Most people have a safe and reliable option to save for their retirement, which is the retirement plan their employer offers. Once the employer offers a retirement plan, saving for retirement becomes easy. You don’t need to do anything to accumulate a decent amount for your retirement, money is deducted from your salary automatically. If you are lucky, you will be a part of a retirement plan where your employer matches your contribution. This helps you have a nice little nest egg by the time you retire.
However, it is possible that you have an employer who does not offer you a retirement plan. This puts you in a difficult situation where you have don’t have a strategy to save for retirement. This situation would also be faced by freelancers and those who have started their own business. They wouldn’t have the facility of an employer providing a retirement plan. If you are in a situation where you don’t have a retirement plan, then you need to look for another option. This is important because saving money for your retirement is crucial.
Why save for retirement?
Once you retire, you probably will not have a job that can get you a monthly paycheck. You would continue to have expenses, even though you don’t have an income. How do you manage these expenses without a job? As you grow older, your healthcare needs would increase. Post-retirement, you would probably like to spend more time on travel and visiting places across the world that you couldn’t do while you were working. You would also want to leave some money for your children. All these require money, which you are not earning anymore. There is thus a need to create a nest egg or a substantial amount of money that can take care of your needs.
You may want a lump sum of money that you can use as you wish. Alternately, you may prefer an annuity to be paid for the money you have accumulated. This would work as a pension that would be paid to you every month and can take care of all your expenses. Someone used to getting a monthly paycheck would find a monthly pension convenient. It helps you lead a comfortable retired life without having to worry where you would get the money for your expenses. A retirement plan would help you manage your post-retirement expenses.
A retirement plan for you
If your employer is not offering a retirement plan, then you can opt for a retirement plan on your own. The IRA or Individual Retirement Account would be the best option for you if you want to start a retirement plan to save money. There are two types of such IRAs that you can consider. One is a traditional IRA and the other a Roth IRA.
A traditional IRA is one where anyone can start investing money. There is no income requirement stipulated to start a traditional IRA. You can contribute $6,000 every year to the IRA. If you are older than 50, you can contribute up to $7,000 annually. The traditional IRA offers tax-deferred savings. There is no income tax payable until you withdraw the money from your account. The advantage of the traditional IRA is that you can open two accounts, one in your name and the other in your spouse’s, even if one of you is not earning. So, you can save up to $12,000 annually without paying taxes on it. The idea behind an IRA is to save money for your retirement. You can withdraw money once you turn 59 years and 6 months. You can withdraw money early if you need it, but then you have to pay tax on it and you may also be charged a penalty.
An alternate IRA option that is popular is the Roth IRA. This retirement plan is named after Senator William Roth, who proposed this idea. This plan is popular because of its tax benefits at the time of withdrawal. When you invest money, you would be investing after paying taxes. The interest you earn and the amount you withdraw would be tax-free. It is similar to the traditional IRA, in that you invest up to $6,000 annually (or $7,000 if you are over 50). However, there is an income requirement. Your gross income, after adjustment, needs to be less than $122,000. You can withdraw your contributions anytime. You can start a Roth IRA even if you have an IRA account.
A variant of the IRA that would be suitable for freelancers and those who are self-employed is the SEP-IRA (Simplified Employee Pension Individual Retirement Account). For the purpose of taxes, it is treated in the same way as a regular IRA. This is beneficial as the minimum age for commencing investment is 21 years, with three years’ experience and earning at least $600 compensation. If your business is not doing so well, you can even skip contributions for a few years. The money invested can be claimed as a tax deduction. At the time of withdrawal, it would be subject to taxes. Withdrawal can be done once you reach 59 years 6 months of age.
The IRA in its different variants is thus a suitable option to invest money for your retirement. There are tax benefits available, depending on the type of account you invest in. The IRA is one of the best options to save money for retirement when your employer does not offer a retirement plan.
How much can you expect from an IRA?
