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April 28, 2022 5:02 pm
Plan for success planning matters radio program. My name is Amber Rochon with Sean planning in April is financial literacy month. In a recent series of interviews Peter Rochon, my husband of Rochon planning the importance of general financial literacy and understanding of basic financial concepts as well as more specific issues like traditional versus Roth IRAs. The Fed interest rate hikes and where you can get a government-backed guaranteed 7.12% interest on safe money right now. Each of these interviews were produced as podcast for you to listen or view on demand and can be found at www.richenplanning.com if you have any questions or would like to improve your financial literacy or confidence in your financial plan well-being and future contact Peter Rochon at Rochon planning at 919-300-5886. Now let's get into financial literacy month topics with Peter Rochon. Good to see you April is financial literacy muscle happy financial literacy for nuncio and this is so important.
The importance of a financial education. In fact, FINRA often gives people a test to measure their knowledge of interest compounding inflation and bonds. And surprisingly, only 34% of people are passing so break it down Peter, why do you think a financial education is so important because only 34% of people are passing to me and I think is really important that we we get that financial education. Understanding the financial literacy of the FINRA test has a lot of different components that go into it that they ask questions about some of them are just as simple as compounding interest. Do you understand that it's important that you're earning money on the money that your money has earned for you.
That's when you put money to work and not only 34% financially literate. According to that FINRA test, but I also saw some other studies from Bloomberg that under 30% of millennial's felt financially prepared for an emergency or the unexpected. So we really need to do a better job, and in getting educated and and setting that foundation in place for some good financial habits into and throughout life could play a little bit more about compounding because I think this is one of those things I wish I'd known earlier, and here he said this specifically is so important to you that you actually make it your mission to go out in the community and educate young people about it. You have been to a couple of the local area high schools here invited in for career day, or for some one off a professional information and education days and I talked to the high schoolers about the importance of saving early and often and as much as possible, but also the difference between saving and investing and I show them a chart similar to what you're you're putting on the screen now where we see the implications. The effects of compounding interest. Albert Einstein said it was the most powerful force on the planet.
The power compounding is been called the eighth wonder of the world and the reason why is that your money works for you. It continues to grow. I show the high schoolers a chart of somebody who begins saving at 20 and saves only till 30 versus somebody who starts at 30 and saves all the way till 65 and the difference is pretty remarkable and then I show them if they didn't stop at all, but start at 20 and save all the way through to 65 what that looks like. But here's the thing.
If your money is not compounding for you. It doesn't matter where in that chart you take time off like the end of that chart, it begins to show the real power of compound interest. The growth of the money against the hockey stick and grow exponentially. And if you miss any time.
It's not back time at the beginning or the middle that you miss it is the end where that money really begins to pick up and grow so quickly because of that compounding interest right well said reasons I think that it's kinda so complicated now is that we live in this world that the entire financial landscape has changed, but she among them retirement planning right used to be that we had a pension, you would contribute somebody else with management and then he would retire and it was great but now there are so many options to choose from you.
No tax-deferred. I pay my taxes now or later, and this is something that you nationalize in helping people navigate all these options and figuring out what's best for them yet. Well, having many, many options doesn't necessarily simplify things right more often than not it actually complicates writings and in our world of ease of use and digital done for you. Everything financial and retirement planning has agreed with you, Erin become more complicated.
Used to be that we had the pensions set it and forget it.
