Online Financial Advisors – Is a Robo-Advisor or Human Advisor Right for You?

Online Financial Advisors: Is a Robo Advisor or Human Advisor Right for You?

Should you be working with an online financial advisor aka. robo advisor? Or do you need the help of a qualified professional and fiduciary? Human vs. robot, let’s dig in.

By Michael Urch, CFP® of 360 Financial, Senior Wealth Manager

As a CERTIFIED FINANCIAL PLANNER,™ Michael advises his clients on insurance planning, investment planning, retirement income planning, tax planning, and estate planning. He prides himself on being a professional advisor who puts planning before products.

What Is a Digital Financial Advisor?

Before everyone started meeting in Zoom rooms, the term “online financial advisor” was coined to refer to an online platform that allows you to manage your investments. You’re not actually working with an advisor, you’re doing DIY investing through a platform that simplifies the process.

But is this the best choice?
And what are your other options?

In this article, we’ll go into the pros and cons of both traditional fiduciary financial advisors and online financial advisors.

a traditional financial advisor has a legal obligation to act in your best interest

The Benefit of Financial Advisors Who Work with You Online

Not all financial advisors have pivoted to keep up with the demands of 21st Century investors. But if you can find a financial advisory firm with fiduciary advisors who will work with you online, this may be the best option for you.

Why?

Because when you work with a fiduciary, they have a legal obligation to act in your best interest at all times. A fiduciary can’t sell you packaged investment products with excessive fees, so you can know that you have a customized portfolio for your risk tolerance and goals. 

While a robo-advisor (aka. algorithmic investment management) may provide some benefits and is certainly an improvement upon just keeping your money in your mattress, you won’t get help that’s specific to your needs and goals. You also won’t have anyone to talk you off the ledge when you go to sell all your investments when the market takes a turn for the worse.

For some people with nerves of steel who are in the very early years of investing a robo-advisor may be a good fit. But for anyone who wants guidance and is moving closer to their retirement date, working with an experienced professional who can meet online via Zoom is certainly preferable.

Should You Work with a Financial Advisor Online?

It used to be that you had to work with a financial advisor in your local area. But that’s no longer the case. At 360 Financial, we work with clients all across the US as well as within our home state of Minnesota. We’re able to give our clients full-service wealth management that rivals the big investment firms no matter where they live. If you’re an American who lives abroad for some of the year, this might be even more critical to you.

Digital nomads often earn well but don’t have their investments managed effectively.

Likewise, entrepreneurs and business owners often have all or most of their wealth tied up in their businesses. This can be risky. It’s important to have your assets diversified because then you don’t have to spend sleepless nights worrying about whether everything you’ve built might disappear with one bad move.

What Is a Robo-Advisor?

A Robo-Advisor relies on algorithms to help individuals manage their investments. The scope of advice provided is generally limited to investment advice. Many rely on their own proprietary tools to help customers rebalance their portfolios, tax loss harvest and automate other investing decisions.

What Is a Fiduciary Financial Planner?

A Fiduciary financial advisor is an advisor that has a legal obligation to make recommendations that are in the best interest of their clients. CERTIFIED FINANCIAL PLANNER™ professionals are held to this fiduciary standard in all of the recommendations that they make, not just in regard to investment decisions, but also in all other addressed during the financial planning process.

What Are the Best Digital Financial Advisors?

Betterment is one of the best known digital financial advisors. Bloom Retirement Alternative is another popular option, and Vanguard also has a robo advisor offering. All of these Robo Advisors help individuals to manage their investment portfolio.

a robo advisor relies on algorithms

5 Benefits of Working with a Financial Advisor Rather than a Robo-Advisor

1. Traditional Financial Advisors Help with Tax Planning and Estate Planning

Have a CFP® professional review your tax return for tax planning, assess whether your savings rate will help you accomplish your retirement goal, and help guide you through a conversation about your legacy planning. This is something your robo-advisor can’t do for you. And it’s just part of the reason why for anyone with substantial assets, a complex tax situation, or who plans on growing their wealth, a robo-advisor might not be the best fit.