The key to any investment account to build wealth is to start early.The later you start, the lesser you save. The ideal time to start saving for your retirement is in your 20s, when you start working. Assuming you invest for a period of 30 years (which means you start investing in your late 20s), your annual investment of $6,000 can yield you $300,000.Therefore, at the time of retirement, you can earn a lump sum of around $300,000. The question is whether this amount is sufficient for your retirement. Let’s do some number crunching.
A thumb rule on the amount you need to save is as follows. You should be able to earn 80% of your last annual income before retirement, through your retirement savings. Let’s assume when you retire you are earning $100,000 annually, so you would need $80,000. You can apply the 4% rule to determine how much you need to save. To earn $80,000 annually from your retirement fund, you need to save $80,000 divided by 4%, which works out to be $2 million. If you save 2 million, you can expect to earn sufficient money for your retirement.
Investing in a conventional IRA with returns of around 5% would earn you $300,000. This is a far cry from the $2 million you need to accumulate by the time you retire. So, what then is the solution? The 5% returns that your IRA earns is not really sufficient. You need to do something to earn a higher rate of interest from the money you invest in your IRA. The solution is investing in the stock market.
How the stock market can help you earn more?
Conventional saving options cannot help you earn much interest as these options are conservative in nature and do not take much risk. If you need more interest, you must be prepared to take more risk. The stock market is an option, where you can invest money to earn a higher rate of interest. This would carry a certain amount of risk, due to the volatile nature of the stock market. Stocks and related investments can make you a millionaire.If not managed well, you face the risk of losing your capital invested. This is the reason most people are scared of investing in the stock market. There is no doubt, however, that the stock market can fetch you handsome returns.
If you want to earn in millions for your retirement and thus have sufficient money to lead a comfortable life post-retirement, you need to consider the stock market. Your IRA can invest in riskier investment options like stocks, mutual funds, and index funds. Investing in this way can help you expect a rate of return of 8% to 12%, which can be useful to earn more for your retirement. The same $6,000 when invested in stocks can help you earn a million in 30 years. If both you and your spouse have IRA accounts of $6,000 each, you can easily save $2 million in 30 years.
The IRA thus allows you a build a substantial amount of money for your retirement that should take care of your expenses after you retire. You would also have social security benefits that would help you. That has not been accounted in these calculations. Whatever you get from social security is a bonus. Saving money for your retirement when you don’t have a plan from your employer is thus possible thanks to the IRA.
How to do it?
Now that you would have understood the role the IRA can play in helping you for your retirement, you would probably be ready to go ahead. Here are some pointers for you to keep in mind before you start the process.
1) You can decide on the asset allocation
An IRA allows you to invest your money in assets of your choice. You can choose to invest your money in safe options like bonds, where you would earn less interest but have the advantage of less risk. You can also choose to invest in stocks and mutual funds, where you can earn higher returns, with the risk being higher. You need to decide how you want to invest your money in both these types of options. You can choose to invest 70% in equity (stocks and mutual funds) and 30% in debt (bonds). This is a suitable allocation if you are 30 years of age. If you are 40, then you can invest 40% in debt and 60% in equity. The idea is that as you near retirement, you have less of risky exposure to equity.
2) Invest at an early age
As discussed earlier, when you start investing early, you can earn more interest. You can benefit from the power of compounding by earning interest on interest. The earlier you start, the more you can save by the time you retire. If you start investing when you are 25 and assuming you retire at 60, you can save money for 35 years, which is sufficient time to earn a lot of money. If you delay saving and start when you are 35, you can invest for only 25 years. The amount you finally earn will be lesser. The more you delay investing, the lesser is the amount you earn.
3) Don’t wait until tax day
To get tax benefits for the amount you invest in a year, you need to invest before the last date for paying taxes. Ideally, you should not wait until then, but invest money at the beginning of the year. This would earn more interest. You can even invest systematically every month, dividing your contribution over a period of 12 months.
4) Diversify your investments
As mentioned above, you can invest your money in stocks, mutual funds, and bonds. This ensures you are invested in multiple options that help in spreading your risk across different types of assets. You can spread your equity investments in mutual funds, stocks, and index funds to reduce your risk.
