Tag Archives: Retirement

Retirement Readiness and Cash Flow

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Building wealth is essential to accomplish a variety of goals like retiring in lifestyle you desire.

Retirement Comes First

It can be tempting to put your saving and investing for retirement on the back burner by paying for your child’s college education, helping your adult children with living expenses, or paying for a wedding. But it is incredibly important that you prioritize and put your retirement savings first. While loans are available for things like college education and home improvement, there are no loans or money growing on trees to finance your long-term retirement.

Dipping into your retirement tax deferred accounts can be equally tempting — such as cashing out your 401(k) when you leave a job or tapping it if you’re strapped for funds. You might also think about withdrawing funds as soon as the early withdrawal penalty disappears at age 59½.

Think twice! Even without early withdrawal penalties, federal and state income taxes can eat up a big chunk of what you withdraw, and you will lose all the possible growth of that money over the long term.

When you retire matters

Make sure you, your partner and your adult children are on the same page regarding your retirement timing and your financial planning. Sit down and have a conversation with your family about your changing priorities and goals as you near retirement.

“During Americans early years in retirement, many retirees end up spending as much as or more than they did when they were working,” says Jennipher Lommen, a certified financial planner in Santa Cruz, Calif. And, when and at what age you decide to retire matters greatly. If you retire before age 65, you’ll need to pay more for your health care before you’re eligible for Medicare benefits.

What is your retirement number

When it comes to retirement, it’s what you spend and your cash flow that matters most. Base your retirement needs and number on 100% of your pre-retirement expenses — plus 10%.

A rule of thumb to retirement savings states that you’ll need to save about 20x your gross annual income to retire. In other words, if you earn $50,000 per year, you’ll need $1,000,000 to retire. This is a good rule of thumb, however, it is expenses are what matter.

To come up with your own number for income (or cash flow requirement to cover your expenses) during retirement, you need to figure out how much you’ll actually spend in retirement, which means coming up with a comprehensive retirement budget. Only then can you determine whether your savings, pensions and other sources of retirement income are sufficient to finance the lifestyle you’ve envision.

The wealthy, according to Thomas J. Stanley, author of the best selling book, “The Millionaire Next Door,” have several financial habits in common when it comes to spending, saving, investing and accumulating wealth. One key commonality: They started early saving, investing and building wealth when they were young.

Give some serious thought to how you’ll spend your time—and money—once you stop working. The first few years of retirement are often referred to as the “go-go years”. It’s the period when many retirees are still in relatively good health and eager to do all of the activities they didn’t have time to do when they were working.

Retirees “always spend more on travel and entertainment than they thought or projected that they would,” says Jorie Johnson, a CFP in Brielle, N.J.

Creating a budget and sticking to it positions you for success since it creates a job for your dollars. “A common misconception is that budgeting is only for people who are struggling to make ends meet,” says James Kinney, a CFP in Bridgewater, N.J. “A household will feel wealthier and be better able to achieve its goals if it plans and monitors spending.”

If the word budget turns you off, “think of it as a spending plan,” says Lauren Zangardi Haynes, a CFP in Richmond, Va. “You choose where to allocate your monthly spending in line with what’s important to you.”

Get Organized

It’s not unusual for one partner to take sole responsibility for managing finances. However, when you’re married, planning your retirement needs to be a dual effort. Make sure each person is aware of financial plans and cash flow requirements, since both will be affected by the decisions that have been made.

It’s essential to organize your financial records. Work together with your spouse to gather records for each: bank account, credit card, retirement account, insurance policy, loan, mortgage, or other property (like cars). By the end of this exercise, you should both understand what assets you have and what debts you owe.

Many assets — like retirement plans, banking accounts, investment accounts, and insurance proceeds — let you name a beneficiary who will immediately become the owner of that asset when you pass away. The more assets you can transfer to beneficiaries, the fewer assets you’ll need to send through probate*, and the more effectively you can care for your life partner and family in the event of your or your spouse’s unexpected death.

But for all of this to work, you must make sure that your beneficiary designations are up to date. Assets that transfer directly to a beneficiary when you die are said to “pass outside” or “pass over” your Will.

Update your beneficiary designations:

  1. Go to your bank and ask to set up a POD, or Payable-On-Death, designation for any accounts that are held solely in your name. Joint accounts will automatically pass to the survivor listed on the account.
  2. Check the beneficiary designation for any of your retirement accounts.
  3. Do it today

Your vision for retirement is unique to you and your spouse.  The role of money in retirement is to provide security and freedom. Over half of retirees wish they had budgeted more for unexpected expenses, according to Edward Jones. So, don’t delay and start planning and preparing for retirement today.

References:

  1. https://www.kiplinger.com/slideshow/retirement/t047-s002-make-sure-you-have-enough-money-in-retirement/index.html
  2. https://www.kiplinger.com/slideshow/saving/t037-s003-money-smart-ways-to-build-your-wealth/index.html
  3. https://www.edwardjones.com/us-en/market-news-insights/retirement/new-retirement

Saving for the Future

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“Don’t just save money, save for your future and with purpose.” America Saves

Many Americans spend more than they save, and nearly one in five people are saving less than 5 percent of their income according to a Bankrate’s 2015 Financial Security Index survey.

Saving money isn’t the easiest thing to do, especially if you’re one of the many of Americans living paycheck to paycheck. Yet, saving for the future remains a vitally important endeavor — not just to enable you to make large discretionary purchases such as a big screen television or a luxury vacation, but for emergencies, living a life of dignity in retirement, or buying a home.

Many Americans have more month left than money

And, unfortunately, many Americans aren’t where they should be financially. A 2019 Charles Schwab Modern Wealth survey found that about 59 percent of American adults are living paycheck to paycheck.

If you’re having a hard enough time paying the bills and making rent payments without racking up debt, saving for the future is probably the last thing on your mind. Only 38% of people have an emergency fund, according to Charles Schwab, and one in five Americans don’t have a dime saved for retirement, according to a survey from Northwestern Mutual.

Building a “cash cushion” is an important step towards financial freedom. A cash cushion, or emergency fund, is essential if you want enough cash on hand to cover three to six months’ essential expenses.

A well-rounded savings strategy should focus on both short-term and long-term goals, says personal financial expert, Carrie Schwab-Pomerantz CFP®. And, if you can make moves to save extra dollars, they should be used in two ways: to pay off debt (credit cards and student loans) and to save.

The first step is to set a clear savings goal. Having this savings goal will help you when it comes to setting aside a specific amount every month or year in order to reach that milestone. Whatever your goal, the amount you set aside to get started does not have to be large. To jump-start your savings, consider automating your accounts to transfer the budgeted amount to your savings each month.