2. Financial Advisors Prevent You from Making Massive Investment Errors

A financial advisor provides an extra barrier between you and your investment decisions. Rather than allowing our clients to quickly buy-and-sell their investments based on what they are thinking or feeling at any given moment, we provide due process. Each client gets an investment policy statement and our advisors meet as an investment committee every two weeks to review our portfolios. We do not make hasty decisions, and we stay committed to a disciplined process. This prevents clients from making catastrophic investment decisions that could affect their net worth for years to come.

3. Financial Advisors Know What Is Important to You

Everyone has their own priorities, preferences and goals in life. A good advisor is going to spend time understanding what is really important to you. Then they will create a plan that will make progress toward your goals. An algorithm can only go so far, and it does not deliver customized advice.

4. A Robo-Advisor Is No Match for a CERTIFIED FINANCIAL PLANNER™ Professional 

A certified financial planner helps in all of the realms of financial planning. Investments are only one element of a financial plan. Working with a CFP® professional will help you to view your entire financial picture and provide recommendations for far more than investments, which also often leads to a more successful investing experience.

5. The Cost of an Advisor Is Often Offset

A good financial advisor will provide their clients with multiples of their fee in value. In other words, the cost of working with a good financial advisor is worth it. But why? A financial advisor who is great at what they do will coach clients in wealth building strategies, show clients how well they are moving toward their goals, and stand between clients and bad investment decisions. They will be there for you at every important financial milestone ensuring that you make the best possible financial and wealth-building decisions.

advisor question and answer

Common Questions about Financial Advisors and Planners

Is it worth paying for a financial advisor?

Yes, especially if you do not have the time or temperament to successfully invest and create a financial plan on your own.

How much money do you need to talk to a financial advisor?

Generally, I recommend talking with a financial advisor after your net worth is more than $500,000.

Is it smart to invest with a financial advisor?

Yes, especially if you do not have the time or temperament to successfully invest on your own.

What is the difference between a financial advisor and a financial planner?

A financial planner is going to focus on all the areas of financial planning, where some financial advisors are focused on investment management. Titles are not standardized across the industry, so sometimes it can be difficult to tell whether someone is really able to offer financial planning. As a good rule of thumb, if you are working with a CFP® professional they are able to provide financial planning for you.

What is the difference between a financial advisor and an investment advisor?

An investment advisor or a registered investment advisor is not an individual. An RIA is an entity (or a company) that provides investment advice per the 1940 Investment Company Act. RIAs are held to a fiduciary standard. Many financial advisors are investment advisor representatives. 360 Financial is an RIA and I am a wealth manager, a CFP® professional and an investment advisor representative. I am held to a fiduciary standard both as an investment advisor representative and a CFP® professional.

How do I find a legitimate financial advisor?

I recommend working with a CFP® professional who works at an RIA. You can research at Adviser Info for information on financial advisors or registered investment advisors.

What is the average cost of a financial advisor?

Each advisor has their own fee structure. It is fairly common for advisors to charge a fee based on the investments that they are managing for you. The industry average tends to be between 1 and 1.5%. Some firms charge an additional fee for financial planning services, and some firms include financial planning in the single asset under management fee.

Are robo-advisors good for beginners?

If you are in the early years of wealth accumulation, a robo advisor can be a great place to gain some investment experience. Once you are above $500,000 in net worth, you likely would benefit more from a stronger offering.

How much is a personal financial planner fee?

Financial planners can charge hourly, on a project basis, a monthly retainer, or include planning as part of their asset under management fee. If you are paying for a stand-alone financial plan, it is not uncommon to see a charge of $3,000 – $10,000 (depending on the complexity of your situation).

Are financial planner fees worth it?

If you are in need of a financial planner, can you really afford not to work with one? In some cases, I have seen clients come out ahead financially after working with a financial planner, and I always see someone have increased confidence after having a professional create a financial plan for them.

Work with a Financial Advisor Online or In Person

If you need a wealth management team to help you achieve your big-picture goals, we recommend scheduling a call with a financial advisor at 360 Financial.

360 Financial is one of Minnesota’s best independent wealth management firms. We work with clients in Minnesota and across the US. If you’d like to work with a team that always puts your best interests first and is committed to helping you create a lasting legacy, please get in touch. 

