Next Steps to Success After Becoming a Saver

Five Things You Should Know

1. Equity Markets – moved lower this week with U.S. stocks (S&P 500) down -4.12% while international stocks (EAFE) fell –3.76% 
2. Fixed Income Markets – finished mixed with investment-grade bonds (AGG) up 0.92% and high yield bonds (JNK) down –0.34% 
3. Jobs Report – The U.S. economy added a less-than-expected 142,000 jobs in August and saw further downward revisions to prior month’s figures. The labor force also saw unemployment tick up to 4.3%, all but guaranteeing a Fed rate cut this month with many now speculating the cut could be as high as 50 basis points. 
4. Election Risk – As economic agendas from candidates become clearer U.S. banks have raised concerns on the global impact. Bank of America has moved election uncertainty as their top risk to the global economic outlook while JPMorgan Chase has walked back its buy recommendation on Chinese stocks, citing volatility surrounding the election among its reasons. 
5. Key Insight: [VIDEO & ARTICLE] Today we answer the question of “What’s Next?” when one is maxing out their 401k. If you’re a business owner or high earner, this one is for you!

Weekly Wealth Insights

by Ben Klündt

I’ve encountered a handful of business owners or high earners who have a 401k and can finally max that out, but they don’t know what comes next. They don’t work with an advisor, or if they do it was their mom and dad’s and he’s about to retire and he hasn’t provided any meaningful help. They know they need some guidance on what comes next as a 401k alone is unlikely to get them to the place of financial independence.

First off, let’s address the notion that financial advisors are ONLY for the rich…

In truth, there are financial advisors that claim all sorts of niches (sidenote: most of these claims are far more marketing than reality), from those that service clients at the beginning of their financial journey to those focusing on higher net worth clients in need of more complex cash management, investment management and/or financial/estate planning.

While TEN services clients of many types, today’s commentary is focused on those that may not yet have a high net worth, but do have high annual earnings (perhaps a business interest) but in any case find themselves in need of new levels of planning, especially to save on taxes.

Here are a few things that you may want to consider if you fall into the boat of those who are looking to move to the next level on your journey to financial independence (or wanting to be some day, but have a good income now!)”

1. Max the 401k. I know I mentioned it above but if you’re not already, be sure that you are maxing out your 401k that either you or your employer sponsors. Many 401ks today will allow for either pre-tax or post-tax deferrals (the money the employee puts in) up to $23,000 (2024) and if you’re over age 50 you can do an additional $7500 in catch-up deferral. The passing of Secure Act 2.0 allows for the employee to pay income tax on the employer contribution and have that grow “tax-free” as a Roth Contribution as well. This is dictated at the plan level so you would need to ensure your specific 401k plan allows this.  Whether or not you’ll want to do that would certainly depend on your taxable income that year.
2. Back Door Roth IRA. Depending on your income you may or may not be able to directly contribute to a ROTH IRA. The IRS has phaseouts starting at 230k for a Married Filing Joint (MFJ) filer, and that means you will be forced to take out any contributions you made to a Roth IRA if your income is about that phaseout limit. Keep in mind, with a 401k, there is no ROTH deferral phaseout so you can contribute to that form of ROTH without worry. The back door ROTH IRA contribution really works best when one is above the income limit, and has a zero balance IRA that they use as a conduit. How it works is you make a non-tax-deductible contribution to your traditional IRA then a subsequent conversion to your ROTH IRA and voilà you successfully added to your ROTH! NOTE: At tax time your CPA would not deduct this on your personal 1040 after you received a 1099-R from your custodian, Charles Schwab in the case of those who work with us at Ten Capital.
3. Consider putting your spouse on the payroll. If you have a spouse that does not qualify for a retirement program at their own place of work you may want to consider putting them on your payroll if you are self-employed to take advantage of their ability to then contribute to the 401k plan you sponsor and get a tax deduction for their deferral in addition to your personal deferral. If you’re kids are old enough you can put them on the payroll in some cases and really give them a head start with saving as well!
4. Have liquidity. We always recommend that folks keep 3-6 months of living expenses in a cash/cash equivalent in the event they have an unforeseen event arise. After that, a good argument can be made to invest excess cash into a joint account with your spouse or a corporate account for both personal and/or business reserves. Think of this as a savings account that is invested in the market, so while it does fluctuate given the performance of the underlying holdings it is not subject to the rules of “no distributions until you’re 59.5 without penalty” like many retirement accounts. On this note, there are many ways to get this money to work in or outside of the stock market.
5. It’s boring but necessary, life insurance. No one wants to talk about death, but it’s important that we talk about protecting your family and the business you’re a part of. People rely on you and while one could never replace the loss of a loved one, or key employee, not having the capital to sustain your lifestyle in the event of a loss just makes it all worse. What type of life insurance policy you go with will really depend on one’s liabilities, family dynamics, business interests, and estate tax issues. We recommend folks go through a needs analysis to determine if life insurance is needed and how it should be held.

I could keep cramming away on this keyboard with ideas that high earners and business owners may want to consider but the best is always to get a plan in place. Like I mentioned earlier, whether you’re starting out, have a couple million sitting in cash and need direction, or maybe you’ve only saved in the 401k and looking to sell your business, get a plan.

Feel free to connect with us and we will be happy to provide resources and direction where we can. If you fail to plan, you plan to fail!

-Ben and the Ten Capital Team

Data, Just the Data

U.S. Initial Jobless Claims – dropped by 5,000 from the previous week to 227,000 on the period ending August 31st. This was well below market expectations of 230,000 and reached a new 7-week low. 

U.S. MBA Mortgage Applications – rose by 1.6% from the previous week. This built on the slight increase of 0.5% gain from the earlier period and added to the sharp cumulative increase from the start of the month. 

U.S. ISM Services – increased to a three-month high of 57.30 points in August of 2024 from 57 points in July, which was above above forecasts of 56. 

U.K. Composite PMI – rose to 53.8 in August of 2024 from 52.8 in the previous month. This was revised higher from the preliminary estimate of 53.4 and sharply above the initial market expectations of 52.9. 

Eurozone Composite PMI – was revised slightly lower to 51 in August of 2024 from a preliminary of 51.2. Compared to 50.2 in July,