5) Go ahead and invest
You can open an IRA through a bank, financial institution, or a brokerage. Compare charges before you decide where to open your account. You can carry out your investment online for ease of operation. Don’t forget to name a beneficiary for your IRA, so your loved one would benefit if anything happens to you.
You are now ready to start saving for retirement even if your employer is not offering you a plan. Happy investing!
COVID-19 and PCL property – a market on the rise?
By Alpa Bhakta, CEO of Butterfield Mortgages Limited
Over the last five years, demand for prime central London (PCL) property has been fairly inconsistent. Sudden peaks in interest from buyers could be followed by periods of stagnate price growth. Nonetheless, the advantages of PCL property investment, particularly by international investors, has remained well known.
Well-funded development and neighbourhood re-generation schemes, alongside an influx of overseas investment, has resulted in a vibrant market with a diverse range of opportunities for prospective buyers.
Nonetheless, the PCL market has not been immune to the impact of the COVID-19 pandemic. During the first half of the year, the lockdown meant physical valuations and onsite inspections could not take place. People in the UK were also discouraged from moving properties unless they found themselves in extreme circumstances.
However, as we now enter the final weeks of 2020, I believe there’re plenty of reasons to be optimistic about the future prospects of the PCL property market. Buyer demand has resulted in a new wave of activity, and this is resulting in significant house price growth. Indeed, it was recently revealed by Halifax that the average rate of house price growth in November was at a four-year high.
Obviously, there are multiple factors that have helped sustain this strong level of house price growth. Most notably, the Stamp Duty Land Tax (SDLT) holiday has succeeded in coaxing buyers back to the property market––be they seasoned buy-to-let (BTL) investors or first-time buyers––by offering up to £15,000 in tax savings on any given property purchase.
However, it’s worth considering the other factors underway in London’s property market. With the UK in a second national lockdown, many investors will be keen on hedging against future COVID-imbued market uncertainty through acquiring safe-haven assets like British property. As you’ll read below, this is having a positive impact on the PCL market.
Investors are flocking to PCL opportunities
The PCL property market has managed to be one of the most active areas of the UK’s real estate market during the whole of 2020. When discussing why this is so, we must first begin by understanding the behaviours of overseas buyers.
Given that international investors represented over half (55%) of all the PCL property purchases recorded in the second half of 2019, anything to further incentivise or dissuade such foreign actors would hugely impact PCL property transaction figures.
Earlier in the year, alongside the announcement of the aforementioned SDLT holiday, UK Chancellor Rishi Sunak indeed announced that he would be implementing 2% SDLT surcharge for non-UK based buyers of British property from April 2021 onwards.
So, for those seeking properties worth over £5 million in the UK capital, a 2% additional cost may represent a substantial amount of wealth. To avoid this, many overseas buyers who may have been contemplating a PCL property acquisition have rushed to buy such properties before this surcharge is applicable. This trend will undoubtedly continue until 1 April, 2021.
Remote working and PCL
On the topic of the PCL market’s future, many property speculators were concerned earlier this year that London’s property market would potentially collapse entirely as a result of remote working. With homeworking set to remain the norm for the foreseeable future, commentators predicted that professionals would escape the capital en-masse in favour of roomier, cheaper properties farther from their London employer’s offices.
While there have been some signs of shifting demand from urban London neighbourhoods to suburban ones, according to Rightmove statistics, there has been no recordable effect on the UK’s property market as a result.
Conversely, property specialists Savills have actually discovered that over half of all transactions including properties worth more than £5 million in the UK this year were all located in just five central London postcodes.
A busy few months
Given the performance of the PCL property sector in 2020, I only foresee this market growing stronger and stronger in the years ahead. Recent developments in the production of COVID-19 vaccine have many hoping that we may return to normality by Spring 2021, which would represent fantastic news for those involved in bricks and mortar, should it transpire.
In the coming months, I anticipate a surge in activity across the PCL market as buyers look to take advantage of the tax breaks on offer. As such, it will be important that these buyers have access to the financing needed to complete these transactions quickly. If not, there is a risk any purchase they attempt might be concluded in April 2021 when the current tax breaks in place are removed.
