Intro: Royal Standley of Oregon Pacific Financial Advisors, offering securities through United Planner Financial Services, member of FINRA/SIPC, shares his planning approach to help people toward a place where they may be at peace regarding their financial goals. In this dynamic podcast, Royal will share his insights on how to design a retirement plan to help you plan for your future. Now, onto the show
Aric Johnson: Hello and welcome to Life by Design with Royal Standley from Oregon Pacific Financial Advisors. Today we're going to be talking about the most asked questions Royal and his team get from people that are interested in working with a financial advisor or a financial planner. And it just kind of the it's almost like a top 10 list but I think there's actually more than 10. So we're going to dive right in after we say hello to Royal. How are you?
Royal Standley: I'm doing great. How are you doing, Aric?
Aric: Doing fantastic. You sound great.
Royal: Well, thank you.
Aric: Well you know,
Royal: I appreciate the compliment.
Aric: Yes. No problem. I like your voice. So that's always good, right?
Royal: Yes.
Aric: All right. Well let's get down to business here. And we've, this is an ongoing podcast. We did about four questions or five questions last time and we're probably going to have a podcast or maybe two more podcasts on this, but the first question for today is about tax laws. Are you ready for that?
Royal: Let's jump in.
Aric: All right. Tax laws are changing. They change all the time and they're definitely changing for next year. So what do we need to know as it relates, as the tax law changes relate to retirement.
Royal: Great question. So the biggest things that we're looking for will review client tax returns and when we're doing a little bit of that tax review in our annual reviews and our first appointment is really looking at how the new tax law has affected clients’ tax returns. So right now we're looking at the 2017 taxes. Those were on the old system. We're in 2018 and this is, this will be the first year that's going to be affected by those new changes. And the two biggest ones are the change to the standard deduction,
Aric: Mm-hmm.
Royal: And then the elimination of personal exemptions. So the standard deduction, you still have the choice of either taking a standard deduction or if your itemized deductions are higher you can take an itemized deduction. However, with the government increasing the level of the standard deduction more and more people are just going to take that standard deduction. So that removes the ability for a lot of people to write off their mortgage interest deductions. It causes a lot of people to lose the ability to write off their charitable contributions, as well.
Aric: Hmmm.
Royal: So we're really talking to our clients, especially those over the age of 70½, of looking at a qualified charitable distribution which is the distribution directly from your IRA to a charity, a 501(c)(3) charity.
Aric: Mm-hmm.
Royal: And for people under the age of 70 maybe looking at grouping or clumping your charitable distributions where maybe for an entire year you just don't give anything to charity but you put it in a bank account and save it up and then on January 1st or January 2nd of the next year you give that to the charities that you want to support and then give throughout that tax year; where basically you're clumping two-year’s worth of giving into one tax year. So, you're creating enough of a charitable contribution for that tax year to really help your taxes there.
Aric: Mm-hmm.
Royal: And in the off years you’re just taking the standard deduction. And so, the standard deduction for people under the age of 65 for a single person is $12,000. For married filing jointly it's $24,000. So, we, we’re doing a lot of planning around that because I think that's where we can come up with some decent tax savings for people under the new tax laws. The other good positive of the new tax law is just a lowering of the tax rates at pretty much all of the different bracket levels.
Aric: Mm-hmm.
Royal: So, we definitely like to see that for our individual clients. I think you can argue how beneficial this will be in the long run because we definitely cut out a lot of revenue. We'll see if the economy is able to replace that. I think the jury's really still out on answering that question.
Aric: And I know there's a lot of strategies that you and your team use to help folks and we've touched on it before and maybe will do more in another podcast some point kind of revisit it, but I know donor-advised funds can be part of the strategy. I know that the standard deduction, actually it sounds like it doubled if I'm not mistaken is that about right? It doubled?
Royal: Not quite.
Aric: Not quite?
Royal: Not quite. They're kind of tricky with what they did there. Os they increased the standard deduction by let's say about $5,000. But they took away the $4,000 personal exemption. So, for most people that increase in the standard deduction really only helped them, you know, if you kind of net out those two by a $1,000 or $2,000 per year.
Aric: Ohhhh. Oh wow. Thank you for clarifying that I didn't know that.