Schedule a 15-minute Call

Read More:

How to Choose a Good Financial Advisor

About the Author: Michael Urch

Michael Urch Senior Wealth Manager and CFP

As a CERTIFIED FINANCIAL PLANNER,™ Michael advises his clients on insurance planning, investment planning, retirement income planning, tax planning, and estate planning. He prides himself on being a professional advisor who puts planning before products. This is one of the reasons he was attracted to 360 Financial’s client-focused culture. Michael likes to start with each client’s “why.” By understanding what’s truly important to them, the “what” of investment and planning strategies can be custom designed to support their long-term ambitions.

Prior to joining 360, he spent nine years honing his skills first at a Fortune 100 Financial Services Company and then at independent, planning-centric firms. He graduated magna cum laude from Bethel University with a BA in economics and finance, as well as a minor in mathematics.

Michael lives in Golden Valley, Minnesota with his wife, Bri and their three children. When he is not working, he enjoys exploring parks and reading books as a family, hiking, and playing guitar.

Schedule a 15-minute Call with Michael

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

401(k) Retirement Planning Essentials

401(k) Retirement Planning Essentials

401(k) retirement planning is essential for most Americans who want to retire with a comfortable and sustainable lifestyle.

By Will Grant, CFP® CPWA® of 360 Financial

As a CERTIFIED FINANCIAL PLANNER™ and Certified Private Wealth Advisor®, Will helps clients create their ideal life through values-based financial planning. His process is designed to pursue each client’s objective, whether it’s preparing for retirement, ensuring smooth business succession, funding for education, implementing wealth transfer strategies, or navigating other impactful financial events.

Retirement Planning and Your 401(k) Plan

Retirement planning is an essential step to ensure financial security later in life. The 401(k) plan is one of the most popular tools used by Americans for retirement. 

By setting aside a portion of their income, employees can build a nest egg and start building wealth and preparing for retirement. Additionally, many employers offer matching contributions, further boosting the potential savings. Understanding the ins and outs of a 401(k) is vital for maximizing its benefits.

Let’s go over the benefits of using your 401(k) as part of your retirement plan. 

Table of Contents

  1. What is a 401(k) Plan?
  2. How does a 401(k) retirement plan work?
  3. Traditional 401(k)
  4. Roth 401(k)
  5. How to Contribute to Your 401(k) Plan for Retirement
  6. Pros of a 401(k) for Retirement Planning
  7. Cons of a 401(k) for Retirement Planning
  8. Contribution Limits of a 401(k) Plan
  9. 401(k) vs IRA for Retirement Planning 
  10. 401(k) Updates for 2023
  11. Required Minimum Distributions i.e. What You Have to Withdraw at Retirement
  12. What to Do with Your 401(k) When You Switch Employers
  13. Common Questions about Retirement Planning and 401(k) Plans
  14. Work with a Financial Advisor Online or In Person

What is a 401(k) Plan?

A 401(k) is a retirement savings plan sponsored by employers for their employees. It allows you to save a portion of your paycheck before taxes are taken out. These funds are then invested in a variety of options, including stocks, bonds, and mutual funds. 

Over time, these investments can grow tax-deferred until withdrawals are made in retirement. The name “401(k)” comes from the section of the U.S. tax code that outlines its provisions.

How does a 401(k) retirement plan work?

As an employee, you decide how much of your paycheck you want to contribute to your 401(k) plan. This money is then deducted from your wages or salary before taxes, reducing your taxable income. 

Employers can also contribute to the plan, often through matching your contributions up to a certain percentage. Investments in the 401(k) grow tax-free until they are withdrawn. Once you reaches retirement age, you can start withdrawing from your 401(k), at which point the distributions (i.e. withdrawals) are typically taxed.

How does a 401(k) retirement plan work?

Traditional 401(k)

In a traditional 401(k), contributions are made pre-tax, which means taxes are deferred until funds are withdrawn. This allows employees to reduce their current taxable income, potentially placing them in a lower tax bracket. 

The investments grow tax-deferred, compounding over time. Withdrawals made in retirement are taxed as ordinary income.* 

Penalties usually apply if funds are withdrawn before age 59½, with certain exceptions.

