Category Archives: Financial Planning

Social Security Retirement Benefits

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Achieving the dream of a secure, comfortable retirement is much easier when you plan your finances.

Social Security is part of the retirement plan for almost every American worker. It is considered to be one of the three “legs” of retirement finances (retirement plans and savings being the other two), and for some it may be the only source of retirement income. It provides replacement income for qualified retirees and their families.

Planning is the key to creating your best retirement. You’ll need to plan, save and invest for decades to achieve your retirement goals. While many factors affect retirement planning, it is important that you to understand what Social Security can mean to you and your family’s financial future.

As you make your financial and retirement plan, knowing the approximate amount you will receive in Social Security benefits can help you determine how much other retirement income you’ll need to reach your goals.

Social Security replaces a percentage of a worker’s pre-retirement income based on their lifetime earnings. The portion of your pre-retirement wages that Social Security replaces is based on your highest 35 years of earnings and varies depending on how much you earn and when you choose to start benefits.

How Social Security system works

The theory behind the concept of Social Security was that taxes assessed on the wages, up to a statutory limit, of those who are gainfully employed will be used to pay the benefits to those who have left the work force due to old age. This, when you work, you pay taxes into Social Security. Social Security Admission (SSA) use the tax money to pay benefits to:

  • People who have already retired.
  • People who are disabled.
  • Survivors of workers who have died.
  • Dependents of beneficiaries.

The money you pay in taxes isn’t held in a personal account for you to use when you get benefits. SSA uses your taxes to pay people who are getting benefits right now. Any unused money goes to a Social Security trust fund that pays monthly benefits to you and your family when you start receiving retirement benefits.

You can work while you receive Social Security retirement or survivors benefits. When you do, it could mean a higher benefit for you and your family. But, if you’re younger than full retirement age, and earn more than certain amounts, your benefits will be reduced. The amount that your benefits are reduced, however, isn’t truly lost.

Your benefit will increase at your full retirement age to account for benefits withheld due to earlier earnings. (Spouses and survivors, who receive benefits because they have minor or disabled children in their care, don’t receive increased benefits at full retirement age if benefits were withheld because of work.)

Each year, Social Security Admission (SSA) reviews the records of all Social Security beneficiaries who have wages reported for the previous year. If your latest year of earnings is one of your highest years, they recalculate your benefit and pay you any increase you are due. The increase is retroactive to January of the year after you earned the money.

When you begin receiving Social Security retirement benefits, you are considered retired for SSA purposes. You can get Social Security retirement or survivors benefits and work at the same time. However, there is a limit to how much you can earn and still receive full benefits.

If you are younger than full retirement age and earn more than the yearly earnings limit, we may reduce your benefit amount.

If you are under full retirement age for the entire year, SSA deducts $1 from your benefit payments for every $2 you earn above the annual limit. For 2020, that limit is $18,240.

In the year you reach full retirement age, we deduct $1 in benefits for every $3 you earn above a different limit. In 2020, this limit on your earnings is $48,600. They only count your earnings up to the month before you reach your full retirement age, not your earnings for the entire year.

When you reach full retirement age:

  • Beginning with the month you reach full retirement age, your earnings no longer reduce your benefits, no matter how much you earn.
  • SSA will recalculate your benefit amount to give you credit for the months we reduced or withheld benefits due to your excess earnings.

To Receive Benefits

The age you begin collecting your retirement benefit affects how much you will receive. There are three important things to know about age when thinking about when to start your benefits.

  • Full Retirement Age – Full retirement age is the age when you will be able to collect your full retirement benefit amount. The full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960, until it reaches 67. For anyone born 1960 or later, full retirement benefits are payable at age 67. You can find your full retirement age by birth year in the full retirement age chart.
  • Early Retirement Age – You can get Social Security retirement benefits as early as age 62. However, your benefit is reduced if you start receiving benefits before your full retirement age. Understand how claiming retirement benefits early will affect your benefit amount.
  • Delayed Retirement Age – When you delay collecting benefits beyond your full retirement age, the amount of your retirement benefit will continue to increase up until age 70. There is no incentive to delay claiming after age 70.

In 2020, if you’re under full retirement age, the annual earnings limit is $18,240. If you will reach full retirement age in 2020, the limit on your earnings for the months before full retirement age is $48,600.

Starting with the month you reach full retirement age, there is no limit on how much you can earn and still receive your benefits.

Let’s look at a few examples. You are receiving Social Security retirement benefits every month in 2020 and you:

  • Are under full retirement age all year. You are entitled to $800 a month in benefits. ($9,600 for the year)
    You work and earn $28,240 ($10,000 over the $18,240 limit) during the year. Your Social Security benefits would be reduced by $5,000 ($1 for every $2 you earned over the limit). You would receive $4,600 of your $9,600 in benefits for the year. ($9,600 – $5,000 = $4,600)
  • Reach full retirement age in August 2020. You are entitled to $800 per month in benefits. ($9,600 for the year)
    You work and earn $63,000 during the year, with $50,718 of it in the 7 months from January through July. ($2,118 over the $48,600 limit)
  • Your Social Security benefits would be reduced through July by $706 ($1 for every $3 you earned over the limit). You would still receive $4,894 out of your $5,600 benefits for the first 7 months. ($5,600 – $706 = $4,894)
  • Beginning in August 2020, when you reach full retirement age, you would receive your full benefit ($800 per month), no matter how much you earn.