You start your career you work your entire career for one company and then you retire and that company continues continues to pay you whereas today, that burden has really been placed more on each one of our own individual shoulders and there is a lot that goes into what that pension used to provide that we as individuals now needs to make sure that we have accounted for income planning is is a buzzword of the last maybe 15 years. That really wasn't heard much before that because income in retirement was sort of taken care of for night longevity was was not necessarily something that was considered as much of a risk when pensions provided for a payment that was guaranteed throughout the duration of your lifetime, but now that we retire with a finite amount of money, no pension. We gotta make that money last for an unknown amount of time longevity risk as its come to be known as something that we really have to specifically take the steps to address financially so that we can once again look at longevity as is a blessing and something that we hope for, rather than something's going to risk our financial well-being and security. Right now, especially now that retirement here is 25, 30 years. He wanted to last as long as possible. More like your help, then enough and crunching the numbers regarding retirement or anything that isn't making sense them right now is the best way to retail where you can reach out online Rochon planning.com it looks like Rich on planning.com you can email me firstname.lastname@example.org or you're welcome to give the office call 919, 300-5886 919-300-5886. I am actually pushing to have some financial literacy classes taught in the local area high school so if anybody here in in the Fuquay Marina Willow Springs area would like to see that as something being taught to their high school students are encouraged to reach out and let your career guidance counselor or or students let their teachers know that this is something they would be interested. I vote yes on that. That's great. I'm glad you're doing it. Thank you.
Absolutely. Thank you. Great information Peter. The next interview was on the difference between tax-deferred traditional IRA and Roth a very important distinction to understand as it could potentially save hundreds of thousands of dollars in your retirement.
Let's listen as Peter Rochon continues the financial literacy discussions hey Peter, happy financial literacy month is so great we are creating a series of videos that were breaking on some really good topics to focus on the difference between a traditional and a Roth IRA. This is important because I know that retirement planning is something you specialize in, but you also encourage tax diversification so just break down what is the difference between a traditional and a Roth IRA. Well it's pay me now or pay me later and a lot of people have made the deal to pay later.
It's what we've sort of been taught and encouraged to do since really the inception of the 401(k). We were told and taught to put as much money into the 401(k) as possible and by the way, don't worry about paying taxes on that because the be lower later. Well, a lot of people forgot there still do. Later, you still gotta pay those taxes and you know, as we are turning from the working years into retirement years.
The result is that tax planning and proactively managing that tax liability that we've built up for ourselves as really become a very important factor in retirement right and so as we consider the two kind of Ross is that it basically pay her taxes now or later. But as I look at this to try to figure out what I don't know what my future marginal tax rate would be. So I'm asking why would I want to pay my taxes now yet well again. They're two different types of IRAs, traditional that is saved don't pay the taxes now put it away in retirement account and taxes will be due at a later date in retirement or Roth go ahead and pay the taxes now by Uncle Sam out of that account out of ownership and be done with taxes forever.
So all of the growth in all the income that you take. It is yours to keep.
Now, you do need to crunch some numbers carefully on this because retirement is not always about replacing 100% of your working career income retirement often is about replacing 100% of your needed expenses and a lot of people are earning sufficiently more income today during their working career than they are likely to be spending in retirement so you do have to do some projections there and figure out okay what am I earning today what tax rate and bracket does this put me in and write what are my living expenses today and can we extrapolate this out and with any likelihood and probability are we going to be in a lower tax rate and bracket in retirement. If so, it may make sense to continue to defer and delay paying those taxes until retirement. But if we find that were likely to be about the same place probably just as well go ahead and pay those taxes for a couple of different factors.
One is just easier to pay a bill while you're earning a paycheck and brand-new income with which to pay it than it is to try to budget out of your retirement nest egg but also we know as tax laws stand right now that tax rates are slated to increase in just a few short years, the 2017 tax tax cuts and jobs act will expire. It was only a temporary measure in 2026 tax rates in brackets go back up to their previous levels. It's not just on the ultra-wealthy or the evil rich people or those making more than $400,000 to 12% bracket the lowest one goes up to 15%. The 22 goes up to 25, the 24 goes up to 28 so it's an across-the-board tax increase. Why not pay taxes now at a lower rate if we crunch these numbers and figure out that that makes sense, but it does again Erin takes in some pretty careful planning for that right yet rates are historically low and then just to get everybody anxiety because it gives me anxiety to look at it. The national debt clock. You know the government has get his money somewhere, right, Peter is either by raising taxes or reducing spending so I would think the safer bet is that your taxes are getting what I think anybody who's been paying taxes has felt like the government's been getting their money, but they been spending clearly from the national debt clock way more than they've been collecting. I saw this highlight video of of the great recession and the housing market crash and was showing different clips and one of them was the national debt in 2007 where it was just cracking $10 trillion to go back and check that for reference. Yeah $30 trillion in debt. Ironically, maybe not so ironic. There is estimated to be just over about $30-$35 trillion in yet to be taxed tax-deferred retirement accounts, and so those could become a target. Kind of in the bull's-eye of the government's question of where we going to raise enough money to hopefully pay for some of our expenditures. So yeah, I really think that. Take a look that clock.
