Archives for January 17, 2019

Retirement is an exciting time that most people look forward to throughout their working lives. However, many Americans’ retirement is put in jeopardy by common financial mistakes they make once they leave the workforce. And these mistakes can have serious consequences, leading to a loss of savings and forcing people to abandon retirement and return to work. According to a Labor Force Transitions report published by the Federal Reserve Board, one-third of American retirees return to work on a full-time or part-time basis, and the majority do so because they need more income. Here are three common mistakes to avoid in retirement.

The best-laid financial plans can go awry if you make these mistakes in retirement. 

1. Overspending

Let’s start with the most obvious mistake people make in retirement: overspending. Whether it means splashing out on the car of your dreams, traveling to exotic locales, taking out an expensive golf course membership, or undertaking a major home renovation, it’s easy to spend too much money in retirement. Nearly half (45.9%) of retirees spend more money in the first two years of retirement than they did when they were working, according to the Employee Benefit Research Institute. There’s no problem with rewarding yourself after decades of work, but it’s important that you adjust your lifestyle to the reality of living on a fixed income.

As a rule of thumb, financial experts say retirees should not deplete their savings by more than 4% to 6% a year. If, for example, you have $1 million saved, a 5% withdrawal rate per year would give you $50,000 to live on, in addition to Social Security. This is commonly known as the “4% retirement rule.” While not foolproof, this rule can help you estimate how much you can afford to spend each year without jeopardizing your savings. Knowing your annual income, developing a budget, and sticking to that budget can help ensure that you don’t overspend and outlive your nest egg.

2. Being too conservative with your investments

This may sound counterintuitive, but another mistake retirees often make is being too conservative with their investments. While many financial advisors counsel people to reduce the risk of their investment portfolio once they enter retirement, the reality is that most retirees need their investments to continue growing in order to make their savings last over the long term. Not only do you need to account for inflation, unforeseen costs such as medical bills, and living longer than expected, but you could also see a depreciation in other assets, notably the value of your house. For these reasons, it may be best to keep your retirement savings invested and growing during retirement, rather than transferring all the money to conservative instruments such as bonds or certificates of deposit.

One method of determining your ideal stock allocation is to subtract your age from 110, invest that percentage of your portfolio in stocks, and invest the remainder in lower-risk investments such as bonds. For example, if you’re age 65, you would invest 45% of your portfolio in stocks. By age 70, the percentage you invest in stocks should be reduced to 40%. Depending on your financial circumstances and your goals, you could decide to invest a bit more aggressively or conservatively.

While continuing to weather the ups and downs of the stock market in retirement may sound stressful, diversifying your investments and allocating the right percentage of your money to stocks can both grow and shelter your retirement savings.

Taxes are still an issue to be managed in retirement.

3. Making tax mistakes

Taxes don’t go away once you stop collecting a regular pay check. The reality is that taxes in retirement are often more complex, as you (rather than your employer) must ensure that the Internal Revenue Service (IRS) gets its fair share of your income. This can result in a number of tax surprises for retirees.

One of the more common mistakes retirees make when it comes to taxes is failing to withhold the right amount of tax from their pension and/or Social Security income, which can result in one big tax bill at year’s end. Most retirees do not have to pay federal income taxes on their Social Security benefits. However, if you receive substantial income in addition to Social Security, up to 85% of those benefits may be taxed. (The Association of American Retired Persons has a helpful summary on Social Security and Taxes that is worth a read.)

Another common mistake retirees make is failing to take their required minimum distribution (RMD), a certain amount of money that people aged 70 1/2 or older must withdraw from their traditional IRAs and 401(k)s each year based on their age and account balance. It is also important to understand the tax treatment of IRA withdrawals. With a Roth IRA, you don’t owe income tax on your withdrawals, provided the account has been active for more than five years and you’re older than age 59 1/2. With a traditional IRA, withdrawals are taxed as income, and the tax rate you pay is based on your total retirement income for the year.

If you’re not overly savvy about financial matters, then the best course is to work with a financial advisor on tax matters that could impact your retirement savings. And remember that tax planning at year’s end is likely too late. You should have a plan in place at the start of each year to ensure that your taxes are covered and there are no surprises. If you insist on managing your own taxes, the IRS has helpful information on its website concerning tax issues impacting seniors and retirees.

These are three of the most common financial mistakes retirees make. There are many more, including taking Social Security too soon, carrying debt into retirement, not having enough health insurance, and not planning for long-term care. Being aware of these potential problems and planning to avoid them is the best way to ensure that you have a happy and worry-free retirement.

