Archives for February 17, 2019

Retirement is a monumental transition in a person’s life, and it shouldn’t be taken lightly.

Every aspect of life is affected by the decision to retire, including relationships, health and wellness, and of course finances. Couples in particular are learning how to share their hopes and fears about retirement with one another, and looking for ways to stay active in place of their careers.

“The key to a happy retirement is in the planning done during the years leading up to retirement,” said Howard Pressman, partner at EBW Financial Planning in Vienna, Va. “Not just financial planning but taking the time to envision their lives in retirement.” Instead of thinking of retirement as moving away from something, in this case the workplace, near-retirees should think about what they’re retiring toward, he said. “The better they can see what it is they are retiring to, the more successful they are at this transition.”

Going into retirement without a plan can have a detrimental effect on a retiree, throwing them into a depression or even an early death. Inadequate savings can send someone into a tailspin, but so too can feeling as though they’ve lost their sense of purpose or identity. Without preparation for retirement, and activities thereafter, retirees’ cognitive abilities could diminish, according to a study in the U.S. National Library of Medicine.

Sometimes, a “to do” list can help. Here are key points financial advisers suggest couples consider before and during the first few days of retirement. These tasks just scratch the surface.

Budgeting

• Before entering retirement, evaluate your finances. Look over a balance sheet, take account of all income and expenses for the next few decades and consider what unexpected challenges may await you. “We aren’t planning for 1-2 years in retirement, but 20-30,” said Ashley Folkes, senior vice president of investments at Moors & Cabot in Scottsdale, Ariz.

• When creating a budget, track expenses to see where every dollar goes. Couples should review their finances monthly, said Eric Walters, president and founder of SilverCrest Wealth Planning in Greenwood, Colo.

• Understand expenses may not go down as much as expected in retirement, either. “People usually estimate that their expenses will reduce because they are not commuting to work or perhaps not eating lunch out,” said Avani Ramnani, director of financial planning and wealth management at Francis Financial in New York. “They may just get replaced by other expenses, or even increase. They should settle into their new life and track the new set of expenses.”

• Both spouses should take part in managing finances. One may want to handle the checkbook, but they should both have a say in how the money is spent to avoid financial disagreements down the road. Older Americans are filing for divorce more so now than ever before.

Social Security

• Know your benefits. Create a My SSA account to see that work history is listed accurately and how much you should expect in a benefit check each month. The Social Security statement will also identify a person’s full retirement age, which will determine when they qualify to get 100% of their check, or when they may get a discounted amount for claiming early or a fatter check for claiming late.

• Look into claiming strategies and weigh when it makes sense to claim early versus on-time or later.

• Understand what spousal benefits are available for you or a spouse. There are “free spousal” benefits available for some couples, though they must be born before Jan. 1, 1954.

Withdrawing from assets

• Couples should assume they’ll have differences in how they’ll spend their retirement resources, and they should acknowledge those differences instead of ignoring them, said Rand Spero, president of Street Smart Financial in Lexington, Mass. They may very well need to adapt their retirement plan over time as they figure out what works and what doesn’t. “Advertisers show couples sharing blissful retirement years together so that people assume having common goals is the norm,” he said. “However, in real life, the first years of retirement are the most challenging because people move from focusing on their individual careers to considering how to spend their finite retirement resources of time and money together.”

• If you don’t have a financial adviser, read up on all strategies to draw down assets, including the 4% rule and the bucket strategy. Consider the tax consequences as well.

• Keep tabs of required minimum distributions, which must be made from numerous retirement accounts (including 401(k) plans) by age 70 ½. Forgetting to take RMDs will result in a penalty tax equal to 50% the amount that should have been withdrawn.

Health care

• Don’t forget about exercise, nutrition and attending to relationships. Walters gives his clients the book “Younger Next Year,” which is about improving lifestyles in retirement. “It also helps to lower their health care costs and infirmities,” Walters said.

• Have enough stashed away for medical bills and emergencies. This is an expense that will continue to rise as people age. A couple retiring in 2018 at 65 years old could expect to spend $280,000 on health care in retirement, and that doesn’t include long-term care costs.

Relationship

• Talk about goals, early and often. “The biggest challenge for any couple is being on the same page with goals,” said Thomas Rindahl, a financial adviser at Truwest Wealth Management Services in Scottsdale, Ariz. Rindahl said he has been working with a couple where one spouse wants to spend more of the funds than the other who wants to be more philanthropic. “They spent the first year or two coming to a happy balance,” he said.

• Follow the “3 C’s: Communicate, Cooperate and Compromise,” said Linda Jacob, a financial adviser and financial counselor at Consumer Credit of Des Moines in Des Moines, Iowa. To communicate, couples need to “say what you mean, mean what you say and don’t say it mean.” To cooperate, they need to work together to see their goals get accomplished. And they’ll also have to compromise, not always getting what they want. “Sometimes you have to take a back seat and let your spouse get what they want,” she said. “Then when it’s your turn, they help you.”

