit-card balance was $6,088 in the third quarter of 2023.1 Although paying off your cards may not sound as appealing as a trip to Hawaii or a new car, it could prove to be one of the wisest “investments” you make. Here are four strategies to help pay down credit-card debt more quickly. 1. Pay more than the minimum monthly amounts whenever possible, and try to reduce the account balances on the highest-rate cards first. 2. Use low introductory rates or 0% balance transfers to help lower interest payments and pay off more of the balance during the promotional period. Before transferring balances, make sure any rates that might kick in later won’t be higher than normal, and resolve not to spend more and run up the balance again after you pay off the card. 3. Make monthly payments on time. The interest rate on some accounts may be much higher for cardholders who pay late or have low credit scores in general. 4. Call the credit-card company and try to negotiate a lower rate. 1 Transunion, 2023 $310,605 Estimated cost to raise a child born in 2015 to age 18 (with projected inflation) $24,030 Average annual cost to attend a four-year public college, 2023–2024 (in-state tuition, fees, housing, and food) $56,190 Make that a private college

Regardless of where you live, what you do for a living, and the lifestyle you personally enjoy, there are many forms of insurance that could provide some financial protection from life’s unknowns. Therefore, it might be worth the time and effort to review your coverage and evaluate whether it is still adequate for your family’s needs. Protection Strategies Strengthening Your “Safety Net”

1 Employee Benefit Research Institute, 2023 Homeowners Insurance A home could be the single largest investment youmake in your lifetime. Homeowners insurance provides compensation (up to the policy limits) if your home is damaged or destroyed, or if your family’s possessions are stolen or damaged. It can also provide some measure of protection against liability claims and medical expenses that result from property damage or injuries suffered by others on the property. Auto Insurance People rarely stop to think about the dangers associated with driving and many other normal, everyday activities. Auto insurance not only helps protect your vehicle, but it may also shield you from liability for damage or injury (up to policy limits) caused by you or someone else driving your car. Health Insurance As health-care costs have risen, workers who can enroll in an employer-sponsored medical planmay notice plan changes such as higher premiums, deductibles, and coinsurance rates. Individuals who are not covered by employer-sponsored health insurance, Medicare, Medicaid, or another government program can purchase insurance that meets minimum standards directly from a private insurance company (or broker) or from an exchange run by their state or the federal government. The official site is Medicare Medicare is the U.S. government’s health insurance program for people ages 65 and older as well as younger individuals with specific disabilities and illnesses. Even withMedicare, there are some fairly stiff deductibles, copayments, and coinsurance. In fact, Medicare typically covers only about 60% of the cost of health-care services for beneficiaries age 65 and older.1 An alternative to Original Medicare is Medicare Advantage (Part C) —private plans that provide the benefits and services of Medicare Parts A and B and may offer additional benefits such as vision, wellness, and prescription drug coverage.

Source: Insurance Information Institute, 2023 (most current data available) Damage from wind and hail is the most common type of homeowners insurance claim, but fires are generally the most expensive. Homeowners’ Losses by Severity of Claims (weighted average, 2017–2021) Why Homeowners Depend on Insurance Theft $4,646 Fire/lightning $83,519 Bodily injury/property damage (liability) $31,663 Wind/hail $12,913 Water damage/ freezing $12,514 Medical payments (liability) $10,179

Even with insurance, health costs can be a financial burden. In 2022, 23% of adults had major, unexpected medical bills to pay. Source: Federal Reserve, 2023 (2022 data, most current available) A Bitter Pill Health-care costs for the typical American family of four with employer coverage reached $31,065 in 2023. The family’s share amounted to $12,822 in payroll deductions and out-of-pocket expenses— more than the family would spend on groceries. Source: Milliman Medical Index, 2023 $28,310 2021 2022 2023 $29,424 $31,065 Annual health-care costs for a family of four

Disability Income Insurance A disabling illness or injury that prevents you from earning a living could ruin your efforts to secure a comfortable financial future. Many employers offer short-term group disability insurance, but the coverage may last only a fewweeks or months. Long-term group disability coverage generally replaces only 50% to 60% of a worker’s income, and any benefits would be taxable if the employer paid the premiums. Few people would be able to meet all their expenses if they had to live on half of their current salaries. How can you help protect your income and lifestyle from the financial ramifications of a prolonged disability? Youmight consider purchasing an individual disability income insurance policy if you are self-employed or your employer coverage is insufficient for your family’s needs. It might surprise you to know that about one in four of today’s 20-year-olds can expect to be out of work for at least one year because of a disabling condition before they reach age 67. Without disability income insurance protection, that could spell financial disaster. Source: Social Security Administration, 2023