Handling your personal financial management needs online is just a sign of the times.

Whether it’s using financial management software on your laptop or turning to a mobile option to handle your budgets, debts, and investments, digital downloads are the way to go in today’s personal financial management marketplace.

Two of the leading companies in the sector – Quicken and Personal Capital – are used more than most digital financial management packages, and for good reason – they both get the job done, and at a reasonable price (in one case, no cost.)

Let’s take a thumbnail view of both financial management software providers, and see how they stack up against one another.

What Is Quicken?

While Quicken has been around for three decades, the company split off from long-time owner Intuit and re-emerged as an independent firm in 2016, when some of the early founders stepped up and took control of the company.

Quicken, which charges a subscription fee to use the service, offers basic, in-demand financial management services, like tracking spending, creating budgets, and monitoring bank and credit account balances. The software offers bill paying services on its software and its mobile app, and offers digital-age solutions like bill payment alerts and customized financial reporting.

What Is Personal Capital?

Personal Capital is a free, digital-only personal financial management tool that manages all of a user’s financial accounts on a single platform. The platform syncs with a user’s bank, investment and credit card accounts, listing all assets, liabilities, outstanding debt owed by category, and account transaction histories.

Personal Capital draws high marks from users for its asset and investment management tools to help users keep their retirement savings on track, plan big investment savings campaigns (like college and early retirement) and allows you to see how your investment portfolio is performing dynamically, and in real time.

Personal Capital

• $8 billion in assets under management
• 18,000 investment clients in the U.S.
• 1.9 million individual users

Features Included in Personal Capital 2019

Personal Capital has a slew of new and improved features in its 2019 release – here’s a snapshot:

• Retirement Paycheck. The retirement paycheck add-on lets Personal Capital users know how to better withdraw cash from their investment accounts during retirement, and in a tax-wise fashion.
• Retirement planner. The retirement planner tool provides users with a snapshot on where they stand with their retirement planning – bad or good.
• Budgeting. The improved budgeting feature enables users to track weekly ongoing spending outcomes using the platform’s cash flow analyzer spending tool.
• Education Planner. The education planner tool allows end users to analyze college costs, and compare those costs on a school-to-school basis. The planner also aids users by providing year-to-year savings needs to meet a family’s college savings goals.
• Exclude from Advice. This platform management tool allows users to sync an account within Personal Capital, but wall it off from any of program’s investment recommendations.
• 401(k) Fee Analyzer. There’s no doubt retirement planning vehicle fees, like 401k plan fees, can mount up. The 401(k) analyzer tool lets a retirement saver know how much of an impact fees are having on fund performance – and how much of a drag it is on one’s total retirement savings.
• Investment checkup. The investment checkup feature measures the effectiveness of a user’s portfolio investment asset allocation. In analyzing an investor’s risk profile, the platform will automatically generate an asset allocation model that meets the user’s unique financial needs.
• Asset allocation target. The Personal Capital asset allocation target tool shows investors where they stand, investment balance-wise, on their portfolio.
• Upcoming bills. This feature alerts end users to upcoming bills and the dates those bills are due.
• Email notifications – Personal Capital users can get regular updates on portfolio investment performance and on personal budget and spending issues.

Quicken

• In business for 30 years
• Over 17 million investors
• The best-selling personal finance software in the world

Features Included in Quicken 2019:

Quicken, too, has a host of new tools and features in its 2019 release – here’s a look:

• Quicken on the web. Quicken is now available on a web-based platform – a first for Quicken customers looking for the program to move to an internet-interactive model. Platform data is stored on the cloud, and works seamlessly among other digital devices.
• Online bills. Quicken now offers users access to over 11,000 digital creditors, along with Adobe Acrobat downloads to pay bills online.
• Custom reporting. Quicken is also offering customized report layout features along with direct Excel exporting.
• Free updates. Users can now connect with free features for the term of your software license – up to 27 months with special promotions – with no upgrade required.
• Free online backups. Users can get five GB of secure online backup of Quicken with Dropbox.
• Archive investments. Quicken users can transition in and out of their investment archives seamlessly and better track transactions.
• Investment performance analysis. Users can also improve their investment selections for select Quicken model options (Premier package and above)
• Free Quicken bill pay. Quicken users can take advantage of the platform’s bill payment tool – 15 months for free with Premier and higher (a $149.25 value).
• Invoice customization. Small business owners can customize customer invoices, including logo, color and payment links with the platform’s Home, Business & Rental Property feature.
• E-mail Reminders. Quicken’s Home, Business & Rental Property tools also enable landlords to alert tenants when rent is due and send payment receipts after payment is received.

