Finance 101: February 2025
In February the financial advisors at Ruedi Wealth Management wrote four more columns for The News-Gazette’s Business Extra section. Make sure to look for them every Saturday in the weekend edition of the paper, but in case you missed any in February all four are below.
HENRYs, DINKWADs, and POLKs
Paul R. Ruedi, CFP®
Though we often believe the issues we face are completely unique to us, lately I’ve noticed people have sorted themselves into groups based on similar life circumstances and are leaning on other members of that group for advice. As an investor or retiree, it can often be helpful to find which group you fit into so you can go to your peers who are in the same boat for advice. Your group probably already exists and may even have its own clever acronym.
A HENRY is a high earner, not rich yet. These people are learning from each other about automating and optimizing their savings so they can use their high incomes to build wealth. A HIFI is someone who is high income, financially insecure. Naturally, people in this group are leaning on each other for advice on how to use their income to unwind major debts or reduce out of control lifestyle costs.
Another group called the DINKs have dual income, no kids; the closely related DINKWADs have dual income, no kids, with a dog. Though these groups can span large age ranges, they face a lot of the same issues. Seemingly more unifying to this group are the issues they don’t have - they don’t have to worry about providing for children. That creates unique opportunities and the best way to learn about them is often from the other people in this group.
At the other end of the spectrum from DINKs are the POLKs – parents of little kids. These people are concerned about childcare costs and planning for their children’s futures. Another group of parents, the DIPS – short for dual income public school, are getting some relief on childcare costs and may be shifting their concerns to paying for college.
Your group doesn’t have to have a clever acronym to exist. People who are retired have their own groups and forums where they can share knowledge and experience and learn from each other. Though they talk about the financial side of retirement, when I browse online retirement groups for column ideas, I find they spend more time talking about how to find purpose, ways to stay social, or the challenges of taking care of elderly parents.
So whether you’re a HENRY, DINKWAD, or something else, it can be helpful to find your group to learn about the unique challenges you may face and opportunities you may have. If you need help exploring the financial side of those challenges and opportunities, you may want to talk to a financial advisor.
Paul R. Ruedi is a Certified Financial Planner™ professional with Ruedi Wealth Management in Champaign, Illinois.
Income Gap Opportunities
Paul R. Ruedi, CFP®
There are many reasons a person could experience a temporary decline or complete interruption in their income. A person could simply be laid off. Another could be a result of economic cycles, for example, realtors and mortgage brokers who make their money on real estate transactions see their incomes drop when the housing market slows down. Then of course there is the one we are used to dealing with: retirees who have most of their assets in retirement accounts and are not yet subject to required minimum distributions.
Regardless of the reason for its occurrence, a temporary drop in income can result in a temporary drop in tax bracket and tax rate. This can create a couple of silver linings in the form of financial planning opportunities, particularly for those with a substantial amount of assets in a traditional retirement account or taxable brokerage account.
People with a large amount of funds in a traditional retirement account may want to consider Roth conversions during their low-income period. When you convert traditional retirement funds into Roth funds, you must pay taxes at your ordinary income tax rate on the amount converted. Savers who are experiencing a low income, and therefore low tax bracket year, can take advantage of the opportunity to convert their traditional retirement account contributions to Roth at low tax rates. This can be extra beneficial for retirees with large traditional retirement account balances as it reduces future required minimum distributions which can lower your tax rate in the future as well.
Another way for savers to take advantage of a low-income period is by harvesting their capital gains from a typical taxable investment account. Like ordinary income tax rates, capital gains taxes are progressive based on your income. A temporarily-low income creates an opportunity to sell some of those positions in your portfolio that have gains and pay a lower capital gains rate, or even no capital gains at all. A single filer pays no capital gains tax up to $48,350 of income – and that number is double ($96,700) for married couples. A married couple that temporarily only has $20,000 of adjusted gross income could realize capital gains up to $76,700 and pay no taxes on those gains.