“Save and invest too little, and you might not be able to retire. Save and invest too much, and you may decide to retire early.” Vanguard Investments

Once you’ve set your savings goals, it’s time to start saving. Here are seven tips for saving:

  1. Make savings a priority. Each time you’re paid, put a portion of it toward savings. Saving money is a good habit no matter how much or how little you put away each month.
  2. Pay yourself first. Think of saving as paying yourself. In other words, before you spend your first dollar on monthly expenses, first you should set aside 10% to 15% of income for your savings.
  3. Automate your savings. Most financial institutions allow you to automatically transfer funds online or via mobile apps from checking to savings accounts.
  4. An emergency fund is a must. You will need an emergency fund somewhere in the ballpark of three to six months of your income. According to America Saves, and their motto ‘Start Small. Think Big’, they recommend starting with an emergency fund savings goal of just $500. 
  5. Find money to save. Keep track of everything you spend for a week – you’ll be surprised where the money goes. Adjust your spending habits a little and suddenly, you’re saving. And, don’t simply spend less. Save with a purpose, such as college expenses, retirement, or for emergencies.
  6. Keep the change. Some supermarkets have machines that count your coins and give you cash in exchange for a small fee. Gather up your spare change, pour it into the kiosk and see how much your coins add up to. Instead of spending it right away, consider diverting your newfound funds to savings.
  7. Cancel extra costs. Check to see if you have any old subscriptions that you’re not using anymore – whether it’s to a gym, magazine, or streaming service that you no longer use. Many services that you may no longer want could cost you hundreds of dollars per year.

Compound Interest

Interest can build your wealth for you. For example, if you deposit $100 in a savings account that offers 6 percent interest, by the end of the year your savings will have grown to $106. Compound interest can enhance these savings even more by earning interest on interest. With compound interest, the $106 you have after the first year would earn 6 percent again the next year: $6.36, or a 36-cent increase. Add that to the total, and you would have $112.36. If you leave your money in a 6 percent interest account for 40 years, you’ll have $1,028, over ten times the original amount.

The Rule of 72

Want to double your money? Use the “Rule of 72” mathematical formula to find out how long it will take to grow your money. First, divide 72 by your account’s fixed annual interest rate. For example, if your rate is 6 percent, divide 72 by 6. At that rate, it will take 12 years to double your savings. When you think about your financial goals, the Rule of 72 can make a positive impact on your savings over time by helping you make informed decisions.

Micro-saving

There’s a way to effortlessly save money, and turn tiny amounts into big savings.

Micro-saving is the process of regularly saving small amounts of money over time, and it’s something you can do nearly every day. You don’t have to earn a huge income to grow your savings, and better yet, it’s never too late to start.

There are many ways to micro-save — some simpler than others like “rounding up” and saving cashback rewards. These methods requires you to consistently transfer any redeemed cashback rewards from credit cards to a savings account — instead of opting for a gift card.

Perhaps the easiest micro-saving method of them all is via electronic automation. Several apps, like Digit and Acorns, make it foolproof to save spare change, but they charge fees.

Key Point

Starting small and starting now can make savings add up faster than you’d think.

The easiest way to save is to save automatically! Contact your employer to set up a direct deposit into savings each pay period or ask your bank to set up an automatic transfer from your checkings to your savings.

References:

  1. https://www.bustle.com/life/3-women-share-how-theyre-saving-for-their-big-life-goals
  2. https://money.cnn.com/2015/03/30/pf/income-saving-habits/
  3. https://content.schwab.com/web/retail/public/about-schwab/Charles-Schwab-2019-Modern-Wealth-Survey-findings-0519-9JBP.pdf
  4. https://news.northwesternmutual.com/2018-05-08-1-In-3-Americans-Have-Less-Than-5-000-In-Retirement-Savings
  5. https://www.practicalmoneyskills.com/learn/saving/growing_your_money
  6. https://communities.usaa.com/t5/Your-Future/The-Magic-of-Micro-Saving/ba-p/201610

Financial Planning 12 Step Process

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A financial plan creates a roadmap for your money and helps you achieve your financial goals.

The purpose of financial planning is to help you achieve short- and long-term financial goals like creating an emergency fund and achieving financial freedom, respectively. A financial plan is a customized roadmap to maximize your existing financial resources and ensures that adequate insurance and legal documents are in place to protect you and your family in case of a crisis. For example, you collect financial information and create short- and long-term priorities and goals in order to choose the most suitable investment solutions for those goals.

Although financial planning generally targets higher-net-worth clients, options also are available for economically vulnerable families. For example, the Foundation for Financial Planning connects over 15,000 volunteer planners with underserved clients to help struggling families take control of their financial lives free of charge.

Research has shown that a strong correlation exist between financial planning and wealth aggregation. People who plan their financial futures are more likely to accumulate wealth and invest in stocks or other high-return financial assets.

When you start financial planning, you usually begin with your life or financial priorities, goals or the problems you are trying to solve. Financial planning allows you to take a deep look at your financial wellbeing. It’s a bit like getting a comprehensive physical for your finances.

You will review some financial vital signs—key indicators of your financial health—and then take a careful look at key planning areas to make sure some common mistakes don’t trip you up.

Structure is the key to growth. Without a solid foundation — and a road map for the future — it’s easy to spin your wheels and float through life without making any headway. Good planning allows you to prioritize your time and measure the progress you’ve made.

That’s especially true for your finances. A financial plan is a document that helps you get a snapshot of your current financial position, helps you get a sense of where you are heading, and helps you track your monetary goals to measure your progress towards financial freedom. A good financial plan allows you to grow and improve your standing to focus on achieving your goals. As long as your plan is solid, your money can do the work for you.

A financial plan is a comprehensive roadmap of your current finances, your financial goals and the strategies you’ve established to achieve those goals. It is an ongoing process to help you make sensible decisions about money, and it starts with helping you articulate the things that are important to you. These can sometimes be aspirations or material things, but often they are about you achieving financial freedom and peace of mind.

Good financial planning should include details about your cash flow, net worth, debt, investments, insurance and any other elements of your financial life.

Financial planning is about three key things:

  • Determining where you stand financially,
  • Articulating your personal financial goals, and
  • Creating a comprehensive plan to reach those goals.
  • It’s that easy!

Creating a roadmap for your financial future is for everyone. Before you make any investing decision, sit down and take an honest look at your entire financial situation — especially if you’ve never made a financial plan before.

The first step to successful investing is figuring out your goals and risk tolerance – either on your own or with the help of a financial professional.

There is no guarantee that you’ll make money from your investments. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the years and enjoy the benefits of managing your money.