Quicken vs. Personal Capital

Despite existing (and thriving) under the personal financial management digital umbrella, Quicken and Personal Capital vary in important ways – and platform users should understand those differences before they start using either program.

Here’s a snapshot of five key variations between Quicken and Personal Capital:

Retirement and Investment Planning

Quicken makes its bread and butter on drilling down into a money management problem, and that’s evident in its retirement planning channel.

While Personal Capital has a solid analysis tool that takes a deep dive into your portfolio and tracks your progress, Quicken allows a more hands-on experience for users, playing out various “Lifetime Planner” scenarios to see how each plays out.

That gives users a real-world view of what could happen on the path to retirement, and allows the user to have an interactive experience – much more so than Personal Capital.

Budgeting

Quicken has a solid personal budgeting feature that matches up personal spending history with household budget management. That gives users a real-life look at their spending habits, and how they’re impacting the household budget, and enables them to create unique budgeting and realistic budgeting goals going forward, while allowing to better manage current bill payment realities, too.

Personal Capital’s budgeting platform also enables users to you to easily build a household budget, create a monthly spending target, and check in on budgeting performance in a real-time fashion. The platform allows you to track your income by date and source, even if you have multiple bank accounts (you’ll need to sync all your accounts with Personal Capital to take advantage of this feature.)

Your Credit Score

Quicken, like many financial service platform providers, offers users an updated (quarterly) credit score VantageScore from Equifax .

It’s not the actual FICO credit score that creditors use to evaluate your credit risk, but it does give you a good snapshot of where your credit stands, and what you can do to improve your credit score.

While Personal Capital does provide personal financial data that definitely impacts our credit score, it doesn’t provide an actual credit score to users.

Technology Performance

Personal Capital gets the nod when it comes to lining up your financial account data with the digital financial platform, updating information on an automatic basis, while Quicken draws more complaints from end users about an inferior account synching experience.

The most common complaints about Quicken’s synching performance is that users have to download transactions manually and then move those transactions over to the Quicken platform.

Personal Capital also has an edge in updating all financial account data on the company’s digital dashboard, while Quicken doesn’t update a user’s financial data automatically, a user experience that seems dated given the remarkable leaps in financial technology in recent years.

Cost of Usage

You can’t be “free” for a quality online financial management platform and Personal Capital certainly delivers on that front. In fact, it’s no-cost access to its menu of digital personal financial tools is a huge attraction to budget-minded consumers.

Personal Capital does charge for a customized portfolio investment strategy – between 0.49%-and-0.89% of assets under management, which is generally in line (and better than most) traditional asset management firms. A nice feature is available for higher income earners – a pair of dedicated financial advisers to work on the accounts of platform users who bring $200,000 or more in assets to the table.

It’s not that Quicken costs a bundle – it doesn’t. The platform, which transitioned to a subscription-only model in 2018, charges between $34.99 and $99 a year for its Quicken for Windows personal financial management package, which gives you access to the company’s bread-and-butter budgeting, bill payment and investment tracking services, among other features.

That’s a good deal, but if its free basic digital financial management services you’re after, Personal Capital offers the ultimate bargain basement price.

Besides, most banks now offer free online bill pay, which does dilute the value of paying for Quicken’s bill payment service, which is included in the company’s tiered subscription price.

The Takeaway

Both Quicken and Personal Capital offer personal financial consumers a healthy dose of value and creativity in managing their money.

Take a test drive and see which platform meets your unique personal financial money management needs.

Retirement regrets

Retirement is often depicted as a golden phase of life, but the reality of retirement doesn’t always shimmer. More than half of retirees have retirement regrets, according to a 2018 study by Global Atlantic Financial Group. Whether you’re in retirement or looking ahead to it, there are lessons to be learned from those who entered the stage and found it wasn’t exactly as they expected. Follow along as retirees weigh in with their biggest regrets.

Failing to make a detailed financial plan

Drew Parker, a retired financial manager for a Fortune 500 company in Mercer Island, Washington, wishes he had made a more detailed financial plan before retirement. “Knowing what I know now, that I didn’t know before, has afforded me the opportunity to make adjustments to improve my margin of error and to make more informed decisions,” says Parker, who created CompleteRetirementPlanner.com. “This knowledge would have been exponentially more valuable at a much younger age, so I encourage others to take the time to do their own due diligence and to create a comprehensive financial plan based only on their own unique circumstances and needs.”