*Ordinary income refers to the regular income an individual receives that is subject to standard tax rates, as opposed to preferential tax rates. It encompasses income generated from typical sources like wages, salaries, commissions, and rental income, among others. 

Roth 401(k)

The Roth 401(k) option allows participants to contribute post-tax dollars. Unlike the traditional 401(k), withdrawals in retirement are generally tax-free, assuming certain conditions are met. This can be a beneficial choice for those who anticipate being in a higher tax bracket during retirement. 

Contributions to a Roth 401(k) don’t reduce your taxable income for the year. However, the trade-off is the potential for tax-free withdrawals later on.

Determining which 401(k) plan makes sense is an important decision that will depend on your specific situation. Click here to schedule a time consult with one of our 360 Financial Wealth Managers. 

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Roth 401(k)

How to Contribute to Your 401(k) Plan for Retirement

To start contributing, employees typically select a percentage or fixed amount of their paycheck to allocate towards their 401(k). It’s crucial to review and potentially increase contributions annually to account for salary increases or changing retirement goals. 

Taking advantage of employer match programs is essential, as it’s basically “free money” for retirement. Regularly reviewing the investment options within the plan can help ensure alignment with your financial goals.

EXAMPLE:

It’s important to continuously review your 401(k) contributions and increase when appropriate. The difference can be significant. For instance, if a 25-year-old with a $100,000 income contributes 3% of their salary to their 401(k) annually and receives a 3% employer match, they would be saving $6,000 per year.

Assuming an average annual return of 7% on their investments, by the time they reach 65, their 401(k) balance would be approximately $1.2 million.

However, if they were to increase their contribution rate to 10%, the annual savings would amount to $13,000 including the 3% employer match, resulting in a substantially larger retirement fund. With the higher contribution rate of 10%, the 25-year-old would have amassed a retirement fund of around $2.6 million by age 65, assuming the same 7% average annual return.

This substantial difference showcases the power of higher contributions, allowing the individual to retire with financial security and the ability to enjoy a comfortable lifestyle.

How to Contribute to Your 401(k) Plan for Retirement

Pros of a 401(k) for Retirement Planning

401(k) plans come with the significant benefit of tax-deferred growth.

Tax-deferred growth refers to the increase in value of an investment in which the taxes on the investment’s earnings are not paid until a later date, typically upon withdrawal. In other words, while the investment grows and earns interest, dividends, or capital gains, no taxes are due on those earnings until they are withdrawn or distributed. 

The primary advantage of tax-deferred growth is the compounding effect. Because taxes aren’t taken out annually, the entire amount of earnings is reinvested and can earn even more. Over time, this can lead to significantly more growth compared to an account that’s taxed annually.

Many employers provide matching contributions, amplifying the amount saved. The array of investment options within a 401(k) can cater to different risk tolerances and financial objectives. Employees have the option to borrow against their 401(k), though it’s generally not recommended. High contribution limits make 401(k)s ideal for those looking to save sizable amounts.

Pros of a 401(k) for Retirement Planning

Cons of a 401(k) for Retirement Planning

There are some cons to 401(k)s, so it’s important to review some of the downsides. Early withdrawals from a 401(k) can incur hefty penalties and taxes. Investment options can be limited compared to other retirement accounts, potentially hindering diversification. Some plans come with high fees that can eat into overall returns. 

Unlike Roth IRAs, traditional 401(k) distributions are taxable upon withdrawal. It might be complex for individuals to understand all plan details, potentially leading to sub-optimal choices. In fact, if you want to feel more confident in your future retirement, I recommend that you seek the advice of an experienced fiduciary Wealth Manager. 

Contribution Limits of a 401(k) Plan

Each year, the IRS sets limits on how much individuals can contribute to their 401(k) plans. For 2023, the contribution limit might be adjusted based on inflation and other economic factors. 

Catch-up contributions are allowed for those aged 50 and above, letting them save more as they near retirement. These limits do not include employer matches, which can further boost retirement savings. It’s essential to be aware of these limits to maximize contributions without incurring penalties.

The 401(k) contribution limit for 2023 is $22,500 for employee contributions. If you’re age 50 or older, you’re eligible for an additional $7,500 in catch-up contributions, raising your employee contribution limit to $30,000.

