Archives for September 1, 2019

5 Expenses That Can Eat Into Your Retirement Savings

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Saving enough money for retirement is challenging, even if you have a clearly defined plan. What’s disturbing is that most people don’t even have that much going for them. This causes many to underestimate certain retirement costs and overlook others altogether. Here are five commonly ignored costs that could take a sizable chunk out of your retirement savings if you’re not prepared for them.

1. Healthcare

Healthcare is a tricky thing to plan for in retirement because there’s no way of knowing how your health will be as you age. Even if you do everything you can to stay healthy, an accident could still leave you seriously injured and unable to care for yourself. Medicare will cover some of your expenses, but you’ll still have deductibles, premiums, and copays, and there are some services, like hearing aids, that it doesn’t cover at all. 

Estimates for retirement healthcare costs range from $285,000 to over $363,000 for a 65-year-old couple retiring in 2019. These figures represent out-of-pocket costs and do not include the portion that Medicare covers for you. If you’re a long way off from retirement, you can expect the medical inflation rate to drive up these costs even more. Add these expenses into your retirement plan if you forgot or underestimated them the first time around. You can use the above figures as a starting point and then adjust them accordingly based on your lifestyle and family health history.

2. Fees

Every retirement account charges fees to cover recordkeeping, account rollovers, and other services. The investments you choose will have fees also. Mutual funds, for example, have expense ratios, which are annual fees charged as a percentage of your assets that all shareholders must pay. Over time, these costs can eat into your profits, forcing you to work even longer to save enough.

You don’t want to pay more than 1% of your assets in fees annually. This is $10,000 on a $1 million portfolio. Check your plan summary or the prospectus for your investments to figure out how much you’re paying in fees if you’re unsure. Typically IRAs are more affordable than 401(k)s, and larger companies offer more affordable 401(k)s than smaller companies because they have more employees to divide the administrative costs, but this may not always be the case.

If your 401(k) charges high fees, talk to your employer about adding lower-cost investment options, like index funds. These are mutual funds that passively track a market index. You could also move your money to an IRA, but this may not make sense if your employer matches some of your contributions. As long as the matched funds are enough to cover what you’re losing in fees, you’re better off sticking with your 401(k).

3. Debt

It’s best to enter retirement debt-free if you can. Even if you think you’ll be able to comfortably afford your mortgage or car payment or your credit card debt in retirement, an unexpected emergency could force you to divert some of these funds toward something else. Then, if you fall behind on your bills, you could lose your home or vehicle or end up hounded by debt collectors.

Make debt repayment a priority now so you don’t have to worry about it in retirement. Limit your discretionary purchases, work overtime, or seek out side jobs to boost your income and put all your extra cash toward your debt. If you have a large mortgage, consider downsizing to a more affordable place to reduce your monthly payments instead. For credit card debt, consider transferring your balance to a card with a 0% introductory APR or taking out a personal loan to cover the amount so you can have a predictable monthly payment. Getting out from under this debt now can also free up more cash you can put toward your retirement savings so you can retire more comfortably.

4. Taxes

You will still owe taxes in retirement unless all your savings are in Roth accounts. How much you’ll owe depends on how the tax brackets fall that year and how much you withdraw from your retirement accounts. There’s no way to predict this with accuracy, but you can estimate it using the current tax brackets and your estimated annual retirement expenses.

Use this as your baseline, but remember, you’ll owe taxes only on the amount you withdraw from tax-deferred savings. So if, for example, you had half your savings in a tax-deferred account and half in a Roth account and you intended to withdraw 50% of your retirement expenses from the Roth account and 50% from the tax-deferred account one year, you’d owe taxes on only half of your annual living expenses. You may have to beef up your retirement savings plan if you didn’t account for taxes when you first created it; you want to ensure you have enough money to pay your tax bills when the time comes.

5. Your kids

Many parents today help their children pay for their college education so they don’t have to take out as much in student loans. This is noble, but you shouldn’t let it inhibit your retirement savings. Putting yourself first can feel selfish, but it’s actually better for your children in the long run. They may have to take out some student loans to cover their education, but if you can’t save up enough money for retirement because you were too busy saving for their college, you’ll run out of money and your children will have to care for you. This can cost them far more than student loans would cost, especially if you end up needing a lot of medical care in your old age. 