12 Steps to a DIY Financial Plan

It’s not the just the race car that wins the race; it also the driver. An individual must get one’s financial mindset correct before they can succeed and win the race. You are the root of your success. It requires:

  • Right vehicle at the right time
  • Right (general and specific) knowledge, skills and experience
  • Right you…the mindset, character and habit

Never give up…correct and continue.

Effectively, the first step to financial planning and the most important aspect of your financial life, beyond your level of income, budget and investment strategy, begins with your financial mindset and behavior. Without the right mindset around your financial well-being, no amount of planning or execution can improve your current financial situation. Whether you’re having financial difficulty, just setting goals or only mapping out a plan, getting yourself mindset right is your first crucial step.

Knowing your impulsive vices and creating a plan to reduce them in a healthy way while still rewarding yourself occasionally is a crucial part of a positive financial mindset. While you can’t control certain things like when the market takes a downward turn, you can control your mindset, behavior and the strategies you trust to make the best decisions for your future. It’s especially important to stay the course and maintain your focus on the positive outcomes of your goals in the beginning of your financial journey.

Remember that financial freedom is achieved through your own mindset and your commitment to accountability with your progress and goals.

“The first step is to know exactly what your problem, goal or desire is. If you’re not clear about this, then write it down, and then rewrite it until the words express precisely what you are after.” W. Clement Stone

1. Write down your goals—In order to find success, you first have to define what that looks like for you. Many great achievements begin as far-off goals, that seem impossible until it’s done. Though you may not absolutely need a goal to succeed, research still shows that those who set goals are 10 times more successful than those without goals. By setting SMART financial goals (specific, measurable, achievable, relevant, and time-bound), you can put your money to work towards your future. Think about what you ultimately want to do with your money — do you want to pay off loans? What about buying a rental property? Or are you aiming to retire before 50? So that’s the first thing you should ask yourself. What are your short-term needs? What do you want to accomplish in the next 5 to 10 years? What are you saving for long term? 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 and prioritizing your values and goals will act as a motivator as you dig into your financial details. Setting concrete goals may keep you motivated and accountable, so you spend less money and stick to your budget. Reminding yourself of your monetary goals may help you make smarter short-term decisions about spending and help to invest in your long-term goals. When you understand how your goal relates to what you truly value, you can use these values to strengthen your motivation. Standford Psychologist Kelly McGonigal recommends these questions to get connected with your ideal self:

  • What do you want to experience more of in your life, and what could you do to invite that/create that?
  • How do you want to be in the most important relationships or roles in your life? What would that look like, in practice?
  • What do you want to offer the world? Where can you begin?
  • How do you want to grow in the next year?
  • Where would you like to be in ten years?

Writing your goals out means you’ll be anywhere from 1.2 to 1.4 times more likely to fulfill them. Experts theorize this is because writing your goals down helps you to choose more specific goals, imagine and anticipate hurdles, and helps cement them in your mind.

2. Create a net worth statement—To create a successful plan, you first need to understand where you’re starting so you can candidly address any weak points and create specific goals. 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. Subtract your liabilities from your assets and you have your net worth. Your ratio of assets to liabilities may change over time — especially if you pay off debt and put money into savings accounts. Generally, a positive net worth (your assets being greater than your liabilities) is a monetary health signal. 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.

3. Review your cash flow—Cash flow simply means money in (your income) and money out (your expenses). 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?

4. Zero in on your budget—Your cash-flow analysis will let you know what you’re spending. Zeroing in on 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 and spending 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 aligns with your values and what is most important to you.  An excellent method of budgeting is the 50/30/20 rule. To use this rule, you divide your after-tax income into three categories:

  • Essentials (50 percent)
  • Wants (30 percent)
  • Savings (20 percent)

The 50/30/20 rule is a great and simple way to achieve your financial goals. With this rule, you can incorporate your goals into your budget to stay on track for monetary success.

5. Create an Emergency Fund–Did you know that four in 10 adults wouldn’t be able to cover an unexpected $400 expense, according to U.S. Federal Reserve? With so many people living paycheck to paycheck without any savings, unexpected expenses might seriously throw off someone’s life if they aren’t prepared for the emergency. It’s important to save money during the good times to account for the bad ones. This rings especially true these days, where so many people are facing unexpected monetary challenges. Keep 12 months of essential expenses as Emergency Fund or a rainy day fund.  If you or your family members have a medical history, you may add 5%-10% extra for medical emergencies (taking cognizance of the health insurance cover) to the amount calculated using the above formula. An Emergency Fund is a must for any household. Park the amount set aside for contingencies in a separate saving bank account, term deposit, and/or a Liquid Fund.

6. Focus on debt management—Debt can derail you, but not all debt is bad. 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. Don’t go overboard when taking out a home loan. It can be frustrating to allocate your hard-earned money towards savings and paying off debt, but prioritizing these payments can set you up for success in the long run. But, as a rule of thumb, the value of the house should not exceed 2 or 3 times your family’s annual income when buying on a home loan and the price of your car should not exceed 50% of annual income. 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. This is called the debt-to-income ratio. If you stick to this ratio, it will be easier to service your loans/debt. Borrow only as much as you can comfortably repay. If you have multiple loans, it is advisable to consolidate all loans into a single loan, that has the lowest interest rate and repay it regularly.

“Before you pay the government, before you pay taxes, before you pay your bills, before you pay anyone, the first person that gets paid is you.” David Bach

7. Get your retirement savings on track—Whatever your age, retirement planning is an essential financial goal and retirement saving needs to be part of your financial plan. Although retirement may feel a world away, planning for it now is the difference between a prosperous retirement income and just scraping by. 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. To build a retirement nest egg, aim to create at least 20 times your Gross Total Income at the time of your retirement. This is necessary to keep up with inflation. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference thanks to the power of compounding interest. Do not ignore ‘Rule of 72’ – As per this rule, the number 72 is divided by the annual rate of return on investment to determine the time it may take to double the money invested. There are several types of retirement savings, the most common being an IRA, a Roth IRA, and a 401(k):

  • IRA: An IRA is an individual retirement account that you personally open and fund with no tie to an employer. The money you put into this type of retirement account is tax-deductible. It’s important to note that this is tax-deferred, meaning you will be taxed at the time of withdrawal.
  • Roth IRA: A Roth IRA is also an individual retirement account opened and funded by you. However, with a Roth IRA, you are taxed on the money you put in now — meaning that you won’t be taxed at the time of withdrawal.
  • 401(k): A 401(k) is a retirement account offered by a company to its employees. Depending on your employer, with a 401(k), you can choose to make pre-tax or post-tax (Roth 401(k)) contributions. 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.