When SSA figures out how much to deduct from your benefits, they count only the wages you make from your job or your net profit if you’re self-employed. They include bonuses, commissions, and vacation pay. They don’t count pensions, annuities, investment income, interest, veterans, or other government or military retirement benefits.

References:

  1. https://www.ssa.gov/benefits/retirement/planner/whileworking.html
  2. https://www.ssa.gov/benefits/retirement/learn.html
  3. https://www.aaii.com/journal/article/13102-a-primer-on-social-security?via=emailsignup-readmore
  4. https://www.ssa.gov/benefits/retirement/learn.html#h2

Purpose Driven Saving, Investing and Accumulating Wealth

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Investing with a Purpose – “Start with the Why” regarding saving, investing and accumulating wealth.  It’s about your values and life goals.  It’s about keeping your eyes on the prize and on the why you’re saving, investing and accumulating wealth.

There is an underlying reason why you invest your hard-earned money and it’s not just to earn more money.  While that may be the ultimate outcome, the “Why” or “Purpose” of investing is something completely different.  Simply put, you invest to achieve your financial goals in life. These goals are different for every person.  Maybe it’s retirement, a child’s college education, buying a beach house, or planning for the next generation. We all have our own goals, whatever they may be.  It’s your mission to plan out a clear path to achieve those goals. This is what is considered Investing with Purpose.

Purpose-driven investing thrives by instilling a sense of purpose into any investment.  People seek to achieve real-life objectives such as saving for your kid’s college or your retirement.

A firm purpose behind your saving for the future, investing for the long term and accumulating wealth will ensure that you are making the right money management decisions today to achieve long term financial success. Your risk will be optimized when your purpose for saving, investing and accumulating wealth matches your goals and timeline.

People Invest to Achieve Personal Financial Goals

“An investor without investment goals, objectives and a plan is like a traveler without a destination.” Anonymous

Understanding your values and what you want to accomplish in life is essential to “Purpose Driven” saving, Investing and accumulating wealth.  Saving, investing and accumulating wealth are deeply personal undertakings, which is why you must always start with a discussion about what’s really important to you. This helps us shape your saving, investing and accumulating wealth strategy around three key dimensions of your financial life: liquidity, longevity and legacy.

When people are asked why they invest, their answers typically are focused on family and future goals in life—buying a house, saving for emergencies, retirement, taking care of loved ones. Those are the big picture answers. But as in life, it’s often as much about the journey as the destination. Investors have specific expectations about the investment experience, as well as the outcomes.

For example, some investors want long-term growth to build their retirement nest egg, but they don’t want to feel the volatility that can occur in the broader stock market. Others want regular income distributions after they reach retirement. Still others want investments that can help them manage through changes in the economic environment, or more personal economic challenges.

Create the future you want for yourself and your loved ones. New to investing or an experienced trader. To be great and successful at any endeavor, you’ve got to sacrifice and put in the work, because anything easy is just average. To become great you have to make big sacrifices and work really hard — much above average.

Wise spending is a subset of wise investing. And, it’s never too late to start investing.

When you invest in assets over the long term, you are buying a day in the present that you don’t have to work several days in the future.

I like this quote since it succinctly defines one of the primary reason for investing … “putting away money today so sometime in the future, you do not have to work to live”. And the seeds you sow today, will reap the financial harvest to live a life in retirement with dignity and financial security.

Your actions dictate the consequences. Reaps what they sow, they suffer or benefit as a result of their own actions.

Investments are the tools we use to make your financial plan successful.  With your plan as the guide, your stock portfolio should be designed around your personal situation, needs, and goals.

Long-Term Investors Have Almost Always Experienced Positive Returns

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S&P 500 rolling returns have been almost always positive over the long-term.

One of the best ways to invest is over the long term and it’s more important than ever to focus on long-term investing. It’s long-term investing strategy where investors can accumulate wealth. By investing long term, you can meet your financial goals and increase your financial security.

94% of 10-year rolling returns have been positive since 2000.

Rolling returns are measured over consecutive periods starting with the earliest period and finishing with the most recent. For example, the period of measure for a 10-year rolling return for an investment as of the end of February, would be 03/01/2010 through 02/29/2020.

Source: Bloomberg Finance L.P. as of 02/28/2020. Past performance does not guarantee future results. The referenced index is shown for informational purposes only and is not meant to represent the Fund. Investors cannot directly invest in an index.

Investing and learning to think long-term

While many investors of all ages think of investing as trying to time the market to make a short-term return on their investment, investing for the long-term investing is one of the best ways and a proven strategy for investor to accumulate wealth over time and achieve financial security. But the first step is learning to think long term, and avoiding obsessively following the markets daily ups and downs.

References:

  1. https://oshares.com/long-term-investors-have-almost-always-experienced-positive-returns/
  2. https://www.bankrate.com/investing/best-long-term-investments/

6 simple ways to take action in your financial life without hurting your long-term goals | Vanguard

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“It’s natural and human to feel like you need to take action and “do” something–anything–to stay in control and protect your financial interests.”

Scientific studies have shown that the human brain really likes to feel in control. We’re built to take action to protect ourselves and the people we love when signs point to trouble.