Royal: So the removal of the personal exemptions, people really weren't aware of that but that is a big factor. What I'm seeing kind of across the board is most people are saving a little bit of money in the new tax changes who are people who would be my client. But I think for the most part we're not seeing a dramatic reduction in savings. So maybe something in the $25-$50 a month type of savings.
Aric: Got it. Okay. All right. Well onto the next question and this ties into the changes within the tax laws. Is my IRA contribution still deductible under those new laws?
Royal: It is. It is. So they didn't really change anything with the deductibility of IRAs in the new tax laws. I think the biggest thing is when you're looking at making your IRA contributions you just want to make sure you're under those income levels that have been there in the past, as well, that basically say if you if you're already participating in an employer sponsored plan.
Aric: Go ahead.
Royal: Can you make a deductible IRA contribution? So the other good news that we're seeing is we're seeing an increase in how much you can defer into a traditional IRA or a Roth IRA starting in 2019.
Aric: Hmm.
Royal: So in 2019 the amount you can defer into a traditional IRA or a Roth IRA is now going to be $6,000 per person and if you're over the age of 50 you're going to be able to take a $1,000 catch up contribution that you can also defer in there making that limit $7,000 for those above the age of 50.
Aric: Mm-hmm. You mentioned Catch-Up contribution. What does that what does that mean?
Royal:Basically that's a mechanism for someone who's over the age of 50 to just put a little bit more into an IRA. You have the same catch-up language for 401(k)s. Where a 401(k) right now for someone under the age of 50 can put a $19,000 per year not including employer contributions but if you're over the age of 50 you actually get a $6,000 catch up.
Aric: Hmm.
Royal: So you can actually defer t$25,000 a year if you're over the age of 50.
Aric: Oh, ok that's great. All right so now I'm going to switch gears a little bit and maybe it's somebody that is new to a job or they've been in a job for a couple of years but they just never joined the retirement plan that their job provides. And so I'm sure you get that question a lot. How do I join my retirement plan at work?
Royal: Perfect perfect. The easiest way is just talk to your H.R. department. I think the real focus of this question should be when should I start,
Aric: Hmm, yeah, true.
Royal: My retirement savings. And it's that old saying when is the best time to plant a tree? Twenty years ago.
[Laughter]
Aric: If you want some sort of shade, yeah you're going to need to do that.
Royal: And the second-best time is today. So, if you haven't started your retirement plan you definitely want to get on it as soon as possible. So, talk to your H.R. department. Get that package. Get that process started. Now what we do for our clients is we'll help them kind of figure out the basics of it of what’s their risk tolerance? How much of the basic allocation of stocks to bonds so they're in that right level of diversification. And then help them kind of understand how much should they be putting away for retirement. That's just one of the services that we provide for all of our clients just to make sure you're putting away enough. And I think the other thing that is so important we're seeing more and more of it today is what's called auto-escalation. Which is where let's say you're putting in 5% this year,
Aric: Mm-hmm.
Royal: You automatically have your contribution increase by one or two percent each year that you're in the plan up to kind of a capped limit of let's say 15% or 20%.
Aric: Oh wow!
Royal: That's a feature of some retirement plans. I know the, the new Oregon Saves plan that has come out, which is somewhat of a government-sponsored retirement plan that Oregon has rolled out. That has an auto-escalation feature. I think the bigger thing is, is we want people to take responsibility for their own retirement. So, what we like to remind people of is hey every new year every birthday just try to raise your contribution into your employer-sponsored plan by 1- or 2% percent. You're not really going to notice that 1- or 2%, especially if you do it just once a year. You know usually you’ll have raises or cost of living adjustments. We just want to make sure that people are saving enough for retirement
Aric: Mm-hmm.
Royal: And starting that as early as possible. I think it's it's tragic when I sit down with someone who is you know in their 50s or 60s and are just getting started saving for retirement.
Aric: Yeah.
Royal: It's a scary proposition. So, the earlier we can get people putting money away for the future the better off they're going to be.
Aric: Yeah, it goes right back to the tree; right. When do you plant a tree?
Royal: Yep.
Aric: Well it's not going to fruit for a few years, right? They're not going to get fruit from it so if you want the fruit soon, you better plant now or plant you know 5-10 years ago like you said for the benefits.