Lifestyle

• Create a new structure for the workweek, so as not to get bored.

• Talk to your spouse about your hopes, dreams and fears for retirement, as well as theirs. “Most retired couples do not look like those pictured in ads and commercials,” said Patti Black, partner at Bridgeworth in Birmingham, Ala. Spouses need to talk to each other about their expectations in retirement, like if they’ll be eating lunch together or separately often, work around the house and how much they’re willing and able to babysit the grandchildren.

• Don’t spend all of your time thinking about the day you’ll retire and what life will be like afterward. “That’s like the engaged couple who spends all their time thinking about the wedding and not on their marriage,” Black said.

• Draft or update important documents, including wills and advance directives, said David Almonte, a member of the American Institute of CPAs’ National CPA Financial Literacy Commission.

• Remember why retiring was important to you in the first place, and take the time to reconnect with your spouse and loved ones, Almonte said. “You save up your whole life for this thing called retirement,” he said.

Life comes with a lot of little surprises. Your best friends may throw you a party on your 25th birthday, full of confetti and cocktails. Your significant other may get down on one knee and propose during a cozy dinner at home. You may win a trip to Europe after calling into a radio contest, or find an extra few French fries at the bottom of your take-out bag. It’s all beautiful and exciting, because these scenarios are unexpected. There are some money saving tips in your 20s that you never thought you’d follow, and things you’d never thought you’d do, too. Spoiler alert: You followed them and did them all. *Cue the gasps.*

You see, you always knew you needed to focus on your finances. And now, you’re feeling grateful that you did. You’re grateful that you worked towards a career, developed a savings account, or decided to stay in on a Saturday night to avoid overspending. It paid off in the long run, or should I say, the present. You’re feeling the rewards of your decisions right now.

Sure, you may have been a little disappointed or frustrated along the way. Your FOMO kicked in the second you saw your best friends dancing until dawn all over social media. But, you learned a beautiful lesson along the way — one you’ll like learn more than once: Working on your finances and following these five money saving tips is well-worth it.

1. SAYING “NO” TO GOING OUT ON A SATURDAY NIGHT

Back in college, you lived for the weekends. You spent your entire week at the library, working away on your latest assignments and getting your essays turned in on time. Then, Saturday came along, and you were free as a bird to dance until dawn with your best friends.

You never expected you’d eventually turn down these opportunities to save a little money. But, you’ve found that the easiest way to build up your bank account is to ditch the local restaurants and bar scenes. Instead, you find enjoyment out of staying in and watching movies, or snuggling up with your pup. Girl, same.

2. TRACKING YOUR LIVING EXPENSES AND WHERE YOUR MONEY GOES

Growing up, you may have had one dream for your 20s: That, one day, you’dmove and live on the West Coast. You would get a loft in your favorite city, and drink iced coffee in the sunshine every day. Not to mention, you’d run into celebrities casually walking their dogs on the sidewalks.

But, as you got older, you realized that it’s expensive AF to go across the country or to get an apartment of your own — let alone a loft in Los Angeles like the one in New Girl.

So, you moved into your own place, then began tracking your living expenses and where your money goes. You figured out how much you should spend on food, entertainment, and the cable bills, and cut costs where you could.

3. LIVING AT HOME LONGER THAN YOU ORIGINALLY PLANNED

On the contrary to moving out and being on your own, you may have lived at home longer than you originally planned in your 20s. You stayed in your hometown in your childhood room, just to save a little a money.

Living at home taught you to be more financially independent and really helped you put your priorities in place. Not to mention, it gave you some quality time to spend with your parents and siblings, and made you really appreciate where you grew up.

Now, you may have that apartment on the West Coast or in New York City, and feel better than ever. That’s because you didn’t rush yourself and created a budget that will work for now, and for the years to come.

4. SURROUNDING YOURSELF WITH RESOURCEFUL FRIENDS

In your 20s, you’ve learned to be very resourceful. You’ve gotten good at buying items that aren’t single-use, and finding many purposes for a mug or a bowl. It’s helped you save a lot of money every day.

You learned these skills, though, by surrounding yourself with the right people. You may have grown apart from the friends who found every reason to spend money, or couldn’t see the value in getting creative and being grateful for what they have.

In the moment, it felt like the worst thing, well, ever. (Friendship breakups are never easy.) But, you may have learned that it was also necessary to your finances and growing as a person in the “real world.” You started hanging out with other people, and found new friends who appreciate making brunch at home or staying in on a Friday night — the Monica to your Rachel, if you will.