That’s why when markets become volatile, it’s natural and human to feel like you need to take action and “do” something–anything–to stay in control and protect your financial interests. You might feel anxious or worried. Don’t worry; you’re not alone in feeling that way.

Taking action during uncertain times may help you feel more confident about the way things will turn out. That said, if you feel like you need to make changes to your portfolio, it’s important to make sure that the action you take won’t put your long-term financial goals in jeopardy.

Here are some things you can do to feel in control without losing sight of the bigger picture:

Run some numbers

If you feel you have to do something, consider starting with your calculator. Numbers can give you a rational way of framing things that can settle some of those anxious feelings. For example, you can analyze how market conditions have affected your portfolio and compare it with the expectations you had based on your risk tolerance. Or compare your current asset mix with your target and rebalance if it differs by 5 percentage points or more.

Speak the language of action

Describing your strategy as “staying the course” or “doing nothing” may make you feel you’re not doing enough. Instead, describe what you’re doing as fighting the impulse to get out of the market or giving your portfolio an opportunity to rebound. You’re trusting your mix of assets to get you through market ups and downs, and that takes mental strength. Give yourself credit where it’s due.

Talk it over

Consider sharing your plan of action with others. Take a look at the Vanguard Blog for inspiration. When other people show support for what you’re doing and chime in that they’re doing it too, it can make you feel good about your choices. Helping others when they have questions can also go a long way toward building your confidence.

Take comfort in history

So far, every market downturn in history has been followed by a rebound. We don’t know when it will happen or how big it will be, but there’s good reason to believe that better times are ahead.

Think about what you can control

If you’re saving for retirement, you may be able to control how much you save or how long you can save (if you have a retirement date in mind). If you’re retired, you may be able to adjust the percentage of your portfolio you withdraw during a market downturn.

Your spending habits are within your control too. Of course, it’s probably not realistic to expect that you’ll start clipping coupons, switch to generic brands, and skip your afternoon coffee run all at once. Try cutting down your spending in just one area at a time to see what works best for your life.

We recognize that this is your portfolio, and you control your asset mix. We don’t recommend changing your asset mix in response to market movement, but if you’re determined to make a change to your portfolio, make it a small one. Some examples of small things you can do: Direct one of your stock funds’ investment earnings to a bond fund, or change the asset mix of a single account rather than your entire portfolio.

Lean in

Lean on personal financial advisors to provide you with the leadership you need to make it through uncertain times. Trusting a financial expert to bring order to a situation that feels out of control can help you ease anxious feelings.

Source: https://investornews.vanguard/6-simple-ways-to-take-action-in-your-financial-life-without-hurting-your-long-term-goals/?cmpgn=BR:OSM:OSMFB:OTHERS:072920:TXL:OTM:xx::OTHR:OTH:OTS:XXX::XX&sf235757186=1

Note: All investing is subject to risk, including possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

Financial Planning and Market Volatility

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“The first rule of investment is ‘buy low and sell high’, but many people fear to buy low because of the fear of the stock dropping even lower. Then you may ask: ‘When is the time to buy low?’ The answer is: When there is maximum pessimism.”  Sir John Templeton

Market volatility is a fundamental part of trading and investing. When market volatility strikes, it’s common for investors to succumb to temptation and follow the herd to panic sell stocks.

Financial Planning is About Long-Term Goals

“All financial success comes from acting on a plan. A lot of financial failures come from reacting to the market.” Nick Murray

Setting financial goals—and sticking with your plan—is key to potential long-term success. Rather than letting market volatility change your long-term financial plans, it is important to stay focused on your long term goals and disciplined in your investment philosophy.

“Your financial goals aren’t set in stone,” according to Mark Gleason, senior manager of investment products and guidance at TD Ameritrade. “Circumstances change, and what you want might change. When that happens, it does make sense to change your approach.”

“Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.” Peter Lynch

Just remember, the time to make adjustments to your long term financial plan are due to changes in life circumstances and should not be in response to market volatility. Here are four reasons to adjust your financial plan:

  1. Change in risk tolerance. If something has happened to change your risk tolerance, making tweaks to your financial plan can make sense. When a recent shakeup forces you to confront where you stand, it might be time to adjust your approach.
  2. New life events. Perhaps there’s been a death in the family. Or you’ve added a new baby to the mix. Maybe you’re getting married or going through a divorce. All of these life events can indicate a change in your financial planning approach.
  3. Shifting to a new life phase. Sometimes your approach needs to change as you actually start approaching your long-term financial goals. When you move from preretirement to actual retirement, your strategy is likely to change. Likewise, if you’ve been growing your child’s 529 and you’re worried about potential market volatility, you might make a few tweaks to the portfolio.
  4. Setting new financial goals. Most people set different financial goals as they move through life. Maybe you decide that buying a home isn’t the goal now; you’d rather get an RV and travel. Perhaps your target retirement age has changed. Whatever the new goal, you might need different financial planning in order to meet it.

Stay disciplined when investing.

Market volatility can cause discomfort, but it is important to realize that market volatility is short term and should not impact your long term goals and financial planning. You’ve set long-term financial goals designed to help you reach certain life milestones—and you don’t want to undo all your progress just to feel better during a market downturn.