401(k) vs IRA for Retirement Planning 

Both 401(k)s and IRAs are powerful tools for retirement savings. While 401(k)s are employer-sponsored, IRAs are individual retirement accounts anyone can open. IRAs often offer a broader range of investment choices compared to 401(k)s. 

However, 401(k)s typically have higher contribution limits, especially when including employer matches. The choice between the two often depends on individual circumstances, financial goals, and the availability of employer-sponsored plans.

401(k) Updates for 2023

As financial landscapes evolve, so do regulations and provisions for retirement accounts. In 2023, there may be updates regarding contribution limits, withdrawal rules, or other plan features. 

It’s vital to stay informed about these changes to optimize retirement planning strategies. New legislation or economic shifts can impact how 401(k) plans operate. Regularly consulting with your Wealth Manager or HR departments can ensure individuals remain up-to-date.

Required Minimum Distributions i.e. What You Have to Withdraw at Retirement

Required Minimum Distributions (RMDs) are amounts that retirees must withdraw from their 401(k) plans starting at a certain age, currently 72. The amount is calculated based on life expectancy and the account balance. 

Failing to take RMDs can result in significant tax penalties. While RMDs apply to traditional 401(k)s, Roth 401(k)s also have RMD rules unless rolled into a Roth IRA. Planning withdrawals strategically can help manage tax implications during retirement.

What to Do with Your 401(k) When You Switch Employers

When changing jobs, individuals have several options for their 401(k) funds. They can leave the money in the old employer’s plan, though they may no longer be able to contribute. Another option is to roll the funds into a new employer’s 401(k) or into an IRA. Cashing out is another choice but comes with potential penalties and tax implications. It’s crucial to weigh the pros and cons of each option and possibly consult with a Wealth Manager.

Common Questions about Retirement Planning and 401(k) Plans:

Common Questions about Retirement Planning and 401(k) Plans:

What is a good 401(k) amount to retire?

A good 401(k) amount to retire largely depends on individual lifestyle and expenses, but many financial experts suggest having 8-10 times your final salary saved by retirement age. The goal is to have sufficient funds to cover 70-85% of your pre-retirement income annually during your retirement years.

A 401(k) represents just one avenue among various account types available for pursuing your financial objectives, including taxable accounts and Roth accounts. Seeking guidance from a Wealth Manager to comprehensively assess and monitor the diverse assets you’re accumulating by type can be a prudent approach, ensuring you stay on track towards your retirement goals.

How much should I have in my 401(k) if I want to retire at 55?

If you aim to retire at 55, you should consider having saved at least 10-12 times your annual salary in your 401(k) by that age, given the earlier retirement age and potential for a longer retirement period. Early withdrawals before age 59½ may also incur penalties unless specific criteria are met.

How much will a 401(k) grow in 20 years?

The growth of a 401(k) over 20 years depends on the contribution amount, employer match, investment choices, and annual returns. Assuming an average annual return of 6-8%, your 401(k) can potentially double roughly every 9-12 years, depending on compounding frequency and market performance.

Is a 401(k) better than an IRA?

Both 401(k)s and IRAs offer unique advantages. A 401(k) often includes employer matches, allowing for higher total contributions, while an IRA may provide more investment options and flexibility. The best choice depends on individual needs, access to employer-sponsored plans, and financial goals.

Does a 401(k) gain interest?

A 401(k) doesn’t typically earn “interest” in the traditional sense. Instead, it earns returns based on the investments selected, such as stocks, bonds, or mutual funds. The returns can be in the form of dividends, capital gains, or interest from fixed-income investments.

Can I pull money out of my 401(k)?

Yes, you can withdraw money from your 401(k), but doing so before age 59½ often incurs a 10% early withdrawal penalty and the amount is subject to taxes. There are exceptions for specific situations like financial hardships, buying a home, or medical emergencies, but it’s essential to understand the rules and potential implications.

How 360 Financial Can Help You Plan for Retirement 

Unlock the future you envision with 360 Financial. With expert insights, financial planning tailored to your needs and goals, and a big-picture approach, we turn your work-optional dreams into actionable plans. Begin your journey to a secured, fulfilling retirement with the guidance of 360 Financial.

