Finance 101: November 2024
In November 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 November all four are below.
How Much to Give Adult Children
Paul Ruedi
In my experience as a retirement planner, I have found that parents who have more than enough assets to support themselves often want to give some of that wealth to their children, but just aren’t sure just how much to give. This is not usually a result of the actual math of how much they can give, but an entirely subjective issue of how much they should give. Since everyone is different, there is no perfect answer to this question. But parents should really think long and hard about the impact any money they give will have, as it could end up causing unintended consequences.
For wealthy families, this issue is magnified – as parents often feel the responsibility to help their children keep up the lifestyle they were accustomed to while growing up. But parents can risk going overboard, which can rob children of the motivation to do something productive that makes them feel truly feel good about themselves. This can happen at smaller levels too. Even amounts in the hundreds or thousands are enough to remove the motivation to take action to survive.
I have come across this issue so much it even resulted in the creation of a new “Paulism” – what we call helpful phrases and metaphors I use to explain concepts to clients. I think of giving money to children like putting fertilizer on a lawn. Giving a lawn just enough can help make a struggling lawn green, or a normal lawn even greener. But if you put too much fertilizer on the lawn, it actually kills the grass. Giving money to kids is not so different. Too much can cause unintended damage.
Leave it to the “Oracle of Omaha” Warren Buffett to put a solution to this problem perfectly and concisely. Warren has billions he could potentially give to his kids. But when he was asked how much of his wealth he would be leaving to them he said, “enough money so they would feel they can do anything, but not so much that they could do nothing.”
Deciding how much to give to adult children is a complicated issue, and one where the subjective impact the money will have on those adult children will likely require more consideration than the financial impact on the parents. If you need help figuring out how much you can give to your children, you may want to talk to a financial advisor. But only you can decide how much you should give.
Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.
Home Country Bias
Paul R. Ruedi, CFP®
Home bias is the tendency for people to invest in things they know and are comfortable with. A person who works in the oil industry who invests entirely in oil stocks would be an example of extreme home bias. More typically though, it refers to the tendency of investors to over-weight their own country in their investment portfolio. Though it shouldn’t be taken to an extreme, there are some reasons to have a home country bias.
The US stock market makes up around 60% of the global stock market. Investing entirely in the US ignores almost half of the investable universe and is going to result in a less diversified portfolio. So home bias shouldn’t be taken to this extreme.
But there are reasons to have a home bias. The first is that it is generally lower cost for US investors to invest in the US. Another reason investors may want to have a home bias is to hedge inflation within their specific country. If the US, for example, experiences a strong bout of inflation, US companies will be able to increase their prices and return more profits to investors. This can soften the blow of higher prices for US investors.
A third reason is entirely behavioral. Since US investors live in the US, they will hear more about the performance of US companies and indexes. The three most common stock indexes covered by financial media are the S&P 500, Dow Jones Industrial Average, and Nasdaq – all of which consist entirely of US stocks. If an investor holds a substantial amount of foreign stocks and US stocks do particularly well, it may be emotionally difficult for that investor to stick with that portfolio when they feel they are missing out on the returns of US stocks.
Many people are hesitant to simply hold US and overseas stocks in proportion to their market weights for the reasons I mentioned above. But they also shouldn’t invest entirely in US stocks as that lacks diversification. As a result, most people end up somewhere in the middle.
The stock portion of our client portfolios is made up of around 70% US stocks, which is fairly typical of US financial advisors but is by no means a magic number. The important thing is to avoid taking this home bias to the extreme, but understand that means there will be periods where your portfolio underperforms one made entirely of US stocks. If you can’t create a diversified portfolio yourself and stick with it, you may want to work with a financial advisor.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
2025 Retirement Plan Contribution Limits
Paul R. Ruedi, CFP®
The IRS recently announced the new maximum contribution limits for 2025, and though I wish there was some way to frame this information in a creative and interesting fashion, you’ll have to forgive this column for being somewhat of a dry list of facts. However, there is at least one exciting new retirement plan update for people in their early 60s.