Ideally, you should save 15% to 30% from your net take-home pay each month, before you pay for your expenses. This money should be invested in assets such as stocks, bonds and real estate to fulfil your envisioned financial goals. If you cannot save 15% to 30%, save what you can and gradually try and increase your savings rate as your earnings increase. Whatever you do, don’t put it off.

After retiring, follow the ‘80% of the income rule’. As per this rule, from your investments and/or any other income-generating activity, you need to generate at least 80% of the income you had while working. This will ensure that you can take care of your post-retirement expenses and maintain a comfortable standard of living. So make sure to invest in productive assets.

8. Check in with your portfolio—If you’re an investor, when was the last time you took a close look at your portfolio? If you’re not an investor, To start investing, you should first figure out the initial amount you want to deposit. No matter if you invest $50 or $5,000, putting your money into investments now is a great way to plan for financial success later on. Market ups and downs 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. As a rule of thumb, your equity allocation should be 100 minus your current age – Many factors determine asset allocation, such as age, income, risk profile, nature and time horizon for your goals, etc. But you could broadly follow the formula: 100 minus your current age as the ratio to invest in equity, with the rest going to debt. And, never invest in assets you do not understand well.

  • Good health is your greatest need. Without good health, you can’t enjoy anything else in life.

9. Make sure you have the right insurance—As your wealth grows over time, you should start thinking about ways to protect it in case of an emergency. Although insurance may not be as exciting as investing, it’s just as important. Insuring your assets is more of a defensive financial move than an offensive one. Having adequate insurance is an important part of protecting your finances. 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. Have 10 to 15 times of annual income as life insurance – If you are the bread earner of your family, you should have a tem life insurance coverage of around 10 to 15 times your annual income and outstanding liabilities. No compromise should be made in this regard. Review your policies to make sure you have the right type and amount of coverage. Here are some of the most important ones to get when planning for your financial future.

  • Life insurance: Life insurance goes hand in hand with estate planning to provide your beneficiaries with the necessary funds after your passing.
  • Homeowners insurance: As a homeowner, it’s crucial to protect your home against disasters or crime. Many people’s homes are the most valuable asset they own, so it makes sense to pay a premium to ensure it is protected.
  • Health insurance: Health insurance is protection for your most important asset: Your health and life. Health insurance covers your medical expenses for you to get the care you need.
  • Auto insurance: Auto insurance protects you from costs incurred due to theft or damage to your car.
  • Disability insurance: Disability insurance is a reimbursement of lost income due to an injury or illness that prevented you from working.

10. Know your income tax situation—Taxes can be a drag, but understanding how they work can make all the difference for your long-term financial goals. While taxes are a given, you might be able to reduce the burden by being efficient with your tax planning. Tax legislation tend to change a number of deductions, credits and tax rates. Don’t be caught by surprise when you file your last year’s taxes. To make sure you’re prepared for the tax season, review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information at https://www.irs.gov/tax-reform. Taking advantage of tax sheltered accounts like IRAs and 401(k)s can help you save money on taxes. You may also want to check in with your tax accountant for specific tax advice.

11. Create or update your estate plan—Thinking about estate planning is important to outline what happens to your assets when you’re gone. To create an estate plan, you should list your assets, write your will, and determine who will have access to the information. 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.

12. Review Your Plans Regularly–Figuring out how to create a financial plan isn’t a one-time thing. Your goals (and your financial standing) aren’t stagnant, so your plan shouldn’t be either. It’s essential to reevaluate your plan periodically and adjust your goals to continue setting yourself up for success. As you progress in your career, you may want to take a more aggressive approach to your retirement plan or insurance. For example, a young 20-something in their first few years of work likely has less money to put into their retirement and savings accounts than a person in their mid-30s who has an established career. Staying updated with your financial plan also ensures that you hold yourself accountable to your goals. Over time, it may become easy to skip one payment here or there, but having concrete metrics might give you the push you need for achieving a future of financial literacy. After you figure out how to create a monetary plan, it’s good practice to review it around once a year.

Additionally, take into account factors such as the following:

  • The number of years left before you retire
  • Your life expectancy (an estimate, based on your family’s medical history)
  • Your current basic monthly expenditure
  • Your existing assets and liabilities
  • Contingency reserve, if any
  • Your risk appetite
  • Whether you have adequate health insurance
  • Whether you have provided for other life goals
  • Inflation growth rate

A financial plan isn’t a static document to sit on — it’s a tool to manage your money, track your progress, and one you should adjust as your life evolves. It’s helpful to reevaluate your financial plan after major life milestones, like getting m arried, starting a new job or retiring, having a child or losing a loved one.

Financial planning is a great strategy for everyone — whether you’re a budding millionaire or still in college, creating a plan now can help you get ahead in the long run, especially if you want to make a roadmap to a successful future.

For additional financial planning resources to create your own financial plan, go to the MoneySense complete financial plan kit.

References:

  1. https://www.pewtrusts.org/en/research-and-analysis/articles/2017/04/06/can-economically-vulnerable-americans-benefit-from-financial-capability-services
  2. https://www.forbes.com/sites/forbesfinancecouncil/2020/05/26/your-mindset-is-everything-when-it-comes-to-your-finances/?sh=22f5cb394818
  3. https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan
  4. https://www.principal.com/individuals/build-your-knowledge/build-your-own-financial-plan-step-step-Guide
  5. https://mint.intuit.com/blog/planning/how-to-make-a-financial-plan/
  6. https://www.federalreserve.gov/publications/files/2017-report-economic-well-being-us-households-201805.pdf
  7. https://news.stanford.edu/news/2015/january/resolutions-succeed-mcgonigal-010615.html
  8. https://www.investec.com/content/dam/united-kingdom/downloads-and-documents/wealth-investment/for-myself/brochures/financial-planning-explained-investec-wealth-investment.pdf
  9. https://www.sec.gov/investor/pubs/tenthingstoconsider.html
  10. https://www.nerdwallet.com/article/investing/what-is-a-financial-plan
  11. https://www.axisbank.com/progress-with-us/money-matters/save-invest/10-rules-of-thumb-for-financial-planning-and-wellbeing
  12. https://twocents.lifehacker.com/10-good-financial-rules-of-thumb-1668183707

 

Tax Savings in Retirement

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Tax planning keeps more money in your pocket in retirement.

In retirement, one of your top financial planning priorities is to maintain steady cash flow. One means to achieve steady cash flow is to pay as few taxes as legally possible in retirement. It’s important for you to think about how your retirement planning and cash flow are affected by taxes — both now and by potential increases in the future.

Taxes can be a burden for people on fixed incomes. These include federal, state and local income taxes and property taxes. Long-term tax planning is one of the best things you can do to boost your income and cash flow in retirement, however, it’s often overlooked. One way to change that is when your thinking about tax planning in retirement, you choose to think of it as tax saving instead.