If you find yourself experiencing a temporary decline in your income and want to pursue one of these strategies, you should be very conscious of the various tax brackets to make sure you are staying below certain thresholds. If you aren’t able to do all of that yourself, you may want to talk to a financial professional.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
The Millionaire Retirement
Paul A. Ruedi
When I was growing up, being a millionaire was a very big deal. It was the type of wealth people aspired to. But after decades of inflation, does having $1,000,000 to get you through retirement result in the “millionaire lifestyle” that comes to mind when you hear this amount? Today I want to work through a simple example to find out.
Though I was originally tempted to create a full financial plan to run this analysis, I think this is one of those situations where some simple “back of the envelope” math will suffice. Let’s start by approximating how much we can withdraw from the portfolio for 30 years, which is a reasonable timeframe for a retirement, and then we’ll simply add Social Security.
To estimate portfolio spending, I am going to default to the 4% rule. The 4% rule tends to be conservative as it is anchored by the worst 30-year period of stock returns in history. It does not account for the impact of taxes. It does, however, account for inflation.
So for our portfolio spending estimate today, let’s just assume 4% of $1,000,000, or $40,000 per year, inflation-adjusted, for 30 years. Before we move on, is anyone surprised to see that a million-dollar portfolio is only able to produce $40,000 of sustainable spending throughout a typical retirement? I’d bet it is not the millionaire lifestyle most would think of. But let’s not forget Social Security.
According to the Social Security administration, the average monthly benefit is $1,976 as of January 2025. That benefit amount could be lower or higher depending on the person’s income during their working years. According to the Social Security Administration, the maximum benefit a person retiring in 2025 at full retirement age can receive is $4,018 per month.
If you assume the maximum benefit, the result is $88,216 of inflation-adjusted spending per year for a 30-year retirement. If you assume a Social Security benefit in between the maximum and the average, let’s say around $3,000 per month just to make the math easy, that drops annual spending to $76,000. Does that sound like a “millionaire retirement” to you?
Whether you have $1,000,000 set aside for retirement or some other amount, the key is to build a financial plan to make sure you get the most out of your assets. There are some moves you can make like optimizing your withdrawal order between accounts and strategically claiming Social Security that can make your retirement savings go further. If you aren’t sure how to do that yourself, you may want to talk to a retirement planner.
Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.
Trade Settlement
Paul R. Ruedi, CFP®
Though we often talk about the philosophy of investing in these columns, we don’t often talk about the actual mechanics of investing. These things tend to fall into the background of the blocking and tackling we do for our clients’ finances, but they are worth understanding. One of the mechanisms of investing we have not talked about before is trade settlement. Though a person may actually buy or sell an investment a certain day, that transaction is not official until the trade is “settled.”
The day you successfully execute a trade is called the transaction date. That is the day you actually press the button to buy or sell, and the trade is successfully executed. However, the trade settlement date is the day the trade actually becomes official. This settlement date is the date when payment is actually due, the actual shares of an investment must be delivered, and the security’s transfer agent makes a record of the new shareholder and removes the previous owner.
In the past, the SEC required stock trades to settle in five days so people had time to deliver actual physical stock certificates. In 1993 that was shortened to three days, and in 2017 it was shortened again to just two days. In May of 2024 trade settlement for many securities was shortened to just one day, meaning trades will settle on the very next business day.
According to FINRA, this applies to stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds and limited partnerships that trade on an exchange. Mutual funds will typically settle on the following day, though some types of funds may take longer. Settlement for trades involving money market funds occurs even faster, and usually takes place on the same day as the transaction.
This change took place in May of last year, so it may seem like I am reporting somewhat old news. But to be fair, most people didn’t even notice this change occurred. It wasn’t some big news item we really needed to explain to our clients or readers of these columns, but it is worth mentioning in a column devoted to trade settlement.
Your typical person will not see a big impact from the shortening of settlement time. The one rare exception could be people who actually have possession of physical stock certificates – those people may need to deliver these certificates to a broker sooner in order to be able to settle on time. The rest of us can just enjoy the increased speed.
*Disclaimer: Past performance is no indication of future results. You should not make any investment decisions without first performing your own due diligence and consulting your financial advisor.