Not setting goals for retirement

Retirement provides an opportunity to do what you want to do, but you also need to figure out what you want to achieve in retirement. “It took me quite some time to transition from a work mindset to the freedom of retirement,” says Stephanie Cunningham, a retired policy officer for a state-level higher education board in Islington, Australia. “I had to look at what I really wanted to achieve and what was my passion now that I had time and income to do pretty much what I wanted.” Cunningham spent time trying new activities and discarding those that weren’t a good fit. “Failure was a part of this retirement journey,” Cunningham says. “At this point in time, I am quite happy in my retirement, but it took years to achieve this.”

Counting on working until age 70

Timothy Wiedman, a retired professor in Ionia, Michigan, became an academic after asuccessful management career. Shortly after turning 60, he was granted tenure and promoted to associate professor. But his dream job didn’t last due to health problems. “Worsening sciatica in my left leg, coupled with diabetic nephropathy and nerve damage in both feet, made it clear to me that teaching until I turned 70, in order to max out my Social Security benefits, was not the viable option that I had once envisioned,”Wiedman says. “Thus, my long-time retirement plans that included ski trips into Colorado’s nearby mountains went by the wayside.”

Losing touch with adult children

Edd and Cynthia Staton, authors of “Mission: Rescue Your Retirement,” were financially devastated by the economic crisis of 2008. “Our solution to this catastrophe was to retire early and move abroad to a lower cost of living,” Staton says. The couple decided to relocate to Cuenca, Ecuador, where their limited budget stretches much further. Their two adult children felt blindsided by their abrupt move overseas. “Our two adult children were just getting started with their lives and we didn’t want to burden them psychologically or financially with our problems,” Staton says. “We later found out that both were hurt by our honest attempt to shield them from our personal challenges and felt abandoned. Our advice is it’s OK to share the good and bad with your immediate family. If you’re concerned about your financial future or even what you’re going to do with yourself 24/7/365, let them know and seek their input.”

Experiencing social drawbacks of early retirement

An early retirement can seem like a dream come true, until you realize that most of the people you would like to spend more time with will still be busy working. AJ Borowsky, author of “What Next: A Proactive Approach to Success” in La Quinta, California, retired from a 25-year career in television news at age 48. “While I’m generally satisfied with my early retirement, there is one thing that people looking to retire early, especially, should consider. While you suddenly have large amounts of free time, your friends are still working, so the very people you would want to spend time with are unavailable,” Borowsky says. “I think a big reason for boredom in early retirement is the lack of similarly aged friends.”

Not focusing on what really matters

Shortly after remarrying to form a blended family of five children in 2006, Greg Huntington faced a corporate downsizing and took a voluntary retirement separation package at the end of 2007. He spent the next years adjusting to a new life and role and founded True Joy Acoustics in Cincinnati. “Managing money, health, children’s college pursuits and creating a second-act career identity are important, but it has become clear to me that successfully staying above water in these areas is insufficient,” Huntington says. “Never sacrifice your soul and soul mate. A deep sense of spirituality and love in your retirement years will empower you to tend to everything that truly matters in life.”

Failing to embrace a slower pace

After a lifetime of being constantly busy, it can be difficult to slow down in retirement.“I have always pushed myself to be the best that I can be and to achieve as much as possible. I am beginning to realize that it is OK to enjoy the fruits of my labor, to be proud of my achievements and to take life a bit easier,” says Beverly Solomon, a designer phasing into retirement near Austin, Texas. “I want to stay in good shape mentally and physically, and I want to stay creative, but it is really fun to peacefully walk my ranch, to go rock hunting, to travel and to sit by our springs and slowly sip a glass of wine while watching the sunset.”

Not starting a second act career sooner

After stepping away from the office, Lisa Powellstarted a pet-sitting service, Critter Sitter of VA, in Fredericksburg, Virginia. “I’m loving retirement from accounting and my newfound joy. In hindsight, I’m not sure why the idea didn’t come to me sooner; it seems so clear now,” Powell says. “It’s been a balancing act at times with high demand and just not enough hours to personally handle it all. At times I wish this all happened years ago, when the spring in my step was a little quicker. I spend a lot of time going from client to client, so that gives me time to think of goals and plan for the future stages of my business.”