Some parents or grandparents may also take out loans in their own names to cover their child’s education. But if you carry this debt into retirement, you may have to spend less on the activities you enjoy, and you run the risk of jeopardizing your financial security if a major expense arises and you’re unable to keep up with your debt payments. Always focus on your own financial goals first, and if you have extra money left over, you can put it toward helping your children.

Your retirement savings are what’s going to keep a roof over your head and food on your table when you’re no longer working. It needs to be a high priority, and you can’t afford to let the five expenses above eat into those precious savings. Redo your retirement plan if you haven’t accounted for any of these things, and make a plan for how you’ll handle any debt you have before you reach retirement so it doesn’t become a burden to you.

Financial Steps to Take When You’re Pregnant

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THERE’S A LOT OF PREP work to complete when you’re expecting a new baby. Expectant parents have a nursery to paint, strollers to buy, doctor’s appointments to attend and nannies to hire.

But in addition to those tasks, experts say, newbie parents should be taking care of financial matters in the months leading up to a birth.

Pregnancy is a great time to check in on your financial life, says Sharon C. Allen, CEO and co-founder of Sterling Wealth Management in Champaign, Illinois. It’s an ideal time to assess your budget, emergency savings, estate planning documents and insurance needs to determine whether anything needs to be refreshed.

While not every financial question needs to be answered before the baby’s arrival, experts note that it’s easier to meet with your financial team when you’re not carting around a two-week-old.

Want to know how to financially prepare for a new baby? Here’s what to do.

Consider Your Access to Parental Leave and Other Employee Benefits
Let’s start with short-term concerns. Consider how you’ll approach parental leave and whether it will impact your budget.

Review your employee benefits or schedule a chat with human resources to determine how many weeks or months you can take off work and whether you’ll be paid all, a portion or none of your salary while on parental leave.

This step is important because many families are hit with a double-whammy after childbirth. Not only are their living costs increased by the presence of a new baby, but taking parental leave may slash their take-home pay if they need to use the Family and Medical Leave Act, which offers eligible employees 12 weeks of unpaid leave, or tap short-term disability insurance, which typically only replaces a portion of your salary. The amount you receive in short-term disability will also be impacted by whether you pay premiums with pretax or post-tax dollars. If you pay with pretax dollars, your benefit will be subject to taxes, which will reduce the overall amount received.

While reviewing family leave policies, take a moment to evaluate your health insurance and determine which prenatal visits and pediatric care it will cover. Take note: You could be on the hook for health insurance premiums if you’re taking leave from your job, says James Bayard, a certified financial planner in Baton Rouge, Louisiana. Don’t forget that you’ll need to add your newborn to your medical insurance within 30 days of the birth.

Assess Your Budget

Now that you understand what portion of your salary will be covered during parental leave, “practice living under a new budget constraint several months out,” Allen says. If you can, factor in any new expenses the baby will incur, including child care expenses and other fees, although these can be unpredictable.

If you’re tapping short-term disability insurance, there may be an elimination period before your benefits kick in. Determine whether you can survive several weeks before you receive your benefit and aim to shore up your savings in advance of that dry spell. If not, it’s time to shore up your rainy day fund.

Reevaluate Your Life Insurance

Consider whether the life insurance you have now will meet your needs. If you’re looking to add insurance, one product that can work well for new parents is term life insurance, experts say. This kind of insurance is often affordable and expires after a set term, typically anywhere from 10 to 30 years. “At the end of the term, the policy ceases to exist,” says Peter Hoglund, certified financial planner and vice president for Financial Life Planning at AEPG Wealth Strategies in Warren, New Jersey.

The idea is that a payout would help a surviving parent or a guardian care for your child, perhaps send him or her to college and pay for necessary expenses after the death of a parent. But once the child reaches a certain age and level of independence, having an insurance policy on your life would become unnecessary for those reasons, and it would expire.

Bayard notes that you can often get this policy set up while you’re pregnant. But if you’re experiencing health issues related to pregnancy, it may impact your rates and you may want to hold off, or just insure the non-pregnant parent, until six months after the birth.