“Why is staying the course so important?  As an extreme example, consider the investor who lost faith in the markets and cashed out on March 23, the low point in the U.S. stock market. Stocks subsequently rebounded more than 39% over the next three months; the unfortunate individual who moved to a money market fund earned a meager 0.14%. Vanguard’s analysis found that about 85% of investors who fled to cash would have been better off if they had just held their own portfolio.” (Source:  Vanguard, https://investornews.vanguard/a-snapshot-of-investor-behavior-during-a-downturn/)

Reference:

  1. https://tickertape.tdameritrade.com/investing/financial-planning-setting-financial-goals-amid-market-volatility-18160
  2. https://www.livewiremarkets.com/wires/ten-quotes-on-volatility-from-the-masters-of-the-market
  3. https://investornews.vanguard/a-snapshot-of-investor-behavior-during-a-downturn/

Creating a Comprehensive Financial Life Plan

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A Financial Life Plan can help you get on the path to financial freedom.

A comprehensive life financial plan provides a picture of your current finances, financial goals and any strategies you’ve set to achieve those goals. The plan should include details of your cash flow, savings, debt, investments, and other elements of your financial life.

Creating a life financial plan can help bring things into focus—it’s like a roadmap to help you figure out how to reach your financial goals. a clear picture of what you want to accomplish, but the details of how to make it happen.

Financial planning involves identifying financial goals you want to achieve and making sure you have the “what-ifs” covered. This can help guide you through key decisions in life and make you less vulnerable to setbacks and financial hardships down the line. You can feel more confident about financial decision-making when you have a comprehensive plan to guide you. Your financial plan might cover a number of areas, from managing debt and saving for the future to building wealth and protecting your money.

Financial Life Planning connects our financial realities with our values and the lives we dream to live. It helps both pre-retirees and retirees identify their core values and connect them with their financial decisions and life’s financial, health and emotional goals.

It is a financial planning and investing approach which helps people align their investment portfolio with their values and with the things which are important to them. Think of it like a holistic roadmap for your financial well-being.

Financial life plan focuses on the emotional side of financial planning. It considers people’s anxiety, habits, behaviors and other emotions (e.g., fear and greed) tied to investing money and accumulating wealth. People struggling with retirement and other finances really need a plan that helps them manage their attitudes, habits, behaviors, goals and resources.

“The right plan, executed faithfully, can be the difference between success and failure in any endeavor.” Brett N. Steenbarger, Ph.D., author of The Psychology of Trading

Whether you need to reduce spending and eliminate debt, increase your savings, or just refine the details, once you understand your financial mindset and associated behaviors; once you know where you are and where you need to go financially—a financial life plan can provide a more coherent sense of direction.

Market downturns and investment risk management

During periods of high market volatility and declines, financial life planning, when done correctly, assumes there will be these periods of volatility, panic selling and downturns like the equity markets are experiencing today as a result of COVID-19 pandemic. Any actions taken to significantly reduce or eliminate equity allocation could result in investors coming up short in retirement.

The risk of outliving their assets might be the biggest risk that retirees face today. With many of Americans living longer and the rising costs of healthcare in retirement, most retirees need a level of exposure to stocks in their portfolio for growth and to maintain their standard of living.