Overall, I cannot help but be impressed by the performance of the property market more generally during the pandemic. Having experienced slow growth in the years following the EU referendum in June 2016, it is clear that buyers are eager to take advantage of the opportunities on offer. This is particularly true when it comes to PCL property.
An outlook on equities and bonds
By Rupert Thompson, Chief Investment Officer at Kingswood
The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.
The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.
Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.
Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.
Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.
Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.
Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.
We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.
We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.
We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.
On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.
Optimising tax reclaim through tech: What wealth managers need to know in trying times
By Christophe Lapaire, Head Advanced Tax Services, Swiss Stock Exchange
This has been a year of trials: first, a global pandemic and, now, many countries facing the very real possibility of a recession. For investors, private banks, and wealth managers, these tumultuous times have manifested largely in asset price volatility, ultra-low interest rates and uncertainty about when things may level out, as well as questions about what can be done to safeguard portfolio performance.
The answer here lies within identifying and creating efficiencies to maximise performance and minimise cost, and while there is a slew of options as to how to do this, they are often siloed or have a single USP. Tax optimisation, on the other hand, provides benefits to all, not just in increasing returns for investors, but also in creating economies of scale across stakeholders, creating millions – if not billions – in savings for banks.
Evolving tax reclaim
The tax reclaim process used to be a tedious one banks had to manage themselves, and required detailed, industry and country-specific knowledge to stay on top of constantly shifting requirements and regulations. And when we consider that many countries – such as the UK – allow for capital gains exemptions, tax optimisation may not seem like an integral part of the process. However, this isn’t the case for all countries, and can lead to severe after-tax implications on global portfolios.
Furthermore, even if you’re able to avoid double taxation, getting the money back is not always as simple as it sounds. This, combined with the fact that countries often have contradictory taxation rules or requirements, makes navigating the tax reclaim space a challenge even for those with the right expertise and experience.
Ultimately, providing tax optimisation to investors ends up being a heavy lift for private banks and wealth managers, who often don’t have the right solutions, are relying on outdated technology and manual processes. While this is generally fine for business, it is no longer fit for the purpose when it comes to tax optimisation. To date, knowledge and expertise have been the key to protecting and maintaining profitable investments and avoiding tax leakage. However, through tax optimisation services starting to emerge, portfolio managers can now manage and reinvest easily.
Today, technology has evolved the process so that banks are able to access and submit tax reclaim – and the relevant documentation – online, leaving the tech provider to coordinate next steps with custodians and tax authorities behind the scenes. In essence, taking the legwork out of the process while assuring consistency and completeness in execution.
Simplifying tax through tech
While tax optimisation may seem like an easy choice in theory, it is not always the go-to for every private bank or wealth manager. Without the right supports and setup, including innovative technologies and automation, tax reporting must be done manually, leading to labour intensive processes and huge time wastage. Changing these processes can be overwhelming for those used to a certain way of operating.
By making tax reclaim digital, banks will be more able to optimise returns and gain efficiencies while reducing redundancies and unnecessary complexities. Cloud based solutions or platforms can offer a safe and secure solution for banks, wealth managers, and investors to access and submit any information required, processing the data automatically for conformity and completeness.
It is critical that providers who intend to offer tax services are able to do so efficiently with the right software and data processing capabilities. Not only does this drive continuity in service and efficiencies in process, but it is the only sustainable way to handle such a complex landscape sustainably without wasting time or money.
End-to-end, technologically driven tax services offer a huge number of advantages to private banks and wealth managers, the most important of which is the ability to provide continuity through tumultuous times. As we move through the end of 2020 into 2021 this will only be increasingly important as banks, managers and investors look to provide new services to clients and strengthen existing relationships in a difficult market.
As investors seek to find returns amid the global economic downturn, the demand for innovative solutions will only increase. Technology like cloud-based software, AI, and data optimisation can all serve to improve not just the tax reclaim processes, but the overall client experience within capital markets. Private banks and wealth managers are suitably equipped to provide these innovative solutions, but those who do not prepare themselves effectively and keep ahead of trends will run the risk of losing current and new clients to someone who can offer more for less.
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