5. PAYING YOUR BILLS ON TIME

Your 20s has been the decade of realizing that your parents were right when they gave you advice. They told you not to spend a bunch on money and rack up bills on your credit cards at the mall. They told you to collect coupons or deals where you could. You wouldn’t trade those pieces of advice for anything in this world.

But, possibly the most important piece of advice was this: Pay your bills — your rent checks, car payments, and the five dollars you owe to the dentist — on time. Don’t let the late fees and charges pile up, and take care of them as soon as possible.

So, you’ve followed it. You’ve taken a dive head-first into your finances, and scheduled your payments so that they’re never a few days past due. It’s kind of a surprise to you that you actually followed these tips, but it truly worked out for the better.

Americans are hardly known for being great savers. If anything, they have a tendency to spend money and rack up huge loads of debt in the process. The problem has gotten so bad, in fact, that 65% of Americans in debt have no idea when they’ll shed it. Worse yet, 25% of those in debt expect to carry it with them to the grave, according to CreditCards.com.

Now, not all of that debt is the bad kind in nature. Mortgage debt is the most common type among U.S. households, and it’s a pretty healthy type to carry. Unfortunately, credit card debt ranks second behind it, and that’s pretty much the worst type of debt to have. Not only can credit card debt cost you a boatload of money in interest, but it can also damage your credit score, thereby making it more expensive (if not impossible) for you to borrow money the next time you need to.

If you’re currently in debt, it’s imperative that you aim to shed it as early in life as possible. Otherwise, you might indeed carry it for the rest of your life — and beyond.

Breaking free from debt

The sooner you get yourself out of debt, the sooner you’ll stop accruing interest that works against you. But it’s especially crucial that you rid yourself of debt prior to retiring. Once you stop working and move over to a fixed income, you’ll need every dollar of it to pay your living expenses, so having a nagging debt payment to contend with is the last thing you want. And while you might manage to squeeze out some extra money to apply to your debt while you’re still working, once you’re retired, extra money will likely be hard to come by.

So how can you get out of debt? First, figure out which debts of yours are costing you the most. If you have credit card debt, you’re probably paying a higher interest rate on that than on your student loans, so it makes sense to tackle the former first.

Once you order your debts by payoff priority, you’ll need money to make them go away. To that end, try creating a budget. It’ll show you where your money is going, and where there’s room to cut corners.

From there, you’ll need to make some meaningful changes to free up cash to pay down those obligations. That could mean downsizing to a less expensive home, unloading a vehicle you can live without, or cooking your meals at home rather than dining out.

At the same time, look into getting a side job to drum up extra cash. You might consult in your current field, or turn a hobby into an income. It doesn’t really matter what you do for additional money as long as you commit a little time to boosting your cash intake.

Don’t retire in debt

If you’re nearing retirement with a wad of unhealthy debt, it pays to postpone that milestone until you’ve managed to rid yourself of it. Working an extra year or two might enable you to pay off your credit cards so that you don’t continue accruing costly interest at a time in life when you really can’t afford it.

That said, not everyone retires free of mortgage debt. If that’s the scenario you’re facing, and you can afford your home with the money you get from savings and Social Security, there’s no particular need to panic — especially since 30% of seniors today still carry mortgage debt. But ideally, your mortgage should be the only debt that hangs over you once your career comes to a close.

The fact that 25% of Americans expect to die in debt is pretty dire. If you’re carrying debt, make lifestyle changes that allow you to rid yourself of it sooner. That way, you’ll enter retirement without the weight of a nagging series of payments and the financial stress they’re likely to cause.

Most people think of a 401(k) as a smart place to invest their money, and it can be. But it can also be a poor choice if your 401(k) restricts your savings’ growth by charging high fees or offering few investment products for you to choose from.

Before handing over your hard-earned cash, you need to evaluate your 401(k) plan thoroughly to make sure that it doesn’t come with any unpleasant surprises. These four red flags can be an indication that your 401(k) is a poor vehicle for your retirement savings. If it turns out your 401(k) is a stinker, don’t worry; We’ll also give advice on how to save your retirement dollars, instead.

1. Few investment options

401(k)s usually have a limited number of investment options pre-selected by your employer. The average plan offers eight to 12 investment products, but some plans may only offer three. These are typically mutual funds, but some companies may also offer company stock and variable annuities. More investment choices are usually better because you have more freedom to decide how you want to invest your money and it is easier to tailor your portfolio to your needs. If you only have a few choices and none of them line up well with your investing goals, your retirement savings may not grow as quickly as you’d like.

If your 401(k) only offers a handful of investment products, you can talk to your employer and request that they give you more options to choose from, but they are under no obligation to comply. You could also open an IRA instead of or in addition to your 401(k). IRAs offer a much wider variety of investment products, including stocks, bonds, mutual funds, exchange-traded funds, and more, so it’s easy to build a custom portfolio that aligns with your goals and risk tolerance.