Royal: Yes.
Aric: It's funny because you talked about the the automatic plan where it's automatically kind of raising a percent every year and you said it I think of the old Ron Popeil commercial for that, you know, the rotisserie, right? We owned one of those. It was fantastic. I got to say that much. Never bought the hair in the can. Never needed it.
[Laughter]
Aric: And I will never get the hair in a can. But his, his big tagline was set it and forget it. And that's kind of what this is. You don't have to be self-disciplined every year. You do it one time you said it and then you forget it. And every year it's going to increase and it's going to you're going to see that retirement fund grow and grow and grow. I mean I think that's fantastic. I hadn't heard of that before so that's exciting I’m going to look into it. So, for those that have changed jobs like we talked about that little bit how do I sign up for my retirement plans on and so forth. But I've changed jobs and I have a retirement plan or 401(k) from my previous job. What do I do with those?
Royal: So, that's a great question and it kind of depends on where your old job was at and how much was in your plan. And then where are your new job is at and what kind of plan do they have there. So, you really have three basic options when you leave a job and start a new job. With your old 401(k), usually if it's over a $5,000 balance you can just leave that 401(k) there at the plan.
Aric: Hmm?
Royal: It might, might not be the most advisable thing you can do but depending on the plan it might be. In most cases you can roll your existing plan from your old employer over into your new 401(k) at your new employer.
Aric: Oh, really?
Royal: Mm-hmm, mm-hmm.
Aric: Now if you could get them to match that’d be great.
[Laughter]
Royal: That would be nice.
Aric: I just don't think that's how it works.
Royal: And that would be a very generous employee.
Aric: Yeah. We need to find more of those.
Royal: Exactly. Exactly. And then finally you can always roll it over to an IRA. And it really depends on your individual circumstances of what's going to make the most sense. My personal opinion here is is having a whole bunch of small old 401(k) accounts really doesn't do anybody any good.
Aric: Mm-hmm.
Royal: In most cases they are hard to manage. They-re spread out. There's really oftentimes what I see is there's no discipline in how they're invested. It was just oh I picked something twenty five years ago and haven't looked at it ever since,
Aric: Yeah.
Royal: And now I'm doing something different over here. And it just creates somewhat of a nightmare and I'm a big believer in just simplicity. And you don't need to have six different 401(k) accounts to be diversified.
Aric: Mm-hmm.
Royal: When we talk about diversification we're really not talking about having a whole lot of different small accounts kind of floating out there. What we're really talking about is the investment allocation inside of those accounts.
Aric: Yep I agree 100%. Yeah, and I would imagine because I've heard about this in the past, I've heard good stories and bad stories but you hear about people that forget about accounts that are out there. You know they forgot about a savings account or they've forgotten about a different type of account at a different bank. Maybe they had something in a credit union they just completely forgot about. I can imagine it kind of the same thing if they moved a couple of times or not getting all the mail they're supposed to and all of a sudden one of the 401(k)s they had it just it's there and it's just sitting there, but they forgot about it and it's not included in their entire plan. So, you just don't want to forget stuff like that.
Royal: Yeah, absolutely. And I think the other issue is you know if something were to unexpectedly happen to you, do you really want your beneficiaries, your loved ones, trying to track down your work history.
Aric: Exactly, exactly.
Royal: To see if there's any money left over, you know, in six or seven different retirement accounts. It just doesn't make any sense and I think we want to make this process as simple as possible because it's all, it already has some complexity to it. So, let's not create extra complexity by having a bunch of different accounts doing different things with no unified theory around it.
Aric: Mm-hmm. Absolutely. OK. So I imagine that most folks that are coming to you have debt of some kind. Would you say that's a fair assessment?
Royal: I'd probably say about 80%.
Aric: Yeah.
Royal: You know one of the big things I just look for is getting to a point where people are just debt-free. We want to just try to avoid consumer debt,
Aric: Mm-hmm.
Royal: Just across the board. We want to stay away from car loans and that sort of thing. And then the mortgage is the other big piece out there. And you know a mortgage is a wonderful instrument to allow people to get into a home, own a home and build wealth. I mean you look at the studies one of the biggest ways Americans build wealth is by buying a home that they're going to live in.
Aric: Mm-hmm.