It is scary, but it is yet another reason to consider taking advantage of Roth opportunities.
I also want throughout their air and that the Roth opportunity is not just with IRAs any longer.
A lot of companies are now offering Roth availability inside of a 401(k). I kinda get it taken care of automatically out of sight out of mind and oh by the way with your taxes already paid on that account.
Kind of a misconception often confused is that people think that the company will only match if you choose to defer and delay and do the traditional 401(k). The company does not care if you choose the rock Roth. They will still match those contributions, but their match will always go to the traditional side. There were nice enough to offer a match. Not nice enough to pay your taxes on that match for you.
I know we need to negotiate that to my next contract I will say good luck with that later there shifting some of their tax liability onto their workers always take issue with the term free money is no such thing as free money for very little in life is the right.
This is really helpless and we had some questions about the best way that they should diversify their retirement income in their retirement spending right now with the best way to retail will get reach out. Be in touch through the website. Sean planning.com it looks like Rich on planning.com you can email me email@example.com you can call the office 919, 300-5886 I write. Thank you very much. Always a pleasure. Thank you, definitely more great information on the next podcast interview Peter Rochon discusses the feds plan to continue raising interest rates and what it means for the market, the economy and your money. Very good to see we have a really important question for a lot of people today what the Fed rate hike mean for you as you know, after months of anticipation, the Fed is finally raising rates. That means we could be paying less for gas and groceries. I hope, but more for our mortgage credit cards or car loan. It's not all bad news for me to break it down the first Peter what's the big take away for the average person will.
This isn't just a one time thing. The feds language has been that they plan to aggressively raise interest rates may be six more times in 2022 and then several subsequent interest rate hikes in 2023.
The last time the Fed tried to raise interest rates.
We saw pretty deep decline in the market at the end of 2018 and really I think a lot of the volatility that we saw at the beginning of 2022 was the knowledge that the Fed intended to begin raising rates again. So the market had some pressures on it.
As a result of of just the information put out.
They are the Fed's direction was was being signaled and so the market really kind of reacted to that, more so than than even though the rate hike itself seems to ask the feeling there a lot of people who really wanted to buy a home last year or refinance some people were lucky enough they got home. Some didn't, but asking Peter if we take a look at the 30 year fixed rate now in mortgages right now for six, seven, and it's only like you said probably can creep up more as those interest rates keep going up. So I was thinking of buying a refinancing. Is this something I should be doing. Like now. Yeah, I think you better better now than later. If you're looking to finance and are going to need to borrow capital scores like from super perspective. Yet what this rate hike and intended continued right fixed mean are that he is going. The more expensive glass into the rest of 2022 and end years for work. Also, people were moving up to larger and larger homes because they can afford those larger homes for essentially the same payment because of the lower interest rates were probably going to see that slow down as well. But if you're looking to buy your needing to finance that in borrow money. It probably means that now is as good a time as any to get into that process and and lock in these low interest rates for as as long as you can. Really I mean I like being paid out of debt. I don't love having debt but if you can lock into these historically low interest rates for as long a period of time, you're probably going to be able to afford a lower payment and to put some perspective on this.
Erin is like yes the rates are slightly higher than they may be were six months ago or a year ago but nitrates still are very historically attractive right} to feel painful. Historically, not so bad. So the other thing I wanted to ask about home equity line of credit to about refinancing being popular. There was an 3% increase in demand for home equity line of credit. So if I have a HELOC houses can affect me. Well, the variable rates you may need to watch out for those that you have is a low rate last year in a couple years if if you continue just those minimum payments it could adjust if you got a variable rate you need to definitely pay attention to that. I think a lot of the increase in volume of HELOC's, though, was due to a lot of marketing.