Tax planning is one of the best things you can do to keep more money in your pocket in retirement.  And, you don’t need to be a tax guru to save money on taxes. The truth is that you have the power to lower your taxable income.

The good news is that most states offer some form of tax relief for retirees, whether through levying no tax on sales, income, Social Security or some combination. You might even qualify for a property tax exemption, depending on your age, income and where you live. But since these benefits vary depending on your location, it’s important to make a plan now to avoid an unforeseen tax liability later.

While everyone’s tax situation is different, there are certain steps most taxpayers can take to lower their taxable income.

Save for retirement

Starting small and starting now can make savings add up faster than you’d think.

Contributions to a company sponsored 401(k) or an Individual Retirement Account (IRA) can be a great way to lower your tax bill. The two most popular IRAs are Traditional and Roth, and the difference between them is when your contributions are taxed.

Company sponsored 401(k) plans are the most popular option, since many employers often match employee contributions to their 401(k) plans. Experts recommend contributing either the full amount allowed, annually ($19,500 for 2020 or $26,000 for taxpayers 50 and over), or – at least – the maximum amount that will be matched by your employer.

Traditional IRAs are usually pre-tax contributions, meaning your contributions are placed in your IRA before being taxed, lowering your taxable income for the current tax year. You won’t pay taxes on your contributions until you withdrawal the money.

Roth IRA or Roth 401(k) are tax-exempt accounts which offer tax advantages in the future. Your money is taxed before you contribute to the account, but you can withdraw it tax-free in retirement. Thanks to historically low tax environment right now, many Americans are converting traditional IRAs to Roth IRAs. You’ll pay taxes when converting to a Roth, which is why it may be wise to do a partial conversion. This way you’re only moving as much money as you’re able to pay taxes on this year and moving more money next year.

Contribute to your HSA

Pre-tax contributions to Health Savings Accounts (HSA’s) also reduce your taxable income. The IRS allows you to make HSA contributions until the tax deadline and apply the deductions to the current tax year. This means you can continue lowering your tax bill, even after December 31.

Setup a college savings fund for your kids

Originally created to help families save for college tuition, 529 plans were expanded by the Tax Cuts and Jobs Act of 2017 to cover savings for K-12 public, private, and religious school tuition. You can use up to $10,000 of 529 plan funds per year, per student, to pay qualified educational expenses.

  • The contributions you make to a 529 plan are not tax-deductible at the federal level, but part or all of them may be tax-deductible at the state level (the rules vary by state).
  • The earnings from a 529 account are not subject to federal tax, and the distributions are not taxed as long as they are used to pay for qualified educational expenses for the student named as the beneficiary of the plan.
  • Another option under the 529 program is use a pre-paid college tuition plan for a qualified in-state public institution. This allows you to lock in current tuition rates no matter how old your child is.

Make charitable contributions

Making charitable contributions is another great way to reduce your tax bill. Donating cash, toys, household items, appreciated stocks and your volunteer efforts to qualifying charitable organizations can provide big tax savings.

  • Time spent volunteering isn’t tax deductible, but expenses incurred while doing volunteer work may be deductible, such as the cost of ingredients for a donated dish and certain travel expenses when attending a charitable event (14 cents per mile in 2020.)
  • Your donations are only tax deductible if the organization you’re donating to is a qualified nonprofit organization.
  • You must itemize your tax deductions in order for charitable contributions to lower your tax bill.

Except that for 2020 you can deduct up to $300 per tax return of qualified cash contributions if you take the standard deduction. For 2021, this amount is up to $600 per tax return for those filing married filing jointly and $300 for other filing statuses.

Harvest investment losses

Taxable accounts include your brokerage and savings accounts. You are taxed on the interest you earn and on any dividends or gains. Investment accounts are an important part of your overall financial plan, especially during your working years as you grow and accumulate your savings for retirement.

Reporting losses on capital investments can also reduce your tax bill. “Loss harvesting” is considered to be a key year-end strategy. This is when you sell your investments to “realize” a loss(the act of selling at a loss). These losses can be used to offset capital gains taxes, dollar for dollar, reducing your overall tax liability.

  • When you have more losses than gains, you can use up to $3,000 of excess losses to offset ordinary income.
  • The remainder of the losses (in excess of the $3,000 allowed each year) can be carried forward year after year.
  • Keep in mind that the IRS doesn’t allow use of losses from a “wash sale”; when you purchase the same or “substantially similar” investment within 30 days before or after the loss.

Claim Tax Credits

When you claim tax credits, you reduce your tax bill by the dollar amount of the tax credit. For example, if you have a child under 17, you may qualify for the $2,000 child tax credit. That’s an instant $2,000 tax savings.

Take advantage of tax credits

There are many tax credits available, and it is essential to claim all the benefits you are entitled to. Credits are usually better than deductions because they can reduce the tax you owe, not just your taxable income.

For example, suppose you have $50,000 taxable income and $10,000 in tax deductions. These deductions reduce your taxable income to $40,000.

  • $50,000 taxable income – $10,000 tax deductions = $40,000 taxable income

In your tax bracket, that $10,000 of taxable income would have been taxed at a rate of 12%. As a result of your deductions, you would save $1,200 on your tax bill.

  • $10,000 taxable income x .12 tax rate = $1,200

Because tax credits reduce the amount of tax you owe, dollar for dollar, $10,000 in tax credits would mean $10,000 in tax savings instead of $1,200.

Some of the most popular tax credits are:

Maximize your small business expenses

Usually, small business owners and self-employed taxpayers are able to use a much wider range of tax reduction strategies than individual taxpayers because of tax deductible small business expenses. Some common small business tax deductions include,

  • Office rent,
  • Home office expenses,
  • Cost of acquiring and maintaining a vehicle for the business, and
  • Inventory.

The lower your net profit, the lower your self-employment tax will be, so writing off as many expenses as possible can help reduce your tax bill.  Claiming small business tax deductions can also lower both your income taxes and self-employment taxes, and you can deduct a portion of your self-employment tax payments on your personal tax return.

Countless retirees miss out on thousands of dollars in tax savings by not realizing how many expenses they can write off. With the proper tax advice, you can literally convert your personal expenses into small business expenses. The tax code is written for small business owners and investors to prosper, don’t let these savings escape your pockets.