Work with a Financial Advisor Online or In Person

If you need a wealth management team to help you achieve your big-picture goals, we recommend scheduling a call with a financial advisor at 360 Financial.

360 Financial is one of Minnesota’s best independent wealth management firms. We work with clients in Minnesota and across the US. If you’d like to work with a team that always puts your best interests first and is committed to helping you create a lasting legacy, please get in touch. 

Schedule a 15-minute Call

About the Author

William Grant

Will Grant, CFP

Will Grant enjoys empowering people to make informed decisions and seeing the positive impact his guidance can have on their lives.

Prior to joining 360, he spent seven years serving hundreds of clients at a boutique RIA focused on healthcare executives with equity compensation and then at a large, independent RIA. He earned a Bachelor of Science degree in Finance from Miami University and holds his Series 7 and 63 licenses through LPL Financial and his 65 license through 360 Financial.

Will lives in Minneapolis with his fiancée, Melissa. In his free time, he enjoys competing in triathlons, golfing and is an active member of the Minnesota Leadership Council for the Chick Evans Scholarship Foundation, which he was a recipient of.

Schedule a 15-minute Call with Will

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Financial Planning vs. Financial Advisor – What’s the Difference?

Schedule a Call

At 360 Financial, our clients come first. You deserve personalized attention. You’ll be happier and more confident in your financial future when you have an advisor who always puts your needs and best interest first. Schedule a 15-minute introductory call with a 360 financial advisor to see how we can help with your retirement, succession, tax, and estate planning.

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Financial Planning and Estate Planning in Minnesota

If you need financial planning assistance and a wealth management team to help you achieve your big-picture goals, we recommend scheduling a call with a financial advisor at 360 Financial.

360 Financial is one of Minnesota’s best independent wealth management firms. We work with clients in Minnesota and across the US. If you’d like to work with a team that always puts your best interests first and is committed to helping you create a lasting legacy, please get in touch.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Retirement Planning Minnesota: A Simple Guide

A Simple Guide to Retirement Planning in Minnesota

By Mike Rogers, AIF®, Founder and President of 360 Financial

Mike Rogers is a fiduciary financial advisor with over 30 years of experience in the financial services industry as an investment advisor and financial planner. He founded 360 Financial in 1995 and holds series 7 and 63 security registrations with LPL Financial.

 

Whether you’re ten, twenty, or even thirty years from retirement, it’s important to start planning. Review the basics of retirement planning in Minnesota and get started. It’s never too early to start planning for retirement. Part of your planning will be considering expenses, taxes, and investments and how you want to live during retirement. 

 

Retirement Planning Topics in this Article

  1. Understanding Minnesota’s Tax Policies for Retirement Income
  2. Social Security Benefits: Maximizing Your Retirement Income
  3. The Role of a Minnesota Financial Advisor in Retirement Planning
  4. Employer Retirement Plans: 401(k)s, 403(b)s, and IRAs
  5. Minnesota’s Public Employee Retirement Association (PERA)
  6. How to Plan for Healthcare Costs in Retirement in Minnesota
  7. 10 Tips for Downsizing Your Home for Retirement
  8. The Impact of Minnesota’s Cost of Living on Retirement Budgets
  9. Utilizing Health Savings Accounts (HSAs) for Retirement in Minnesota
  10. Create a Retirement Budget
  11. Estate Planning in Minnesota
  12. Long-Term Care Planning for Retirees in Minnesota
  13. Inflation and Your Retirement Savings
  14. Financial Advisors in Minnesota

 

The top five things you should consider when planning your retirement in Minnesota are the state tax laws, cost of living, healthcare costs, how the climate may affect your expenditures during retirement, and estate planning. 

  1. Tax Implications: Minnesota taxes Social Security and most other retirement income.
  2. Cost of Living: Minnesota’s cost of living can impact your retirement budget, especially housing and healthcare costs.
  3. Healthcare Planning: Consider supplemental insurance and HSAs for healthcare costs.
  4. Climate: Minnesota’s cold winters may influence living and travel expenses.
  5. Estate Planning: Minnesota-specific estate planning can ensure a smooth transition of assets.

