Finance 101: November 2023

In November the financial advisors at Ruedi Wealth Management wrote four more “Finance 101” columns for The News-Gazette’s Business Extra section. Make sure to look for them every Sunday, but in case you missed the columns from November all four are below.

Two Questions to Answer for a Happy Retirement

Paul Ruedi

When I work with people who are preparing for retirement, I often ask them a couple open-ended questions to understand their dream retirement lifestyle. Though the numbers are important, the numbers only determine what is financially possible in retirement. Thinking about your ideal lifestyle, on the other hand, will point you toward a retirement that is happy and fulfilling.

The first question is “if I could wave a magic wand, what would my retirement look like?” You’d think this would be the easiest to answer, but people who walk through our doors to talk about retiring usually have a tough time answering this question because they’ve never really thought about it.

Think about what you’d like to accomplish in retirement. What lifestyle do you want to live? What do you want to spend your time and money on? How are you going to use your money on the things that are most important to you?

Don’t be afraid to think big because often you can make some of those dreams come true. We often hear clients say things along the lines of, “well I’d love to do ______, but I know it’s too expensive,” or “we could never do that!” when talking about goals that could be very meaningful to them but have always felt out of reach.

Many people who have been conditioned by a lifetime of frugality and saving are surprised at what they can achieve, and they are often rewarded beyond their expectations. As an advisor, nothing brings me more joy than showing a client that they can fulfill a dream they had thought was previously unobtainable.

The next question is “how will I spend my time?” This may sound simple, but this is an important one. According to some estimates, retirees watch as much as 50 hours of TV per week. For most, this retirement would be lacking the purpose and productivity required for a happy retirement.

I would recommend planning out trips, thinking about projects, and exploring hobbies that will not only keep you busy, but will also keep you interested, engaged, and happy. This is the time to do the things you said you would do but never did because you were too busy.

These two questions can help you envision your ideal retirement and more firmly establish your retirement goals. With those goals in mind, you can then make choices and invest your money to align with those goals and point yourself towards your dream retirement.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.

Do I Have Enough to Invest?

Paul R. Ruedi, CFP®

In the past, investing generally required you to have a lot of money. Before stock investing was widely available you had to have enough money to start or buy a business directly. Even with businesses broken into shares that can be more easily purchased in the stock market, sometimes the cost of one share can be in the hundreds or even thousands of dollars. A single share of Microsoft or Facebook will cost you over $300. It is no wonder everyday investors get discouraged.

But the investment industry has changed dramatically in the last few decades, providing every day investors with more options than ever before. I’d go as far as to say that an investor with as little as $100 can efficiently invest their money. Technically a person could invest even less than this. But I think this is a good starting point because if you can’t pull together $100 to part with, you probably aren’t ready to invest.

It is usually free to open a typical brokerage account – a fancy name for an investment account. Some companies require a small minimum investment, but there are brokerage firms with no minimum requirement. So when it comes to having enough money to actually open an account, $100 will likely more than suffice.

Instead of buying tons of individual stocks, investors can purchase shares of low-cost exchange traded funds (ETFs) – which are basically big investment pools that hold the stock of hundreds or thousands of companies. Though some have share prices over $100, there are plenty below that price point.

Most brokerage firms allow you to trade certain diversified low-cost index ETFs for free. This is important because if you pay a $6-20 transaction cost every time you invest $100, you lose a sizeable percentage of your investment to transaction costs before your money is even invested. Most ETFs also have low expense ratios, so your investment won’t get eaten up by management costs.

The wealthiest people in the world are generally business owners, and today’s investment infrastructure gives small investors the ability to participate in the same type of business ownership that builds wealth over time. By using low-cost ETFs that are free to trade, investors can create a low-cost, diversified portfolio that invests in thousands of companies with very little money. So if you think you don’t have enough money to invest but happen to have an extra $100 hanging around, think again. You can start investing and building your wealth today.

Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.

Retirement Questions: How Much Do I Need to Spend?

Paul Ruedi

In my experience as a retirement planner, I have found that very few people enter retirement completely prepared for what is ahead of them. In addition to all the financial aspects of life without a paycheck, people planning for retirement rarely have any idea of how they will spend their extra time, and often fail to see some of the risks that could impact their retirement down the road.

If you are preparing for retirement, you should ask yourself a handful of questions to envision what to expect and create a plan to live your dream retirement. Today I want to talk about one of the most important questions: how much will I need to spend during retirement?

Most people have no idea how much they will need to spend in retirement to maintain their current lifestyle. People often anchor their retirement spending expectations to their current income, but since taxes and usually savings are taken out of that paycheck before they ever spend a dollar, it actually takes less to replace their current income than they might imagine.

I think a good starting point is to come up with a reasonable estimate of your current spending. By the time you get your paycheck and save, what amount are you spending each month. It can be fairly simple math - if you know you get a $3,000 monthly check after taxes are taken out of it, and you save another $500, you know you are spending around $2,500 a month. That is approximately how much you will need to maintain your lifestyle in retirement.

You should also factor in that certain expenses will go away during retirement, such as extra gas expense from a commute. I would recommend tracking your expenses on an app or mint.com to start to see where you’ll keep spending your money after retirement, versus which expenses may go away once you stop working.

Having an idea of what you need to spend to maintain your lifestyle in retirement is an essential first step in creating a retirement plan. Once you have an idea of your spending needs, you can build a plan to make sure you fund those lifestyle costs, and any other financial goals, and you will be well on your way to your dream retirement. If you aren’t sure how to build a retirement plan to replace your current spending yourself, you may want to talk to a financial advisor.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.

Qualified Charitable Distributions

Daniel Ruedi, CFP®

There are several great ways retirees can use their investment portfolios to give to charity. One of which is taking a Qualified Charitable Distribution from an IRA account, or “QCD” for short. As the name suggests, it involves taking a distribution from an IRA and giving it to a charity, and there are some great tax benefits for doing so.

Traditional IRA savers avoid paying taxes up-front with the agreement that they pay tax on the entire amount they withdraw from the account later. Since the government does not want these savers to keep their money sheltered from taxes indefinitely, they must start withdrawing a required minimum distribution from the account each year once they reach age 73. Even if they don’t intend to spend the money, they must still take it out and pay taxes on it.

This is where a QCD can be helpful. A QCD satisfies the "required minimum distribution" rule, that forces investors with traditional IRAs to start taking money out after 73. Instead of taking out their RMD and paying the taxes required, they can take out a QCD, give it to a charity, and pay no taxes on the distribution.

The rules require that a qualified charitable distribution go directly from the account to the charity. The fund company, bank, or brokerage firm that has your IRA can walk you through the process. Some even provide checkbooks to make your donations easy. An IRA owner must be at least 70.5 to make a QCD and can give up to $100,000 per year. The charity must be a 501(c)3 organization.

Make sure to alert the charity that the donation is coming so you get the proper verification. Don’t withhold taxes. The check must be made out directly to the charity.

The qualified charitable distribution is not an itemized deduction. Instead, it keeps the withdrawal from adding to your taxable income, as most IRA withdrawals do. That means a qualified charitable distribution can benefit an investor who does not have enough tax deductions to itemize and takes the standard deduction instead.

The qualified charitable distribution is a great option for charitably inclined people who are subject to RMDs that they don’t need to use to fund their lifestyle. If you think this may be a good fit for you, you may want to talk to a financial advisor about incorporating QCDs into your retirement plan.

Daniel Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.

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.