Key Points:

  • Maximize your tax-advantaged accounts
  • Roth contributions to retirement accounts are post taxed
  • Traditional contributions to retirement accounts are pre-taxed

References:

  1. https://www.kiplinger.com/taxes/tax-planning/602272/5-strategies-for-tax-planning-now-and-in-retirement
  2. https://www.cofieldadvisors.com/post/5-financial-tips-for-small-business-owners
  3. https://www.kiplinger.com/taxes/tax-planning/602505/good-planning-can-reduce-the-chances-of-taxes-hurting-your-retirement
  4. https://turbotax.intuit.com/tax-tips/tax-deductions-and-credits/7-best-tips-to-lower-your-tax-bill-from-turbotax-tax-experts/L0frRUUVL
  5. https://www.kiplinger.com/retirement/602564/questions-retirees-often-get-wrong-about-taxes-in-retirement

TWELVE SUCCESSFUL WAYS TO SAVE MONEY | America Saves

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Start small, Think big. Make a commitment to yourself to save money, reduce your debt, establish an emergency fund, invest for the long-term and begin building wealth.

By Barbara O’Neill, Ph.D., CFP, CRPC, AFC, CHC, CFEd, CFCS, Rutgers Cooperative Extension

Savings is the foundation for investing. You cannot invest money if you have not saved it first. Like dieting, saving money is hard to start, even harder to maintain, and requires patience and discipline. When you achieve your financial goals, however, the results are so worth it. Below are 12 time-tested ways to save:

  1. Pay Yourself First – Treat savings like an important household bill (e.g., loan payment). Set aside a part of each paycheck, even if it is only a small amount, and leave it there. Save automatically where possible.
  2. Collect Coins – Put loose change into a can or jar. When the container is full, deposit the money into a savings account. Set aside $1 a day, plus loose change, and you should have about $50 a month, or $600 a year, saved. Save $2 a day, plus loose change, and you should have about $1,000.
  3. Complete a Savings Challenge – Pick a savings Challenge that matches your time frame and savings goal such as the 30 Day $100 Savings Challenge or the 50 Week $2,500 Savings Challenge. Savings challenges gradually ramp up savings deposits over time and provide motivation and structure.
  4. Continue to Pay a Loan or Bill – Make payments to savings or investment accounts with money that is freed up when loan payments end or an expense, such as childcare, ends. The rationale behind this savings method is that you are already accustomed to the payment so “redirecting” it will not pinch your cash flow.
  5. Break Costly Habits – Track your spending for a month or two and pick a few places where spending can be cut back or cut out to “find” money to save. For example, brown bagging lunch two or three days per week could save hundreds of dollars over the course of a year.
  6. Bank a Windfall – Save all or part of large, infrequent expected or unexpected sums of money. Examples of common financial windfalls include tax refunds, inheritances, settlements, awards and prizes, retroactive pay increases, and year-end bonuses at work.
  7. Crash Save – Decide that, for a month or two, you will buy only absolute necessities and save any money that remains after paying bills. At the end of the crash savings time period, treat yourself and buy the item(s) that you were saving for. Then resume your “normal” spending habits or set a new crash savings goal.
  8. Start a “Club” Savings Plan – Start a structured savings plan to save money over the course of a year for holiday or vacation expenses. Some banks and many credit unions still offer them. Unlike “coupon books” of years ago, weekly savings deposits are often transferred electronically from checking to savings.
  9. Save Your “Extra” Paychecks – Mark your paydays each year on a calendar. If you are paid bi-weekly, in two months of the year, you will receive three paychecks. If you are paid weekly, there will be four months with five paychecks. Anticipate these months in advance and plan to save part of the “extra” paycheck.
  10. Save Excess Expense Reimbursement Money – Review your employer’s reimbursement policy. If you get a fixed sum for business travel expenses, instead of having to collect receipts, and spend less than the per diem amount, save the difference. Ditto for mileage reimbursement for using a personal car for business.
  11. Reinvest Interest and Dividends Automatically – Arrange to have dividends and capital gains on mutual funds reinvested to purchase additional shares rather than receiving a check for a small amount and spending it. This is a painless way to increase investment account value over time.
  12. Participate in a Tax-Deferred Retirement Plan – Reduce your salary via payroll deduction to save for retirement and aim to take maximum advantage of employer matching. Money contributed to a 401(k), 403(b), or similar retirement savings plan and earnings on these funds grow tax-deferred until withdrawal.

For additional information about saving money, visit the America Saves program website.

——–

Spring is here! This is the perfect time to do some spring cleaning in your financial house. April has been declared as National Financial Capability Month. Throughout the month, the Financial Literacy and Education Commission (FLEC) and the Ready Campaign encourage people to take action to improve their financial futures and to be prepared when disaster strikes.

References:

  1. https://americasaves.org/resource-center/partner-resource-packets/financial-capability-month-ways-to-improve-your-financial-capability-now/
  2. https://americasaves.org

Investing Intelligently

Aside

As an investor, your general investing objectives are to grow your money and invest for the long-term.

Investing can seem challenging since there’s an overwhelming amount of investing information, choice of investment accounts, and strategies out there. Plus, the markets fluctuate and are volatile, and the idea of potentially losing money can create stress, fear and uncertainty.

The lesson for the investor: The fears you feel when you think about starting investing or during periods of market volatility are very similar to those many seasoned feel after decades of investing. The doubts. Negative thoughts. The fear and uncertainty that lead us to think about giving up. The encouragement you get from focusing on the future and your long-term goals. And the satisfaction of crossing goals of financial freedom that you thought were all but impossible.

Investing in stocks is an excellent way to grow wealth. For long-term investors, stocks are a good investment even during periods of market volatility — a stock market downturn simply means that many stocks are on sale. And for long-term investors, time tends to reward their behavior, though research has shown that it is as difficult to practice as it is uncommon.

Most investors never hold stocks long enough to benefit from the fact that the market rises over the long-term. Investors typically buy too late and sell too early. They routinely “greed in” and “panic out” of stocks. They hold stocks for just a few years — or worse, a few months — rather than carefully curating and diversifying a portfolio of stocks for the long-term, typically over decades.

https://youtu.be/hE2NsJGpEq4

By learning more about the process of investing in stocks, understanding the financial markets, and knowing what securities you are investing in— you can gain more confidence and understanding that you are on the right path, according to SoFi.

Investing your hard earned money

Historically, the return on stock investments has outpaced other asset classes like bonds and real estate, making them a powerful tool for those looking to grow their wealth over the long-term.

The average interest rate on a savings account at the top five U.S. banks this year was 0.08%, while the average return on the S&P 500 from 1950 through 2009 was 7%. So, what does this mean for your money? If you had $10,000 today and put it in a savings account with an interest rate of 1% (some banks have rates this high), you would have $11,046 in 10 years. If instead you took that money and invested it, earning an average annual return of 7% and compounding annually, you would have $19,672 in that same time period!

Everyone should have these two, what SoFi calls “bookend goals”, as their primary short-term and primary long-term goals:

  • Create an emergency fund and
  • Save for retirement

Getting started investing is simple.