 

Related Post: A Guide to Financial Planning in Minnesota 

 

Understanding Minnesota’s Tax Policies for Retirement Income

Minnesota’s tax policies can significantly impact your retirement income. The state taxes Social Security benefits to the same extent as the federal government. It also taxes most other forms of retirement income, such as pensions and retirement account withdrawals.

As of 2023, the following is true of tax rates in Minnesota during retirement:

  • In Minnesota, your Social Security income is partially taxed.
  • All withdrawals from retirement accounts are fully taxed in Minnesota.
  • Public and private pension income is fully taxed.

 

Social Security Benefits: Maximizing Your Retirement Income

To maximize your Social Security benefits in Minnesota, you may want to consider delaying your benefits until you reach your full retirement age or older. The longer you wait, the higher your monthly benefit will be. Speak with your financial advisor about this to identify when is the right time for you to start taking Social Security.

 

retirement planning
A Minnesota financial advisor can provide expert advice tailored to your personal financial situation.

 

The Role of a Minnesota Financial Advisor in Retirement Planning

A Minnesota financial advisor can provide expert advice tailored to your personal financial situation. They can help you understand tax implications, investment strategies, and create a comprehensive retirement plan. 

If you don’t want to be worried about retirement for the next ten, twenty, or even thirty years, it would be wise to speak with a financial advisor and create a financial plan. Your financial advisor will be your guide, helping you towards your financial goals.  

 

Employer Retirement Plans: 401(k)s, 403(b)s, and IRAs

Employer-sponsored 401(k), 403(b) plans, and Individual Retirement Accounts (IRAs) are tools for saving for retirement. All of these offer tax advantages that can help your savings grow more rapidly. Minnesota employers may offer a match on 401(k) or 403(b) contributions, effectively giving you free money for your retirement savings.

There are also Roth 401(k)s, 403(b)s, and IRAs that have distinct tax advantages over the traditional plans. Talk with your financial advisor about what contribution is right for you.

 

Minnesota’s Public Employee Retirement Association (PERA)

PERA provides retirement benefits for public employees in Minnesota. If you’re a public employee, understanding the benefits and contribution requirements of PERA is crucial for your retirement planning.

In some cases, it may make sense to choose a lump-sum option rather than taking lifetime income. In addition, there are a number of income options available (joint life for the life of your spouse, individual life for you, individual life with period certain). Your advisor can help you decide what option is best for you.

 

How to Plan for Healthcare Costs in Retirement in Minnesota

Even with Medicare, healthcare can be a significant retirement expense. Consider options like Medigap or Medicare Advantage plans for additional coverage. Also, a Health Savings Account (HSA) can be used to save for healthcare costs tax-free.

If you are retiring prior to age 65, you will want to have good estimates for the costs of healthcare. You would likely be relying on COBRA insurance from your past employer or on health insurance that can be found through the MN health insurance exchange (MN Sure)

 

Estate Planning
Downsizing can reduce living expenses in retirement and free up capital that you can invest.

 

10 Tips for Downsizing Your Home for Retirement

Downsizing can reduce living expenses in retirement and free up capital that you can invest. When looking for a new home, consider location, accessibility, and proximity to healthcare services. Also, consider the emotional aspects of leaving home where you’ve lived for many years.

1 Evaluate your Needs: Assess your lifestyle and determine what you actually need in your new home. Think about the number of bedrooms, outdoor space, proximity to family and friends, and access to healthcare.

2 Sort your Stuff: Go through each room in your house and sort your belongings into keep, sell, donate, or discard piles. Be ruthless. Only keep what you absolutely need or love. Before you give things away, check with family members to see if they want any items. You might be surprised by what people want!

3 Plan your Space: Once you’ve chosen your new home, measure the space and plan where your furniture will go. This will help you decide what to take with you.

4 Sell Unwanted Items: Sell items you no longer need through a garage sale, online marketplaces, or consignment stores.

5 Digitize (Some Of) Your Memories: If you have many photos, documents, or memorabilia, consider digitizing them to save physical space.

6 Consider Storage: In your new home, consider investing in multi-purpose furniture with built-in storage or vertical storage solutions to maximize space.