Life Insurance There are two basic types of life insurance. Term insurance is pure insurance that is purchased for a specified but limited period of time. When the term expires, coverage ends. It tends to be more affordable, especially for younger individuals. Permanent (whole life) insurance also offers a death benefit, but the insurance remains in force for the rest of policy owner’s lifetime, as long as premiums are paid. In addition, a portion of the premiums goes into a cash-value account that accumulates on a tax-deferred basis. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable. As withmost financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

A sound investment strategy based on your financial goals, time horizon, and risk tolerance could serve you well over the long run. To build a portfolio that could help meet your needs, you should consider why you are investing and the time frame available before you need the money. If you are investing for your children’s college education, for example, youmay not be able to assume as much investment risk because your time frame is short. If retirement is a long way off, youmay be able to invest more aggressively. In addition, you should think about your tolerance for risk, which refers to howwell you tend to handle dramatic ups and downs in the markets and changes in the value of your portfolio. Investing Fundamentals Building a Portfolio

Understanding basic investment strategies may help you make more informed investing decisions. Asset allocation involves dividing your portfolio into different asset classes — typically, stocks, bonds, and cash— to seek the highest potential return based on your risk tolerance. This process can help you balance investments that have lower levels of risk with those that have a higher potential for growth. Diversification generally means “don’t put all your eggs in one basket.” Different types of investments may react to changing market conditions in different ways. When your money is diversified, gains in one area may help compensate for losses in another. By distributing your holdings among a variety of investments, you can help limit your risk of loss in any one sector of the market. Dollar-cost averaging involves investing a fixed amount of money at regular intervals, such as monthly. By investing the same amount consistently over time, you are able to buy more shares of an investment when the price is low and fewer shares when the price is high, whichmay result in a lower average cost per share over time. Because dollar-cost averaging involves making periodic investments, you should consider your financial ability and willingness to continue making purchases during periods of low and high price levels. These strategies may seemunexciting, but much of their value comes from reducing the potential to react emotionally during periods of market volatility. Asset allocation, diversification, and dollar-cost averaging won’t guarantee a profit or prevent a loss; they are methods used to help manage investment risk. Investments offering the potential for higher rates of return also involve a higher degree of risk of principal. The return and principal value of all investments fluctuate with changes inmarket conditions. Shares, when sold, and bonds redeemed prior to maturity may be worthmore or less than their original cost.

Tax Issues Managing Your Tax Burden It’s not easy to keep up with complex tax laws that always seem to be changing, much less figure out how they might affect your finances. Even so, it is important to consider taxes when making financial decisions. You may even be able to postpone or reduce your tax obligation with some careful planning and the guidance of a tax professional. Federal Income Tax Brackets There are seven federal income tax brackets, ranging from 10% to 37%. This table shows the taxable income ranges for single filers and married joint filers for the 2024 tax year. Dollar limitations are adjusted annually for inflation. Single filers Joint filers Tax rate Up to $11,600 Up to $23,200 10% $11,601 to $47,150 $23,201 to $94,300 12% $47,151 to $100,525 $94,301 to $201,050 22% $100,526 to $191,950 $201,051 to $383,900 24% $191,951 to $243,725 $383,901 to $487,450 32% $243,726 to $609,350 $487,451 to $731,200 35% $609,350 and over $731,200 and over 37% Taxable income ranges for 2024 Source: Internal Revenue Service, 2023

After the Tax Cuts and Jobs Act of 2017 nearly doubled the prior standard deduction amounts and eliminated the deduction for personal exemptions, more taxpayers take the standard deduction rather than itemizing deductions, leading to a less complex tax filing season. *The net investment income tax (also called the Medicare surtax on net investment income) applies to the lesser of (a) net investment income or (b) the amount by which modified adjusted gross income (AGI) exceeds the above thresholds. It does not apply to municipal bond interest or IRA/qualified retirement plan withdrawals. Source: Internal Revenue Service, 2023 Investment Tax Rates The tax code treats capital gains and dividends differently from ordinary income, such as that received from wages or interest from bonds and savings accounts. High-income taxpayers may also be subject to a 3.8% net investment income tax on capital gains, dividends, interest, royalties, rents, and passive income if their modified adjusted gross income (AGI) exceeds $200,000 (single filers) or $250,000 ( joint filers). Single filers Joint filers Tax rate Long-term capital gain and dividend tax (2024 taxable income thresholds) Up to $47,025 Up to $94,050 0% $47,026 up to $518,900 $94,051 up to $583,750 15% Over $518,900 Over $583,750 20% Net investment income tax (2022 AGI thresholds) Over $200,000 Over $250,000 3.8%* Short-term capital gains on investments held 12 months or less are taxed as ordinary income, so investors in the top 37% tax bracket could owe up to 40.8% on short-term gains.

Retirement Planning Funding a Comfortable Financial Future Setting the stage for a comfortable retirement involves determining how much you need to save and developing a roadmap to pursue your goal. It’s never too early to prepare for retirement. The beneficial impact of compounding is enhanced for workers who start saving early in their careers. People who wait until they are older to save for retirement have less time on their side and will typically have to invest muchmore of their incomes to achieve the same result.