Royal: And hopefully they'll see appreciation in that sort of thing over time. But ultimately what we're trying to get most of our clients to unless they tell us differently, is getting a house that's paid off by the time they retire. It just makes retirement planning so much easier when you don't have a mortgage to have to worry about. And also I think there's a different sort of mindset when you're completely debt free.
Aric: Mm-hmm.
Royal: And you don't owe anyone anything. So, one of my goals when I sit down with a client is doing an evaluation of their debt. And if they want, helping them come up with a plan to get out of debt. You know, sometimes it's you know oh I just need to pay off this debt or that debt. And you know maybe it's just student loans that they’re chunking away at, but other times it could be a much more serious situation,
Aric: Mm-hmm.
Royal: Where they've got accounts everywhere. A lot of times I might see some medical expenses,
Aric: Yeah.
Royal: Which, you know, it's just that's, that's always a tough one. Um, but we want to work up a plan of saying okay, here's a plan how we can get you out of debt in three to four years or 18 months or however long it takes but we want to create an actual plan that people can follow. And oftentimes what I'll do is I'll take them through the Dave Ramsey debt snowball concept,
Aric: Mm-hmm.
Royal: And really just kind of line out a plan for them and then we'll check in you know throughout the year and see how they're doing on it and hopefully be able to kind of celebrate their wins with them.
Aric: Yeah that's great. And we did a podcast on the Dave Ramsey Baby Steps a few podcasts ago, so if you're listening to this now and you're interested in what that process is and what Royal does with his clients in that process be sure to check that podcast out, for sure. Knowing your history with that program knowing your history of teaching debt snowball and all I do need to ask though if you are say you're in your mid 30s and you've got $20,000 in debt, between your car, credit cards other things, and we're not including the house that is going to keep the house out of it
Royal: Mm-hmm.
Aric: Because the mortgage is usually in a really long time but let's say it's $20,000 in that type of debt. Do you recommend that people pay that off first or that they save for retirement while they're trying to pay it down.
Royal: Usually what I’ll recommend is people just focus on getting that debt paid off first. I think it's important. one to just kind of go through the pain of getting debt paid off. And I say pain because I think that's how people grow.
Aric: Yeah, sure.
Royal: You know we reach out as a child we touch the hot stove and we know hey don't touch that hot stove. Same thing with debt. We have to go through the pain of getting that paid off. I always worry about people who might get an inheritance and just pay off their debt and go okay, great I'm debt free now.
Aric: Mmmm.
Royal: And what I find is often they just fall back into their old patterns or old routines and within a year or two they're back at the same debt level they were before they had it paid off.
Aric: And the inheritance is gone.
Royal: Exactly exactly. So what I really try to encourage is hey you know sometimes we can we can use an inheritance like that, but I think it's much more beneficial you know, not to use a cliche, but as a character-building exercise to get that debt paid off,
Aric: Mm-hmm.
Royal: and give you a sense of ‘I control my finances my finances don't control me.’
Aric: Absolutely. I don't even think it's cliche at all, by any means I think you're absolutely spot on. It means so much more when you, when you can say that you know I'm in control. You just don't like those letters coming in the mailbox reminding you of what you're behind on, you know, every every month. So being debt free would be absolutely amazing. I'm not there. I'm working on it but I'm not there yet. I'll I'll be happy when I am.
Royal: Good.
Aric: Royal, I know we talked a little bit about before especially during that the baby steps stuff, however just as a reminder and this is a question you get quite a bit, what do you think about emergency savings and what is your guideline when it comes to emergency savings.
Royal: Yeah. So, my my guideline when it comes to emergency savings is number one it's an essential piece. You have to have emergency savings. You have to have an account where you can dip into in case you know the unexpected happens. And we're not talking you know a Black Friday sale.
Aric: [Laughter] Oh come on. That's an emergency!
Royal: So what we want to do is we want to look at people, what people spend per month. So it's not necessarily what you make each month, but it's really what you need to survive,
Aric: Mm-hmm.
Royal: And get by each month. And then we want to look at that and look at between 3 and 6 months of emergency savings. And I think it varies depending on your situation. A lot of times what we're trying to protect against, I think one of the major ones is someone loses a job and is out of work for a while.
Aric: Mm-hmm, yeah.