7 Downsize Gradually: Don’t try to downsize all at once. Start months before your move, tackling one room at a time.

8 Get Help: Enlist the help of family members, friends, or professional organizers. They can provide emotional support and practical help.

9 Think about Accessibility: If you’re moving for retirement, look for a home that can accommodate your needs as you age, such as single-story living or wheelchair accessibility.

10 Embrace the Change: Downsizing can be emotional. Focus on the benefits, such as less maintenance, lower costs, and more freedom to enjoy your retirement.

 

The Impact of Minnesota’s Cost of Living on Retirement Budgets

Minnesota’s cost of living is slightly higher than the national average. Consider this when planning your retirement budget, especially when it comes to housing, healthcare, and taxes. When you work with a financial advisor, they’ll help you plan for retirement taking into account what you’ll be spending when you retire.

You might also consider the trade-offs of moving out of Minnesota when you retire. By moving to an area that has a lower cost of living or that has a lower state tax bracket, you might be able to afford to retire earlier or be able to spend more on travel and other goals in retirement.

If you’re creating your own financial plan, read more about the six steps in financial planning. Begin creating a financial plan that will help you achieve your financial goals and a relaxing and comfortable retirement. 

 

Utilizing Health Savings Accounts (HSAs) for Retirement in Minnesota

HSAs can be a great tool for saving for healthcare costs in retirement. Contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free. After age 65, you can withdraw funds without penalty, but you will pay income tax on non-medical withdrawals.

If you do decide to utilize HSAs for retirement, you should invest them just like you are investing your other retirement accounts. Talk to your financial advisor about what would be appropriate investments for your HSA plan. 

 

Create a Retirement Budget

Start with your situation today. Review your total income, and subtract the amount you are saving and the amount you are paying for taxes. Now you’ve identified the amount of your current spending.

Will this change in retirement? Do you have a mortgage you will pay off? Will it remain the same in retirement? Are there any travel goals or other budget expenses you would like to add?

This will give you a good idea of how much income is needed in retirement, and you can work with a financial advisor to create a plan for getting that income.

 

Estate Planning in Minnesota

Estate planning involves more than just creating a will. It may also involve setting up trusts, naming beneficiaries for your retirement accounts, and creating a power of attorney and healthcare directive. 

A good financial advisor can help you with your estate planning and discuss the benefits of different legal documents. When it comes to actually drafting the legal documents you want in place, a Minnesota estate planning attorney can guide you through this process.

 

Long-Term Care Planning for Retirees in Minnesota

Long-term care can be a significant expense in retirement. Consider long-term care insurance, and look into Minnesota’s Medical Assistance program, which can help pay for long-term care if you qualify.

Minnesota has a tax deduction for long-term care premiums in qualified long-term care policies. To talk about long-term care insurance with an advisor, schedule a call with a financial advisor at 360 Financial.

 

Inflation and Your Retirement Savings

Inflation can erode your purchasing power in retirement. Consider investment strategies that can help your savings keep pace with or outpace inflation, such as investing in stocks or inflation-protected securities.

 

Financial Planning in Minnesota

SPEAK WITH AN ADVISOR

If you need a wealth management team to help you achieve your big-picture goals, we recommend scheduling a call with a financial advisor or financial planner at 360 Financial.

360 Financial is one of Minnesota’s best independent wealth management firms. We work with clients in Minnesota and across the US. If you’d like to work with a team that always puts your best interests first and is committed to helping you create a lasting legacy, please get in touch.  

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About the Author

Mike Rogers

Mike Rogers is the founder and president of Minnesota-based financial advisory firm 360 Financial. As the founder, Mike’s priority is that 360 Financial always serves the clients with empathy, integrity, and honesty. This customized, client-centric approach allows the firm to help clients decipher between the things they can control and what truly matters.

In other words, Mike understands that money is not the end-all-be-all; instead, it’s the “how” that fuels the “why” to the question: “What’s important to you?”

 

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Schedule a Call

At 360 Financial, our clients come first. You deserve personalized attention. You’ll be happier and more confident in your financial future when you have an advisor who always puts your needs and best interest first. Schedule a 15-minute introductory call with a 360 financial advisor to see how we can help with your retirement, succession, tax, and estate planning.

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This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.