Steps to creating a Comprehensive Financial Life Plan

  1. Develop a Positive Financial Mindset
    The most important step in developing and following a financial life plan is to examine your mindset about money.
    – Are you ready to accept responsibility for changing your financial situation?
    – Do you believe that you can and will change the way you make financial decisions?
    – Can you identify at least one benefit you hope to gain by changing your financial behavior?
    Financial mindset consists of a predetermined set of beliefs, thoughts, habits and behaviors an individual has about saving by paying yourself first, investing for the long-term and accumulating wealth for financial well-being.
    Every person has a set of financial beliefs, thoughts, habits and behaviors about money and personal finance. Even if they can’t express what their thoughts and mindset are, they still exist both consciously and subconsciously. Just by observing your own financial reality and outcomes, you can begin to better understand your financial mindset, behaviors and habits.
    Thus, it becomes important to develop and nurture a positive financial mindset. Since, it is difficult to develop the good financial habits and behaviors that will be necessary to lead to an improved financial outcome and overall financial well-being without a positive financial mindset.
  2. Write down your goals
    One of the first things you should ask yourself is what you want your money to accomplish. Financial goals will differ in the length of time needed to achieve them. Be sure every goal has a specific purpose, a dollar amount that it will cost, and a realistic target date. Make sure your goals are realistic and not set too high, or frustration may keep you from reaching them.
    – What are your short-term needs? Short-term goals are priorities that can be accomplished within two years.
    – Mid-term goals are priorities that can be accomplished within two to five years.
    – What are you saving for long term? What do you want to accomplish in the next 5 to 10 years? Long-term financial goals are priorities that may take more than five years to accomplish. Most long-term goals require investing.
    It’s easy to talk about goals in general, but get really specific and write them down. Which goals are most important to you? Identifying, prioritizing and aligning your goals with your values, your goals will act as a motivator as you dig into your financial details.
  3. Create a net worth statement
    Achieving your goals requires understanding where you stand today. So start with what you have.
    – First, make a list of all your assets—things like bank and investment accounts, real estate and valuable personal property.
    – Now make a list of all your debts: mortgage, credit cards, student loans—everything.
    – Next, subtract your liabilities from your assets and you have your net worth.
    If you’re in the plus, great. If you’re in the minus, that’s not at all uncommon for those just starting out, but it does point out that you have some work to do. But whatever it is, you can use this number as a benchmark against which you can measure your progress.
  4. Know your cash flow
    Cash flow simply means money in (your income) and money out (your expenses). It will show you if you’re spending more or less than you earn.
    – How much money do you earn each month? Be sure to include all sources of income.
    – Now look at what you spend each month, including any expenses that may only come up once or twice a year. Do you consistently overspend? How much are you saving? Do you often have extra cash you could direct toward your goals?
  5. Your budget and manage your expenses
    “A budget is telling your money where to go instead of wondering where it went.” John C. Maxwell
    For most people, financial success depend solely on how much they spend. This, it is important to find out where your money is going. Your budget will let you know how you’re spending.
    – Write down your essential expenses such as mortgage, insurance, food, transportation, utilities and loan payments. Don’t forget irregular and periodic big-ticket items such as vehicle repair or replacement costs, out of pocket health care costs and real estate taxes.
    – Then write down nonessentials—restaurants, entertainment, even clothes.
    Does your income easily cover all of this? Are savings a part of your monthly budget? Examining your expenses helps you plan and budget when you’re building an emergency fund. It will also help you determine if what you’re spending money on lines up with what is most important to you.
  6. Start (or build up) your emergency fund.
    Building a strong financial foundation starts with saving for emergencies. When you have a safety net for unexpected expenses, you don’t have to worry about throwing your budget out of whack. You can be confident that you’re ready for a car breakdown, home repairs, medical expenses or other emergencies that pop up. It’s OK to start small—saving $50 in an account you’ve designated for emergencies is a good starting point. You might work up to saving $1,000 and then eventually aim to save enough to cover three to six months’ worth of living expenses in an emergency fund. An emergency fund is essential because you need to absorb life’s surprises without making things worse. Without a stash of cash, you may have to take on debt for unexpected car troubles or surprise medical expenses. And, the fund can be kept in a savings account kept separate from your regular checking account. It’s not an account that should be dipped into often — unless there’s an emergency.
    If you already have an emergency fund, consider giving it a boost. An emergency fund should consist of three to six months’ worth of expenses, which is a different different amount for everyone. If you don’t think you’d survive financially if you missed a paycheck, then your an ideal candidate for needing an emergency fund.
  7. Focus on debt management
    Debt can derail you, but not all debt is bad. Yet, freedom from debt is an achievable goal for everyone.
    Some debt, like a mortgage, can work in your favor provided that you’re not overextended. It’s high-interest consumer debt like credit cards that you want to avoid. Try to follow the 28/36 guideline suggesting no more than 28 percent of pre-tax income goes toward home debt, no more than 36 percent toward all debt. Look at each specific debt to decide when and how you’ll systematically pay it down. Do you know how much debt you currently have (credit cards, student loans, auto loans, mortgage, etc.) and how long it will take to pay off each debt at your current rate of payment? It’s important to make a long-term plan for debt repayment so you can focus your efforts on the most efficient ways to reduce your debt. This might include tackling high-interest rate debts first or loan consolidation. Create a running list of all your loan balances and interest rates so you can see where you stand today and identify ways to make a dent in your debt. For example, you might make extra payments on your loan with the highest interest rate. A financial advisor can help you review your debt and create a debt elimination plan. Use our Debt Roll-Down Calculator to find the best way to pay off your credit cards.
    If you’ve been struggling with old debt, such as credit cards, student loans or medical bills, now is the time to pay them off for good. If you’re not sure which debt to pay off first, consider the one with the highest interest. High-interest debt, like credit cards, can compound through hefty interest charges, late fees and other penalties. pay down the principal of your student loan. The sooner you pay it all off, the less burden you carry.
  8. Get your (retirement) savings and investing on track by paying yourself first
    Whatever your age, retirement saving needs to be part of your financial plan. The earlier you start, the less you’ll likely have to save each year. You might be surprised by just how much you’ll need—especially when you factor in healthcare costs. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference.
    Spending time today to plan your path to retirement can provide you peace of mind in the future. Getting started is the most important step you can take—it’s never too early or too late to save for retirement! The key is to continue saving consistently and make retirement savings a priority in your budget. Individual retirement accounts (IRAs) and employer-sponsored retirement plans, such as 401(k)s, offer tax benefits that can help your savings grow faster. As you near retirement, you’ll want to set a strategy for tapping retirement assets.
    Your financial plan should outline your retirement savings goals and ways to boost your savings (e.g., increasing your contributions every year or when you get a bonus or raise). Run the numbers using our Retirement Planner Calculator or review your retirement plans with a financial advisor.
    Calculate how much you will need and contribute to a 401(k) or other employer-sponsored plan (at least enough to capture an employer match) or an IRA. Save what you can and gradually try and increase your savings rate as your earnings increase. Whatever you do, don’t put it off.
    And, make the savings a priority by paying yourself first. This means that instead of saving what remains after paying your monthly expenses, individuals should pay themselves first by setting aside at least 10% to 15% of their monthly income as their first expense, and then pay the rest of their monthly expenses. Paying yourself means that your savings and other financial goals are taken care of before you allow yourself to spend money on less important items.
  9. College Savings.
    Parents and guardians face the challenge of balancing multiple financial demands, including your own retirement and future health care costs as well as education expenses for your dependents. Having a financial plan helps ensure you’re taking the right steps to address all areas of your financial life. Choosing the right college savings vehicle and planning ahead to take advantage of financial aid, loans and scholarships can help make college more affordable.
    Determine how much you want to save for college and the best way to grow your savings. Our College Savings Calculator can help you estimate how much you’ll need to save.
  10. Stay invested in the market for the long-term and check-in with your portfolio regularly.
    If you’re confident in your financial life plan and investment strategy, leaving your investments alone during short-term market corrections and Bear markets could help you accumulate wealth over the long-term and help ensure your retirement nest egg.
    When was the last time you took a close look at your portfolio? There are no guarantees when it comes to investing, but it seems that fear and uncertainty tends to put investors on the sidelines when markets plunge and become highly volatile.
    Markets go up and go down down in the short-term which can have a real effect on the relative percentage of stocks and bonds you own—even when you do nothing. And even an up market can throw your portfolio out of alignment with your feelings about risk. Don’t be complacent. Review and rebalance on at least an annual basis.
  11. Make sure you’re adequately insured
    Having adequate insurance is an important part of protecting your finances and family. Insurance is essential to protect your family and your financial future. Having health insurance, auto insurance and homeowners or renters insurance protects you when you need it. You may consider options for life and disability insurance, which can help protect your family’s finances if something happens to you. Review your insurance coverage and beneficiaries, especially if you’ve had any major changes in your family and life. A total risk assessment with an insurance professional can make sure you have the right level of coverage.
    We all need health insurance, and most of us also need car and homeowner’s or renter’s insurance. While you’re working, disability insurance helps protect your future earnings and ability to save. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Review your policies to make sure you have the right type and amount of coverage. You never know what the future may hold—but it helps to be prepared for anything. What if you or a loved one experienced major medical issues or needed assisted living or nursing home care? Making decisions about long-term care can be stressful and emotionally difficult, and the costs can drain your family’s finances.
    You may want to explore options for long-term care insurance to help pay for long-term care needs such as nursing home care. You may also decide to write an advance care directive regarding your wishes for medical care and name a power of attorney to make financial decisions on your behalf if you’re unable to do so.
  12. Know your income tax rate
    Taxes are one of the most insidious destroyers of wealth, along with debt. You should make sure you’re prepared for the annual tax season and review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information; take advantage of tax deferred accounts like IRAs and 401(k)s can help you save money on taxes and accumulate wealth more efficiently.
  13. Create or update your will and estate plan
    At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up-to-date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare. Medical directive forms are sometimes available online or from your doctor or hospital. Working with an estate planning attorney is recommended to help you plan for complex situations and if you need more help.
  14. Invest in yourself and continue to learn
    “An investment in knowledge pays the best interest.” Benjamin Franklin
    While college is a great self-investment, there are other ways you can invest in yourself. Consider taking courses in a field or industry you’re interested in pursuing.
    If you’ve been contemplating a career change, use your money to invest in that switch. If you need capital to start your own business, this could be your chance. Also consider using it to give yourself a much-needed break. Whether this is a vacation fund or simply money for a massage or spa day to recharge, reset and refocus. Focused on what would improve your well-being in the long-term, not a quick fix. Continuous learning and growth are the key.
  15. Three Pillars (financial wealth, physical health and emotional well-being)
    Financial assets like stocks, bonds and real estate are forms of personal wealth. However, Americans need to also focus their attention on staying emotionally and physically healthy. Self-care is paramount in all three facets of life which include financial wealth, physical health and emotional well-being. Eating a balanced diet, exercising, getting enough sleep and connecting regularly with family and friends, are essential to live a purposeful and fulfilling life.
  • Take control of your future with a financial plan for the next five, ten or more years.
  • Insurance Protection. Ensure you have adequate Medical insurance and consider purchasing Long-Term Care insurance.