There are two types of IRAs: Roth and traditional. Traditional IRAs are tax-deferred, like 401(k)s, so any contributions will reduce your taxable income in the current year, but then you’ll pay taxes on your distributions in retirement. While 401(k) contributions are taken out of your paycheck before being taxed, traditional IRA contributions are taxed in your paycheck, but then you write off these contributions when you file your taxes for the year. Tax-deferred accounts are best if you believe you’ll be in a lower income tax bracket in retirement than you are today. Contributions to Roth accounts, on the other hand, do not lower your taxable income that year, but then you don’t have to pay taxes on distributions in retirement. They’re a better choice if you think you’re in a lower income tax bracket now than you will be in retirement.  

It’s worth noting that IRAs have a much lower contribution limit than 401(k)s — $6,000 in 2019 for IRAs compared to $19,000 for 401(k)s ($7,000 and $25,000, respectively, for adults 50 and older). If you plan to make large contributions to your retirement accounts, it’s still a good idea to use your 401(k), even if you don’t like its investment choices. You can contribute to your IRA first to take advantage of the wider range of investment products and then put any extra in your 401(k) to take advantage of the tax-deferred growth.

2. High fees

All 401(k) plans charge fees to cover your account’s investment and administrative costs. Many people don’t realize this because they never receive a bill for the charges because the money is taken directly out of your 401(k) each year. You can figure out how much you’re paying in 401(k) fees by reviewing your plan summary or by looking at the prospectus for your investment products.

The cost of your 401(k) will vary depending on what you’ve invested in, how much your assets are worth, and the company you work for. Mutual funds charge shareholders an annual fee known as an expense ratio. This is charged as a percentage of your assets, so the more money that you have invested in that particular asset, the more you will pay. Administrative fees cover things like recordkeeping and other legal services. Larger companies are usually able to offer more affordable 401(k) plans because the administrative costs are spread across more employees whereas in smaller companies, everyone has to shoulder a larger portion of the expense.

Never pay more than 1% of your account balance in 401(k) fees each year. For a $1 million portfolio, you’d be throwing away $10,000 each year. Some larger companies are able to offer fees below 1% of your assets per year, while some smaller companies are forced to charge upwards of 2% of your assets per year. This can cut into your profits, forcing you to work longer in order to save enough for retirement or leave your finances short at the end of your life.

If your 401(k) plan charges high fees, you may be better off saving in an IRA. These accounts usually have much lower fees — often under 0.5% of your assets per year — especially if you invest in lower-cost investment products, like index funds. These are mutual funds that passively track an index, eliminating the need for costly portfolio managers and analysts. You could also speak to your HR department about offering more low-fee investment options to help you reduce your 401(k) expenses.

The one time you may be better off sticking with your 401(k) even if it charges high fees is if your employer-matched contributions are enough to cover these costs. This way, you don’t have to worry about fees eroding the value of your personal retirement contributions.

3. No employer match

It isn’t a smart move to write off your employer’s 401(k) plan just because they don’t match your contributions. If it offers a nice array of low-fee investment products, it’s still a great place to stash your retirement savings, especially because 401(k)s have a much higher annual contribution limit than IRAs.

But if your employer doesn’t match your contributions and they have few investment options or charge high fees, you may be better off putting your money in an IRA instead. The fees are lower and you’ll have a lot more investment options to choose from. If you max out your IRA and still want to set more money aside, then you can place it in your 401(k) to enjoy its tax advantages.

4. Long vesting period

If your employer does match your contributions, there will probably be a vesting schedule that determines when your employer-matched funds become yours to keep.

Some employers have a graded system where, for example, 25% of employer-matched funds are yours after one year, 50% after two years, and so on. Others may require you to work for the company for a certain number of years before you’re eligible to keep any employer-contributed funds. And there are others that may not have a vesting period at all, allowing you to keep all employer contributions even if you quit after a few months.

A three- to four-year vesting period is common, but some companies may have longer or shorter periods than this. You can check with your HR department if you’re not sure of your 401(k) plan’s vesting period. Of course, the vesting period shouldn’t matter too much if you plan to stay with the company for many years. But if you’re thinking about quitting soon, a long vesting period could end up costing you some or all of your employer match. If these are your circumstances, evaluate the 401(k) based on its fees and investment products to decide if it’s the best place for your money, ignoring the employer match.

A good 401(k) is a great place for your retirement savings, especially if you’d like to automate your contributions. While this is possible with an IRA as well, you must set up the payroll deduction yourself instead of your employer setting it up for you.

If your employer matches your 401(k) contributions and offers a good selection of low-cost investments, it’s definitely worth putting as much of your savings there as you can afford. But if your plan has one or more of the red flags listed above, you may be better off opening an IRA instead.