Investing in stocks will allow your money to grow and outpace inflation over the long-term.

Investing is not just for the wealthy; it’s for anyone who wants to achieve their financial goals and achieve financial security. And your focus should be on the opportunities and rewards of achieving financial goals.

It’s important to understand your goals. Selecting an investment strategy depends on your goal amount (how much you want to save) and the time horizon (when you’d like to use that money).

Before you invest, you should make a list of all of your accounts (bank, investments, retirement, credit cards, other debt) and their interest rates. Know and calculate your personal net worth. And, know your cash flow. How much do you make after taxes? How much do you spend?

First goal: Emergency Fund

Your emergency fund is a cash account that you can easily access should an emergency arise—for example, if you face an unexpected health cost. This fund should be 6 -12 times the amount you spend monthly, depending on how risk-averse you are.

For example, if you’re unable to work, you may be comfortable with having three months saved. You want to keep your emergency fund money “liquid,” or available to access as soon as you need it. With that said, many savings accounts only pay you 0.01% interest on cash balances. This doesn’t keep pace with inflation, so you’re essentially losing money. Instead, you might consider opting for a high-yield savings account that earns 1% interest or more.

Ultimate goal: Retirement

Retirement should be your highest priority and your largest financial goal. Even if it feels very far away, it’s important to start saving early, diligently and purposely. You may share the same priority and retirement goals as many retirees, such as:

  • Essential Living Expenses
  • Reserves in an emergency fund to cover unexpected expenses
  • The stuff that brings joy, emotional well-being, and provides purpose like vacations and spending time with others
  • Leaving a legacy for your family, a charity, or something else

Remaining financially independent and understanding ways to ensure there is enough money to last a lifetime is of great importance to retirees.

https://twitter.com/tdameritrade/status/1362095933387927562

Let’s say you and your partner will need $6,000 per month in retirement income (in today’s dollars). If you start saving at 40, you would need to save $46,000 per year to be on track for retirement at 67. However, if you start saving at 30, you need to save $32,000 per year. (Note: This assumes you’ll both receive Social Security.) This illustrates the importance of starting early and giving your money time to work for you.

Need to catch up? It’s never too late! You may need to save more or be more aggressive, but the most important step is to start saving (and investing) as soon as possible.

Investing should be for long-term goals

If you’re investing for a far-off goal, like retirement, you should be invested primarily in stocks or stock mutual funds and ETFs.

This is an important lesson for the investor: When you think about investing, you usually feel that you know exactly what you are looking for. In your mind, you have defined the plan that will lead to success and you begin to execute it hoping to be able to fulfill it to the letter. The truth is, it rarely happens. The path of the investor is full of surprises, of unintended consequences that you did not appreciate, of outcomes that you did not expect to face. Let yourself be surprised by them, live them and just like the best investors do, dare to take the first step that could take you to achieve financial freedom in retirement.

To start investing for retirement, most financial experts and institutions advise you to invest in an employer-sponsored tax deferred retirement plans. There are several investing options for longer-term goals like retirement and college, according to Navy Federal Credit Union. Here are a few you may consider:

  • As part of your employee benefits package, you may be offered a retirement plan such as a 401(k), 403(b), or 457 plan, Thrift Savings Plan (TSP), or pension. Your contributions to an employee-sponsored plan aren’t taxed until they’re withdrawn in retirement, and your contributions may even be partially matched by your employer.
  • Individual retirement accounts (IRAs): IRAs can operate standalone or in addition to an employer-sponsored plan. Depending on the type of IRA you have, you’ll either pay taxes when you contribute (as with a Roth IRA) or when you withdraw (as with a traditional IRA). A Roth retirement account that allows individuals to pay taxes on contributions to the plan at the time they are made, but when funds are withdrawn during retirement, they are tax-free.
  • 529 college savings plans: 529 plans allow you to make large contributions, some with limits beyond $300,000, with withdrawals used for qualified K-12 and college expenses free from federal income taxes. These plans are a great way to save no matter your level of income or timeline for your or your child’s academic career.
  • Coverdell education savings accountA trust account designed to help fund educational expenses for individuals under age 18. The maximum yearly contribution is $2,000.
  • (ESA): ESAs let you save for school with a greater variety of investment options than 529 plans. If your gross income is under $110,000 (or $220,000 on a joint return), you can set aside up to $2,000 a year for college or K-12 expenses.
  • Brokerage accounts: Brokerage accounts allow you to purchase and sell investments, including stocks, bonds and mutual funds, through a brokerage firm. These investments aren’t insured and are subject to taxation, but you may be able to earn more in returns than with other savings vehicles, and you can use the money for any purpose, such as for retirement.

And, do not be too conservative or risk adverse with your investments. The most successful investors have done little more than stick with stock market basics. That generally means using a low cost S&P 500 index fund for the majority of your portfolio and choosing individual stocks only if you believe in the company’s potential for long-term growth.

Your Tolerance for Risk

“Practice patience in stock investing and give your investments a chance to grow into mighty oaks.”

Learning to invest means learning to weigh potential returns against risk, according to TD Ameritrade. Basically, no investment is absolutely safe, and there’s also no guarantee that an investment will work out in your favor.

Furthermore, the risk of losing money can be daunting and upsetting to typical retail investors. This is why it’s important for you to know your risk tolerance level.  When it comes to your choice of assets, it’s important to understand that some securities are riskier than others. This holds true for both equity and debt securities (i.e., “stocks and bonds”).

Consequently, the best thing to do after you start investing in stocks, ETFs or mutual funds may be the hardest: Don’t look at them. It’s good to avoid the habit of compulsively checking how your stocks are doing several times a day, every day. Instead, stay focused on your values and long-term goals. and periodically check your investments.

Additionally, the toughest thing in stock investing is to do nothing. That’s right, nothing! Once you buy a stock and watch it move up, down and all around for a few weeks, there is an urge to take action.

Most investors lack patience, which is a shame, because almost every successful investor you’ll ever meet or read about has an abundance of patience. You should wait for the right time to buy. And, being patient means you are the best prepared when opportunities emerge.

Many times, the stocks you purchase don’t move much in price for many weeks after your initial purchase. But if you have the patience to stick with those stocks, a few can turn out to be huge winners. And in the end, those big winners are what make all the difference.

References:

  1. https://d32ijn7u0aqfv4.cloudfront.net/wp/wp-content/uploads/20170718165706/Guide-to-Investing-Intelligently_V5-1.pdf
  2. https://www.navyfederal.org/makingcents/knowledge-center/financial-literacy/actively-saving/saving-for-longer-term-goals.html
  3. https://www.nerdwallet.com/article/investing/how-to-invest-in-stocks
  4. https://www.debt.org/advice/debt-snowball-method-how-it-works/
  5. https://tickertape.tdameritrade.com/investing/learn-to-invest-money-17155
  6. https://cabotwealth.com/lessons/practicing-patience-stock-investing/

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Financial Literacy: Six Principles of Personal Finance | TD Ameritrade

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Imagine operating a boat without the basic understanding of nautical rules of the road or even how to operate a boat. Scary thought.