References:

  1. https://www.brownleeglobal.com/financial-life-planning/?preview=true&frame-nonce=60592dd178
  2. https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan?SM=uro#sf228155652
  3. https://www.cnet.com/personal-finance/how-to-invest-your-tax-refund/
  4. https://www.moneymanagement.org/credit-counseling/resources/financial-literacy-month

Financial Literacy and COVID-19 | Charles Schwab Foundation

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“89 percent of respondents to a Charles Schwab’s survey believe a lack of financial literacy contributes to larger social issues—from poverty, to fewer job opportunities, to wealth and gender inequality.” Carrie Schwab-Pomerantz

  • Even in the wake of a global health crisis, Americans value financial education.
  • An overwhelming majority of Americans believe that a lack of financial literacy contributes to larger social issues.
  • Americans want our schools to take the lead in providing our youth with a financial education.

The impact of financial illiteracy is not lost on the American public. 89% of Americans agree that lack of financial education contributes to some of the biggest social issues our country faces, including poverty (58%), lack of job opportunities (53%), unemployment (53%), and wealth inequality (52%).

“Financial illiteracy is insidious. The antidote is financial education, which gives people the skills they need to make smart money decision and can help improve their lives.” Carrie Schwab-Pomerantz, president of Charles Schwab Foundation.