Underestimating the risks of retirement

Leaving behind a steady paycheck to retire is a big risk.“Retirement planning is more risk management than portfolio management, although portfolio management seems to get all the press. Focusing my retirement decision primarily on investing drew my attention from the other risks of retirement, like family members who might need financial support and health care shocks,” says Dirk Cotton, a retired executive in Chapel Hill, North Carolina, and author of The Retirement Café blog. “There were dozens of other risks, some more manageable and some not, that I didn’t consider, but would have if I had approached my retirement planning more from the perspective of risk management than as an investment game.”

Holding onto stuff instead of memories of experiences

Jonathan Look, founder of LifePart2.com, planned to sell everything he owned and travel the world in retirement.“While for the most part I succeeded, there were some things – keepsakes, special gifts and sentimental items – that I couldn’t bring myself to get rid of,” says Look, who currently resides near Lisbon, Portugal. “Eventually I pared everything down to a large Tupperware container that I stored at a relative’s house. Now, after seven years, I cannot remember what is in the container, but I know I still have to deal with it. I wish I had realized that the value of these items is in the memories they represent, not in the things themselves.”

Many people are getting their 2018 year-end 401(k) statements about now, and they’re probably seeing significant declines in their account value for the first time in recent memory. If this happens to you, should you be concerned? The answer: It depends.

For one thing, it depends on your age, and for another, it hinges on whether you have a strategy to address the inevitable stock market fluctuations that will occur during your lifetime. Let’s look at the steps two different age groups should be taking.

Workers under age 50

If you’re less than 50 years old, “do nothing” is most likely the best course of action when market tumbles lead to a drop in your 401(k). One of the worst things you could do during a stock market decline is to sell out, locking in your losses and potentially foregoing the chance for future gains. 

Instead, take some comfort in the fact that the stock market experienced nine straight years of positive returns in the S&P 500 index, including dividends, from 2009 to 2017 before it experienced a loss in 2018. If you were invested in stocks during this winning streak, you’re still way ahead by doing so compared to having invested in bonds, money market funds or stable value funds, even with the recent drop.

At your current age, you most likely won’t need to tap into your 401(k) account for at least 10 years, so you have time for the stock market “double-double” to work for you. This term refers to two historical stock market trends:

• Since 1926, the S&P 500 has been positive in more than twice as many years than years with negative returns. To be exact, 68 years had positive returns vs. only 25 with negative returns.
• When the S&P 500 experiences a positive annual return, the magnitude of the average gain is almost twice as large as the magnitude of the average annual loss.

Since your investing horizon is 10 years or more, you have time to ride out stock market declines.

If you’re still concerned, you might want to revisit your investing strategy with the goal of helping you ride out stock market declines. One good strategy is to commit to only “buying low” and “selling high” rather than ever “buying high” and “selling low.” You can do that by investing in a fund that has a specified asset allocation between stock and bonds and that periodically rebalances its portfolio.

If stocks decline relative to bonds due to a market dip, the fund buys more stocks to bring it up to the target asset allocation and vice versa in the opposite scenario. Examples of such funds that are typically found in 401(k) plans include balanced funds or target-date funds.

Older workers and retirees

Older workers are in a different spot — they don’t have as much time available to ride out a market drop and rebuild on the rebound. But if you’re an older worker or retiree with a thoughtful strategy to convert your hard-earned savings into a portfolio of retirement income, this should allow you to sleep at night even during stock market volatility, such as the wild swings that have become common recently. 

If you don’t have such a strategy in place and are approaching your retirement years or are already retired, you should shift your thinking from accumulating assets to generating retirement income. Here’s one strategy that can work for many people:

• Cover your basic living expenses with “retirement paychecks” that don’t drop if the stock market crashes. Sources include Social Security, pensions, low-cost payout annuities, bond ladders and tenure payments from reverse mortgages.
• Cover your discretionary living expenses with “retirement bonuses” that have the potential for growth though stock market investment. However, be prepared to reduce your discretionary spending if stocks tank.

This strategy can help you ride out any market declines because you know you have money to pay for housing, food, utilities and health insurance premiums.

For most retirees, Social Security accounts for 50 percent to 80 percent or more of their total retirement income. As a result, a large part of their total retirement income is already protected from falling stock markets. Giving careful thought to the portion of your retirement income portfolio that will be devoted to retirement paychecks should allow you to sleep at night.

As life expectancy gains, it’s inevitable that we’ll experience a few more stock market crashes during our lifetimes. But nobody can accurately predict when one will happen and when a recovery will take place. The best you can do is develop strategies to ride out the downturns, without needing to know exactly when they’ll happen.

By planning ahead, you’ll give yourself the best chance at experiencing the retirement you’ve always dreamed of.