Starting in 2025, the maximum an individual can contribute to a 401(k), 403(b) or 457 plan will increase by $500, allowing up to $23,500 per year. Catch-up contributions for those age 50 will remain at $7,500 per year, the same as 2024, bringing the total annual amount a person can contribute in their 50s to $31,000.
The exciting new update I mentioned earlier is a larger catch-up contribution for people in their early 60s. In 2025 savers age 60, 61, 62, and 63 can make an even larger catch-up contribution of $11,250, pushing their total elective deferral limit to $34,750.
The contribution limits for Roth and Traditional IRAs will remain the same at $7,000, with a catch-up contribution of $1,000 available for those over age 50. However, the income levels where phaseouts happen will increase. The Roth IRA phaseout range will increase to $150,000 - $165,000 for single tax filers and those filing as head of households, and to $236,000 -$246,000 for couples.
For those hoping to make deductible contributions to traditional IRAs, single taxpayers covered by a workplace retirement plan will see their phaseout range rise to $79,000 - $89,000 in 2025. For couples who file jointly, the phaseout range will increase to $126,000 - $146,000 if the spouse making the IRA contribution is covered by a workplace retirement plan. If the person contributing to the IRA is NOT covered by a workplace plan but is married to someone who is, the new phaseout range will be $236,000 - $246,000.
Starting in 2025, the amount most people can contribute to their SIMPLE IRA accounts will increase by $500, to $16,500. The catch-up contribution for those aged 50 and older will remain at $3,500 in 2025 for a total of $20,000. But starting in 2025, savers aged 60, 61, 62 and 63 will be able to make an even larger catch-up contribution of $5,250 to their SIMPLE plans for a total contribution of $21,750.
It is important to be aware of these limits and utilize tax-advantaged saving to the fullest extent possible. If you aren’t sure how to do that, 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.
Should Retirees Pay Off Their Mortgages?
Paul R. Ruedi, CFP®
The older I get, the more Dave Ramsey pulls me in with his strong opinions on the benefits of being debt free. As of right now, the finance person in me just can’t look past the mathematical drawbacks of paying off a low-interest mortgage at the cost of investing in a diversified stock portfolio. But the human, emotional side of me still fantasizes about “going wild” and paying off my mortgage to be done with it.
If I am feeling this way, I can only imagine how retirees or people approaching retirement must feel about having mortgages. But should they rush to pay them off? It is once again one of those decisions where there isn’t a single correct answer. Adding to the complication, what is mathematically optimal may not optimize your happiness and peace of mind.
When mortgage rates were 3%, this decision was usually pretty easy from a mathematical perspective. With a low hurdle rate like 3%, it was usually an advantage to delay paying off your mortgage, in favor of investing your money in other things to seek a higher return. With interest rates exceeding 7%, it is possible a person could be mathematically better off paying off their mortgage instead of investing somewhere else at a lower return.
I think most people would be happy to pay off what is likely their largest debt if the math suggests they would be better off to do so. But what if the numbers suggest you shouldn’t pay it off early? Could the emotional impact be enough to outweigh the financial drawbacks? For some people it could be worth it.
However, I’d likely only recommend paying off a mortgage to retirees that had more than enough cash or fixed income in a taxable account. I wouldn’t likely recommend raiding retirement accounts to do so. Large withdrawals from traditional IRAs would come with a tax burden that may weigh the math against paying off a mortgage from a tax perspective. Giving up the flexibility and tax-free growth of a Roth IRA wouldn’t be a decision I take lightly either.
It is completely fine to do things that are mathematically “sub-optimal” if you have more than enough assets to achieve your goals, and doing so will bring you greater peace of mind. The important thing is to do the math with respect to a retirement plan to make sure you aren’t making a mistake that will cost you significantly. If you need help with that, 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.
*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.