I mean, I heard the radio commercials almost every day saying you could consolidate other debt you could put new additions on your home.
You could buy that Kitchener that that swimming pool that you would always dreamed of. Or you could even eliminate that by borrowing more money from your home didn't make much sense to me… I look at eliminating debt by going out borrowing more right again as compared to a lot of other rates like credit card rates which are usually in in the double digits. They're not very attractive if he could borrow money at a low rate, put it on your home. It did seem like a much better deal. But I imagine that we will see this slowing down pretty substantially as well as those rates to begin to creep up the way that I'm hearing you explain this. It's not greatness. If you have debt, but it could potentially be good news if you are a saver or an investor. Why is that well. Specifically, a saver, I mean the interest rate that we will get on deposits to banks, checking, savings, money market, those should slightly improve in the grand scheme of things is money in the bank keeping up with inflation. No, probably not, and the rates that were making on savings will probably lag behind the increase in the Federal Reserve's stated interest rate they probably will creep up quite as quickly, but we should over time begin to see better rates on savings on deposits where we are saving money but there is a difference between saving and investing. Investing involves risk and the bond market is actually much larger than the stock market. We hear a lot about the stock market because it's more exciting. It moves the drive headlines bond market is where people, institutions have loaned money for a stated interest rate over a given period of time to entities that need that money, municipalities, governments. There are are bond issuers. Corporations that want to raise capital and what they do is they borrow that money from investors well when you make that loan as an investor, you walk into an interest rate for a period of time.
If interest rates during that period of time begin to creep up and you want your money back then. You may have to sell your bond holding your loan at a lower cost at a lower premium than what it had been valued out previously if I if I have a 4% bond and interest rates are now five in order to make that attractive to a buyer. I have to lower my price to give them an equivalent yield night that's all a lot to say that interest rates and bond values tend to move in opposite directions. So as we see rising interest rates. It may be that we could go out and buy new bonds for a better yield and get a better rate, but the value of existing bonds and bond funds could suffer historically, it has been known that when interest rates rise bond values and bond fund values all and problem there is. That's what is typically used for the more conservative portion of investors portfolios so we really need to be cautious on on what we are looking at is far as the market direction. We talked about the market, including stocks and bonds. What these rising interest rates may mean for the markets in general and then you know the that the housing market has ripple effects and implications throughout the economy so as that slows down, what does that mean for the rest of the market and also no economist are paying pretty close attention to the yield curve basically I should be able to get a higher rate if I loan money out for a longer period of time, then I would get for a shorter period of time. But when that yield curve inverts meaning that I am actually earning higher rates of return of short-term money economist have said that this often is kind of a a signal a warning flag if you will that there could be some coming economic headwinds.
In fact it's it's been a leading indicator of some worship recessive recessionary periods in the past.
Right now, almost guy thinks that there is only one exception when it didn't when it wasn't head of a recession is a lot to unpack Peter at their summer to consider somebody like to talk to you more about your prioritizing paying down their debt or where they should be investing now in this scene of very volatile climate was the best way to reach you can call the office 919, 300-5886. You can go online with Sean plan and.com. It looks like Rich on planning.com but it's my last name are Sean Peter Sean Sean planning. You can also email me firstname.lastname@example.org all the way. Thank you so much pleasure. And thank you will need to have an understanding of the factors that can influence our money. We also want to earn as much honor money as possible and only take risk where necessary.
Did you know that you can get a government-backed guarantee 7.12% right now on this podcast interview Peter Sean discusses where you can secure this kind of rate without market risk. Hey, Peter is very good to see you today we are talking about a relatively investment that will soon yield almost 10%. We are talking about.
I bonds which I feel like the rest of the country is talking about. I bonds right now as well series I savings bonds are tied to the inflation rate and I do not say this is I know you know what the CPI recently had 8.5% in March is a numbers we haven't seen since the 80s. So Virgie hearing a lot of interest from savers and investors. Let's start at the top what is and I bonds and is a good investment. When I bond is a security offered by the US government. It's got the full faith and credit and backing of the US government so you mentioned the word safe as much as anything could be considered those things with the full faith and credit and backing of the US government are on that spectrum of safety and the I bond is attached to inflation or inflation rate.