Americans indicated they wish they had better money management skills, according to a Charles Schwab survey. When asked what they would teach their younger selves about personal finance based on what they know today, Americans said the value of saving money (59%), basic money management (52%), and how to set financial goals and work toward them (51%).

From the survey, it is apparent that every person in America should be taught the fundamentals of money management including budgeting, saving, avoiding debt, setting financial goals and investing.

“The pandemic has underscored just how critical basic personal finance skills are in preparing for the unexpected. Financial literacy is a survival skill that everyone needs.” Carrie Schwab-Pomerantz

Carrie Schwab-Pomerantz recommends five key steps every American can take to help shore up their finances during this period of global health crisis and economic uncertainty.

  • Start an emergency fund (or add more to it) to help protect yourself against an unexpected drop in income or expense shock. Set aside whatever you can – every little bit counts. Try to aim for $1,000-$2,000 to get started, and then work your way up to 3-6 month worth of essential expenses over time.
  • Create a budget to help you prioritize and assess your financial resources. Self-isolation has led to different spending patterns for many people, including cutting back on what we may have previously thought of as “essential.”
  • Create a financial plan to help you navigate from where you are to where you want to be. You don’t need to have a lot of money to need a financial plan. Consider it a roadmap to reach your financial goals, whether that’s to pay off debt, build savings, or make a large purchase.
  • Ask for help if you’re struggling. Given the scale of this economic crisis, the government, lenders and creditors are trying to work with borrowers through this difficult time. Don’t hide from creditors – that can make things worse.
  • Focus on what you can control. You can’t predict or control the market, but you can control how you manage your investments, your savings rate, having a financial plan and how you react to events.

“The need for financial literacy is especially urgent for women and minorities, who continue to face unique challenges at home and in the workplace,” said Schwab-Pomerantz.

However, financial literacy isn’t a cure-all, but it is an essential key to unlocking doors to opportunity and financial security.

References:

  1. https://www.schwab.com/resource-center/insights/content/americans-want-financial-literacy-now?SM=URO#sf237483690
  2. https://pressroom.aboutschwab.com/press-releases/press-release/2020/Charles-Schwab-Financial-Literacy-Survey-Exposes-Grave-Impact-of-Lack-of-Financial-Education-During-COVID-19/default.aspx

Top Five Global Investment Risks In 2021 | Charles Schwab

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The top five global risks for investors in 2021 are all surprises to the consensus view:

  • Problems with the vaccine rollout,
  • Geopolitical and trade tensions do not subside,
  • Fiscal and/or monetary policy tightens,
  • A “zombie” economy, and
  • Interest rate/dollar shock.

History demonstrates that the biggest financial risks in a typical year aren’t usually from out of left field (although a black swan did occur in 2020 with the COVID-19 outbreak). Rather, they are often hiding in plain sight.

Risk appears when there is a very high degree of confidence among market participants in a specific outcome that doesn’t pan out. So, by identifying the unexpected, here are the top five downside global risks for investors in 2021. To read more: https://www.schwab.com/resource-center/insights/content/top-five-global-investment-risks-2021?cmp=em-QYD

Be prepared

Whether or not these particular risks come to pass, a new year almost always brings surprises of one form or another. Having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome are keys to successful investing.

References:

  1. https://www.schwab.com/resource-center/insights/content/top-five-global-investment-risks-2021?cmp=em-QYD

Trading vs. Investing

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Trading and investing are two approaches to participating in the stock market. Each approach brings its own opportunities and risks

  • Investing involves buying an asset you expect will rise in value over the long term, with the goal of long-term gains.
  • Trading, on the other hand, is about timing market short term moves and buying and selling stocks within a short period for quick returns.

With trading, you’re hoping to earn quick returns based on short-term fluctuations in the market and stock price. Long-term investors, in contrast, tend to build diversified portfolios of assets and stay in them for the long term through the ups and downs (volatility) of the market.

Investing basics

Investing is geared towards managing and growing wealth in the market over a longer period of time like years or even decades. This means buying securities with a long-term outlook in mind and holding them through both market ups and downs until you reach your financial goal or are near the end of your investment time horizon.

Investing involves putting money into a financial asset (stocks, bonds, mutual or exchange-traded fund, etc). that you expect will rise in value over time. Investors generally have a long time horizon and predominantly look to build wealth through gradual appreciation and compound interest.

Diversification (owning a mix of investments) is important for investors as it can reduce their risk — mainly by mitigating the effects of volatility.

Trading basics

Trading is all about making frequent, short-term transactions with the goal of “beating the market,” or generating greater returns than you’d expect to receive by buying and holding over a longer time frame.

Trading involves buying and selling stocks or other securities in a short period of time with the goal of making quick profits. While investors typically measure their time horizon in years, traders think in terms of weeks, days, or even minutes.  

Two of the most common forms of trading are day trading and swing trading. Day traders buy and sell a security within the same trading day; positions are never held overnight. Swing traders, on the other hand, buy assets that they expect will rise in value over a matter of days or weeks.

Trading can be a risky endeavor for the uneducated and unskilled trader. If a trade goes against you, you can lose a lot of money in a short period of time. If you have a low risk tolerance and want to avoid volatility, investing will be the way to go. But if you’re more of a risk-taker and would like the chance to earn bigger returns, trading could be appealing.

https://twitter.com/jrdorkin/status/1332382094048202753?s=21

Takeaway

Although the terms — trading and investing — are often used interchangeably: trading focuses on short-term buying and selling, while investing involves buying and holding securities for an extended period of time.