Royal: So if you're a single breadwinner or single-family, single person breadwinner, and everyone is reliant on your job I think it's probably in everyone's best interest to try to go for that six months of emergency savings. If you're a retired couple where both of you have Social Security and you have investments that you can access you know $10,000 might just be plenty to cover, you know, any unexpected emergency that might pop up. But really what we're shooting for is that three to six year or - excuse me - three to six months month time frame of expenses. The other thing people I think get confused about is they think that they need to get this great rate of return on that emergency savings. Now what my criteria there is, is it has to be liquid. It has to be accessible, number one. So, we don't want to tie up emergency savings and really any investment beyond a high yielding money market account.
Aric: Mm-hmm.
Royal: Because that just that's easy to access, easy to get to. Yes, you could make more money if you had it invested in mutual funds or that sort of thing, but that's not what a, what an emergency savings account is designed for.
Aric: Got it. So what did you say was a possibility to use. High-yield money market?
Royal: Yeah money market, savings accounts that sort of thing.
Aric: Got it.
Royal: And you know some people feel really bad that their money is not working at the highest level for them. But it's really a safety mechanism there,
Aric: Mm-hmm.
Royal: Because we'd never want your emergency savings tied up in the markets because what happens if you lose your job during an economic downturn when also Oh the stock market's down 25%.
Aric: Yeah absolutely. Double whammy. Double whammy.
Royal: Yeah.
Aric: Yeah. And and people do get hung up on the fact that OK I have it in a savings account and the bank is offering point 000001%, you know, interest on that account so I am really I'm not making any money but it really, truly is - the main word is emergency. You want to have access to that money instantly in case something happens. And I mean losing a job that's something that you're going to have to plan for for quite a while, but maybe something else happens and it happens with your car. Major, major expense and that's an instant thing that you're going to need a vehicle right away. So whether that's having to rent something while your car is being repaired and the repair bills could be $3-, $4-, $5,000. That's what it is for - instant access.
Royal: Exactly. You'd never store your fire extinguisher inside of a safe. You want it accessible.
Aric: That's a great analogy. Yeah no that's very true. I would never remember the combo in time. So, then it's just me in the kitchen sink with that little hose and that's just not going to work. So,
Royal: Yeah. Yeah.
Aric: All right. Well Royal, thank you so much this has been eye opening. I know we have a few more questions that we're going to go over, but we're going to be saving that for the next podcast. And that'll wrap up all the first-time questions that you guys get and your office gets. Again, I am putting the invitation out there if you are listening to this and you have questions that you would like to have answered on one of Royal’s podcasts go ahead and contact Royal. Royal why don't you give them your e-mail address that you’d like them to send questions to.
Royal: Absolutely. Just shoot me an e-mail with your questions at Royal R-O-Y-A-L at opfa.com.
Aric: And I know Royal takes his relationships very very seriously and very confidentially, so if your question is of more of a personal nature to your specific situation and you don't want it on the podcast it won't go on there. Just let them know hey I'd love to ask you this in person or I'd rather this not go on the podcasts a little bit too specific to me and he would honor that. No problem. So I encourage to send those e-mails and send those questions in and we'll get to them on the podcast if you'd like. Thank you Royal for your time.
Royal: My pleasure.
Aric: And thank you all for listening to the Life By Design Podcast with Royal Standley . If you have not subscribed to the podcasts yet, please click the subscribe now button below. This way when Royal comes out with a new podcast it'll show up directly on your listening device. This makes it much easier to share these podcasts with your friends and family. Again, thanks for listening today. For everyone at Oregon Pacific Financial Advisors this is Aric Johnson reminding you to live your best day every day. We'll see you next time.
Outro: Thank you for listening to the Life By Design Podcast. Click the subscribe button below to be notified when new episodes become available. The views expressed are those of the presenter and may not reflect the views of United Planner Financial Services. Material discussed is meant to provide general information and is not to be construed as specific investment, tax, or legal advice. Individual needs vary and require consideration of your unique objectives and financial situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.
Advisory services offered through Oregon Pacific Financial Advisors Inc. Securities offered through United Planner Financial Services of America, member FINRA and SIPC. Oregon Pacific Financial Advisors Inc. and United Planners Financial Services are independent companies.