So what the CPI acknowledges that were paying about 8 1/2% higher prices for the goods that we buy each and every day.
Now savers are often looking for a way to maintain purchasing power. Unfortunately in in banks.
In this low interest rate environment we been in really for years now. Inflation hasn't been that much of a problem until recently, but the interest rate still work keeping up with inflation. Prior to this by coming inflation historically has been about 3 1/2% interest rates were paying .01%, less than one half of 1% kind of across the board so money sitting in banks in excess of what you may need or can justify as an emergency account was in fact losing money safely at the end of the year. If inflation is 3% your interest rate was only one you've lost 2% in purchasing power. So right savers look for alternatives. I bonds offer about an alternative that can help keep up with inflation and the rate currently is 7.12%. Because of this higher CPI number that was just released. We think that those rates could in fact go up but 7.12% government-backed guarantee by all intents and purposes, not a bad rate.
Here's the downside is that each individual can only invest $10,000 to get that rate not good for IRAs.
You can't do it inside of a tax-deferred account of Scotty, cash on hand nonqualified money. Technically, if you're doing a tax return and getting a refund. You can direct up to 5000 additional dollars from your refund to buy more, but each individual. The maximum amount each year would be a total combined of $15,000 10,000 that you can deposit 5000 that you can put from a tax return, you could do that for members in your family and and and maybe multiply that number.
Depending on how many people you have in your household.
But if you're doing that for like children or grandchildren that is considered a gift so you need to be aware of that but a gift earning 7.12%. Not a bad deal.
Not too shabby but not as helpful so let's break down a little bit more those pros and cons. You did mention like if you have a savings account which right now the returning .06%.
CDs right now returning .15%. This may be a good option for those who are conservative investors but again it's Out at $10,000 yeah and and you know in a savings account. I always talk about the 3 to 6 months worth of living expenses for your emergency account is appropriate to be in the bank. However, a lot of savers conservative minded folks have put more money than that in in banks in CDs has traditionally been the approach they may have 100,000 or several hundred thousands of dollars in CDs. You can't convert all of that money over and and get into one of these series I bonds because again the limits 10,000 also the interest rate can adjust after a year right now. This year, 7.12%. The penalty for getting out early, as long as you been in it. At least one year.
But before five is three months worth of interest so you could potentially lose three months worth of an annual 7.12%. If you got out early and if the rates do adjust in this 7.12% falls and becomes less attractive than that penalty correspondingly would be less also. But you do need to understand that if you're going to dedicate some money to some of these I bonds that there is a cost of liquidity. If you do need to get out early and you need to be able to mentally dedicate that money for at least one year where you're not gonna need a touch always very important to note. This is really helpful to speak with you, and I think that you have so much to offer when it comes for people who are looking for. Kind of alternate investments during the time inflationary. Some questions with the best way to reach him. We you can reach me by calling the office 919, 300-5886. You can go online Sean plan and.com. It looks like Rich on planning.com. Also worth noting here though Aaron is that I don't offer I bonds.
In fact, they are something that you have to buy direct from the government treasury direct.gov. It's something that I have talked about with my clients over the past several months and they say if you got some extra cash. Here's a great place to put it but it's not something that you purchase through a bank or an investment advisor or stockbroker you have to purchase it directly with a treasury direct.gov account so that's where you go.
That's where you can find out more information. If you want to evaluate if that's right or or what piece of of your assets. That's right. For then we can talk about it, but that's where you go to actually make your purchase but I do very much appreciate talking with you. This is very helpful. Thanks for tuning in.
As we highlighted some of Peter Rochon's recent interviews for Aprils financial literacy month.
If you'd like to hear any of these educational interviews again or want to get in touch to find out more, visit www.richonplanning.com or call Peter Rochon ever Sean planning directly at 919-3005 planning matters, bring matters, rate the content of this radio shows were provided for informational purposes only and is not a solicitation or recommendation of any investment strategy you weren't purchasing investment tax or legal advice from an independent professional advisor.
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