If you’re comfortable with the risks, trading a portion of your money can be rewarding and could lead to higher returns. If reducing risk and volatility are your main goals, then you’ll want to stick with long-term investing to build wealth.

References:

  1. https://www.ally.com/do-it-right/amp/investing/trading-vs-investing/?__twitter_impression=true
  2. https://www.businessinsider.com/trading-vs-investing

Becoming Financially Responsible | Vanguard

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  • Live within your means by earning more than you spend.
  • Prepare for both an income shock and a spending shock.
  • Build a strong credit history.
  • Continue to learn and grow your financial literacy muscle

Most people do fall somewhere on the spectrum of financial responsibility.

Keep income > spending

The math behind living within your means is simple: When you subtract what you spend from what you earn, the result should be positive. If it’s negative, you’re living beyond your means.

If you’re in the positive, keep it up. Try to save even more, if you can. If you’re in the negative, don’t panic. Take control:

  • Distinguish between your wants and needs. This may be easier said than done. If you don’t have easy access to another form of transportation, a car is a need. A nice car is a want.
  • Create a budget. Just having a general goal in mind for how much you can spend on certain expenses—food, entertainment, housing, transportation—over a certain time frame can help you make smarter spending decisions.
  • Avoid your spending triggers. Do your best to maintain your discipline, and try to resist temptation. If bargain shopping is your downfall, unsubscribe from promotional emails to reduce temptation. If you overfill your cart when you go to the grocery store before dinner, don’t shop on an empty stomach.

Prioritize your savings

Prepare for an emergency

Having emergency money means you’ll be less likely to need a loan from a friend, a family member, or an institution if your car breaks down or your roof leaks. Even if your emergency stash falls short, it can still lower the amount you have to borrow (and pay back, possibly with interest).

There are two types of emergencies you should prepare for: a spending shock and an income shock. A spending shock pertains to a onetime unexpected expense, such as paying for car repairs after an accident. An income shock represents a sudden loss of continuous income (for example, experiencing a layoff).

Getting started may feel daunting, but begin small and build your savings over time. We recommend setting aside at least $2,000 to prepare for a spending shock. Consider keeping this money in a low-risk investment like a money market fund. That way, your money will be easy to access and won’t change much in value over time.

For an income shock, aim to have at least 3 to 6 months of living expenses set aside. If you’re retired, try to have 12 months of living expenses saved. Don’t be afraid to start small and work your way up: Tally your unavoidable living expenses for one month. Divide the amount by 12. Save that amount each month. When you reach that savings goal in one year, do it again until you have a few months of savings to fall back on.

It is recommended to save money for an income shock in an easily accessible account like a taxable money market account.

Get ready for retirement

You’re responsible for your retirement savings. The details of your retirement—the age at which you stop working, where you live, and how—are up to you.

Here are the top 3 things you can do to prepare for retirement:

  • Enroll in your employer’s retirement plan if one is offered. (If you don’t have a retirement plan benefit, you still have options, such as an IRA.) 
  • Save, or work toward saving, 12%–15% of your gross (pre-tax) annual income, including any employer contributions.
  • Invest your savings in a diversified, low-cost portfolio that complements your time frame and risk tolerance.

You’ll need to consider your monthly expenses when you retire. Most of them will most likely stay the same, but you may need to review new items in your budget (such as Medigap or long-term care insurance) as well as expenses you’ll no longer need to consider (such as payroll taxes, clothes, and gas for work). You’ll also need to determine your monthly income from Social Security, pensions, or any other part-time work or passive income that you may be expecting in retirement.

Give yourself credit

Your credit history refers to how you use money. Your credit report is a record of money-related activity (balances, charges, and payment history) on credit cards, some bills (such as utility bills), and loans associated with your name and Social Security number. A credit score is a number based on your credit report giving potential lenders a sense of how you handle debt payments and bills.

You need to establish a credit history to get credit. If you don’t have a credit history, it can be hard to get a job, a credit card, an auto loan, an apartment lease, or a mortgage. Before a potential employer, lender, or landlord takes on the risk of giving you something, they want to see evidence you can handle it. In the eyes of a potential lender, your credit report and credit score are good measures of how financially responsible you are. Having a strong credit history and a high credit score can also lower your cost to borrow by qualifying you for a lower interest rate.

For example, if you have excellent credit and qualify for a $20,000 auto loan with a 1.5% interest rate for 5 years, you’ll pay about $772 in interest over the course of the loan. If you have fair credit and qualify for a loan with a 3.5% interest rate for 5 years, you’ll pay over $1,800 in interest—a difference of over $1,000 that you could’ve saved or invested.

Review your credit report for accuracy each year. You’re entitled to a free copy of your credit report once a year, but there may be a charge for getting your credit score.

It’s go time

Smart money management skills can take time to develop. Start by holding yourself accountable for the financial decisions you make. You have a lot to gain by spending less than you earn, preparing for an emergency, taking control of your credit, and saving for retirement. But if you don’t take steps to be financially responsible, you also have a lot to lose.

References:

  1. https://investornews.vanguard/becoming-financially-responsible/