How much money will you need? It basically depends on a number of factors specific to your personal situation. You might start by addressing these questions: Considering these and other retirement expenses, especially the potential for higher health-care costs, experts suggest that you might need at least 70% to 80% of your pre-retirement income to live comfortably in retirement. Have you considered the impact of inflation on your savings needs? If the average 30-year inflation rate of 2.50% were to continue going forward, an item that cost $1 in 2023 would cost more than $2 in 2053 — twice as much! What retirement lifestyle do you envision? Do you plan to move, travel extensively, or maintain a country club membership? You might need more than someone who anticipates a more frugal lifestyle. How many years will you spend in retirement? Consider your health and family history. At what age would you like to retire? The earlier you retire, the more financial resources you may need. Will you pay for health-care expenses out of pocket, or will a former employer help cover the costs? It’s estimated that some couples who retired at age 65 in 2022 could need as much as $383,000 in savings to cover their health expenses in retirement. Source: Employee Benefit Research Institute, 2023 This hypothetical example is used for illustrative purposes only. Actual results will vary.

Social Security: Benefits are based on your earnings history and the age when you claimbenefits. If you retire at your “full retirement” age —which ranges from 66 to 67 —you will receive your “full” Social Security benefit. If you choose to claim benefits at age 62 (the earliest claiming age), you will receive a permanently reduced benefit (25% to 30% less than the full benefit, depending on your year of birth). If you delay claiming benefits after reaching full retirement age, you will receive a larger benefit — about 8%more for each year you delay, up to age 70. Married couples may have additional filing strategies to maximize lifetime benefits. Personal savings and investments: Unless you receive a traditional pension, the money you save and invest will make up the bulk of your retirement income. Youmight invest in IRAs and employer-sponsored retirement plans. And youmight supplement these plans with taxable financial vehicles such as stocks, bonds, cash alternatives, and mutual funds. Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. Even though you might receive annual cost-of-living adjustments (COLAs), Social Security shouldn’t be counted on to cover all your living expenses in retirement. The average monthly benefit for all retired workers in November 2023 was only $1,845. Source: Social Security Administration, 2023 What Income Sources Will You Have?

401(k), 403(b), or 457 plan Traditional and Roth IRAs (combined limit) Regular annual limit Catch-up contribution for workers age 50 and older Retirement Plan Contribution Limits (2024 tax year) If you are eligible to contribute to an IRA or an employersponsored retirement plan, your annual tax-deductible or pre-tax contributions are capped by federal law. $1,000 $7,000 $23,000 $7,500 $8,000 $30,500

Estate Matters Preserving Wealth Your estate comprises all the wealth you have accumulated over your lifetime, including real estate, stocks, bonds, business interests, retirement plans, personal effects, and anything else you own. Effective estate conservation can provide several benefits: • Select the people and organizations you want to receive your assets, and determine how and when they will receive their inheritance • Choose individuals who will manage your estate, including an executor, a trustee, and others • Choose guardians for minor-age children • Help reduce estate settlement costs, including probate

Important Estate Documents Having certain legal documents in place can provide a roadmap that your heirs can follow. It is important to keep these documents up-to-date and in a secure location that is known to family members and/or trusted professionals. A last will and testament is a good start, but it won’t prevent your estate from going through the probate process, which can be expensive and time-consuming for heirs. Here are some of the documents that typically make up an estate plan. Power of Attorney Gives someone of your choosing the authority to act on your behalf in legal and financial matters. A durable power of attorney designates someone to act on your behalf even in the event that you become disabled or incapacitated. A medical power of attorney gives someone the authority to make medical decisions for you if you are unable to make them yourself. Last Will and Testament Provides instructions detailing how you want your estate to be distributed. Contracts The assets in life insurance policies, pensions, IRAs, and retirement plans will pass directly to the beneficiaries you have designated on the account beneficiary forms, superseding instructions in a will. These assets typically are not subject to probate. Trust Enables you to specify how and when assets in the trust should be distributed after your death. Assets in a trust may avoid probate and possibly estate taxes. A trust can also be used to provide for a dependent with special needs and to make a substantial contribution to your favorite charitable organization. Living Will Differs from a standard will in that it outlines which medical procedures you will allow in the event of a debilitating or chronic illness. It is often used to authorize termination of artificial life support in the event of terminal illness. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax professionals before implementing such strategies. There are initial costs and ongoing expenses associated with the creation andmaintenance of trusts.

Have you taken the time to list and prioritize your financial objectives? If you start preparing today and resolve to stay focused on your goals, you might accomplish more than you ever imagined. © Prepared by Broadridge Advisor Solutions. © 2024 Broadridge Financial Solutions, Inc.