Here’s another scary circumstance – one that is all too real. Many Americans are making financial decisions with minimal financial knowledge of investing, budgeting, and credit. The TIAA Institute conducted a survey on U.S. financial literacy, asking 28 basic questions about retirement saving, debt management, budgeting, and other financial matters. The average respondent answered only about half of the questions correctly.

Another study, conducted by Pew Research, found that one in four Americans say that they won’t be able to pay their bills on time this month.

It has been said that knowledge is power, and if that’s true, then too many Americans lack the power to control their financial futures. Financial success rarely happens by accident; it is typically the outcome of a journey that starts with education.

Talking about money is one of the most important skills to being a fiscally responsible and a financially literate person. However, 44% of Americans surveyed would rather discuss death, religion or politics than talk about personal finance with a loved one, according to CNBC.

Why? Two major reasons are embarrassment and fear of conflict, even though the consequences can be grave: 50% of first marriages end in divorce, and financial conflict is often a key contributor. Additionally, it is considered rude to discuss money and wealth.

The missing component is financial literacy education and training.

Mastering personal finance requires you to look at your financial situation holistically and come up with a plan for how to manage your money. In this TD Ameritrade video, we’ll look at helpful principles for six personal finance topics:

  1. Budgeting – focus on the big ticket items by cutting cost on the expensive costs such as cars and homes
  2. Saving and investing – be specific about your destination and your plan on achieving your goal and reaching your destination
  3. Debt and Credit – avoid high interest debt and loans on items that will quickly lose value
  4. Reduce taxes – find ways to legally pay less taxes on the income you earn,
  5. Avoid insurance for expenses you can pay out of pocket – purpose of insurance is to protect you in unfortunate scenarios.  60% of all bankruptcy is related to medical expenses
  6. Investing for retirement. – don’t just save for retirement, invest for retirement.

Make high impact adjustments to your finances to improve your financial future.

References:

  1. https://www.cnbc.com/2019/04/30/the-us-is-in-a-financial-literacy-crisis-advisors-can-fix-the-problem.html
  2. https://www.tiaainstitute.org/publication/financial-well-being-and-literacy-midst-pandemic
  3. https://www.pewtrusts.org/en/research-and-analysis/articles/2017/04/06/can-economically-vulnerable-americans-benefit-from-financial-capability-services

Financial Literacy: Saving for Retirement

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“We teach our kids everything in high school: sex education, geography, math, reading, etc. We do not teach them anything about credit cards, or debt, or investing. Then we ask ourselves why we end up in a situation as we are today, which has been highlighted by the pandemic a bit: There’s 100 million people in America that have set nothing aside for their retirement.” Kevin O’Leary

The retirement crisis in America is an ongoing worry for most Americans. As companies have shifted away from offering traditional (defined) pension plans to employees, much of the responsibility in planning for financial life after work now relies heavily on individuals. Unfortunately, the crisis is mostly due to a lack of financial literacy and consumer spending on new shiny things, and as a result, most are struggling to keep up.

A March 2019 Bankrate survey found that more than 1 in 5 working Americans aren’t saving any money for retirement, emergencies or other financial goals. Major barriers as to why respondents said they weren’t saving included not making enough money, financially helping adult children, and large credit card and other personal debt payments.

Financial assistance to adult children

Parents are helping their adult children financially and the majority of those parents say that financially supporting their adult children is hurting their savings for retirement and their financial futures, according to Bankrate. In total, 50 percent of respondents to a Bankrate survey say they have sacrificed or are sacrificing their own retirement savings in order to help their adult children financially.

Living and remaining in the workforce longer

American baby boomers are healthier and are living longer; as a result, they’ll need a bigger nest egg to fund their retirements, especially since the number of employers providing pensions has been steadily shrinking. As some reach retirement age and realize they don’t have enough saved, it’s keeping them in the workforce longer. Workers older than 55 years young filled almost half of all new jobs in 2018 even though they make up less than a quarter of the nation’s labor force, according to an analysis of Labor Department data by The Liscio Report.

“Many seniors are having a hard time making ends meet and find they have to work when they had not planned to.” Dean Baker, cofounder of the Center for Economic and Policy Research.

“Most Americans haven’t made saving [for retirement] a priority”, says Nick Holeman, CFP at Betterment. “Most people don’t like to admit that, but we live in a consumer culture and it can be difficult to turn down the new shiny gadgets.” Saving for retirement is your largest and most important financial goal. Even if it feels very far away, it’s important to start saving early.

Holeman recommends that Americans wanting to retire to take three steps:

  1. Create financial goals and a financial plan. At a minimum, you should have these two financial goals: Create an emergency fund and save for retirement. SoFi calls these “bookend goals”—your primary short-term and primary long-term goal. Your financial plan should consist of small, achievable goals; they’ll help you see your finish line and empower you to stay on track. Start by determining how much you need to retire comfortably.
  2. Come up with a strategy to execute. Selecting an investment strategy depends on your financial goal amount (how much you want to save each month or year) and the time horizon (when you’d like to use that money). Decide how you plan to save that amount.
  3. Get creative. For those struggling to save, consider retiring later or working part-time during retirement. Holeman says there are tons of other options out there, which he refers to as “levers,” like moving to a low-cost state or downsizing your home. Engaging them can help get your retirement savings back on track.

Investing

It has been regularly reported that billionaire investor Warren Buffett made 99% of his current wealth after his 50th birthday.  At an age when most Americans give up hope achieving financial independence, Buffett was just getting started on the capital assets he controls today.  Building wealth could mean financial peace, taking a spur-of-the-moment international travel.

Many older Americans are advised to sell or significantly reduce their stock holdings and frankly, this advice is antiquated, shortsighted and wrong.  Buffett built his incredible level of wealth by continuing to buy stocks despite his advanced age.

References:

  1. https://www.bankrate.com/personal-finance/financial-independence-survey-april-2019/
  2. https://www.bankrate.com/retirement/baby-boomers-unable-to-retire-gig-economy/
  3. https://www.usatoday.com/story/life/allthemoms/2019/04/24/adult-children-robbing-parents-retirement-savings-study-finds/3559812002/
  4. https://d32ijn7u0aqfv4.cloudfront.net/wp/wp-content/uploads/20170718165706/Guide-to-Investing-Intelligently_V5-1.pdf

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

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/