Here’s the No. 1 thing this retirement pro is telling his clients right now

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Savings matter.

That’s the No. 1 idea Stadion Money Management’s Will McGough, the firm’s chief investment officer for retirement, is promoting among his clients as he tracks what he calls a burgeoning ”‘savings more’ crisis.”

That’s because McGough, whose firm invests its $3 billion in assets under management almost exclusively in exchange-traded funds, believes the act of saving matters much more than even picking the right portfolio.

“Saving is by far more important than what your investment mix is going to be,” McGough tells CNBC’s “ETF Edge.” “The more people can save today, the more compounding will play off in the future.”

Compounding refers to growing the value of a given asset by allowing it to appreciate via stock market gains or increasing interest. And, for McGough, letting that process play out will benefit long-term investors much more than the occasional rally.

“Saving’s No. 1. Investments are No. 2,” he said on Monday.

And at a time when the median retirement account balance for investors 65 and older at Vanguard, one of the largest investment firms in the world, is just $58,000, McGough’s message hits home.

“Having a long-term view is very important to us,” he said. “We’re not looking at year-over-year returns.”

In that framework, McGough’s firm precisely allocated its exposure, with 65% in U.S.-based equities and 35% in international stocks. Its split between developed and emerging market investments is 80% to 20%, respectively.

“For this bull market, we definitely like the U.S. and large-cap stocks,” McGough said. “Why would you bet against the largest U.S. companies [versus] the rest of the world? Right now, even with the volatility and the marcro backdrop, they’re holding up well.”

Retirement Plan Investors Who Work With Advisors See Bigger Balances

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Most retirement plans, such as 401(k)s, typically lock you into a plan that offers a small selection of mutual funds for the participants to invest in.

However, more retirement plans are letting participants have a brokerage account within the plan. This allows investors to invest outside the plan’s investment offerings, and put their money into any mutual fund, exchange-traded fund, stock or bond they choose.

Among these self-directed brokerage accounts (SDBAs) only 20% of the participants worked with an advisor, according Charles Schwab’s SDBA Indicators Report for the second quarter of 2019. The study found that the SDBA participants who worked with an advisor had an average balance of $448,515 – nearly twice as much as the $234,673 held by non-advised participants

Somewhat surprising was that the Gen X generation represented the majority of advised accounts, with 43.9%. One would have guessed that Baby Boomers used advisors the most, but in fact they came in second, with 43%. Not surprising, was that Millennials made up just 9.7% of the advised accounts.

In non-advised accounts, participants allocated one-third of their portfolios to equities. Apple (AAPL) and Amazon (AMZN) represent nearly 17% of their equity allocation. The other top stocks purchased by participants include Berkshire Hathaway (BRK.A, BRK.B), Microsoft (MSFT), Facebook (FB), Visa (V) and Alphabet (GOOG), the parent company of Google, accord to the report.

Mutual funds were the second most-used asset class, representing approximately 32% of participant assets. The remaining assets were held as cash, ETFs or bonds.

The top mutual funds were the Schwab S&P 500 Index (SWPPX), Schwab Total Stock Market Index (SWTSX), Pimco Income (PIMIX), DFA US Core Equity (DFQTX), and the Vanguard 500 Index (VFINX).

Meanwhile, in advised accounts, the investment vehicle of choice was the mutual fund, which held approximately 50% of participant assets. ETFs were the second-largest allocation, followed by equities, cash and fixed income.

The top ETF holdings were the Vanguard Total Stock Market ETF (VTI), the SPDR S&P 500 ETF (SPY), the Schwab US Broad Market ETF (SCHB), the Schwab US Large-Cap ETF (SCHX), and the Invesco QQQ Trust (QQQ).

The report said both advised and non-advised participants held Apple and Amazon as their top stocks; however, non-advised participants were much more concentrated in these positions. Non-advised participants put more of their money into growth stocks, which can be volatile, while the ones who worked with advisors invested in more value-oriented companies.

The report also said that from the first to second quarters of this year the average SDBA account balance grew 3.3% to $276,547, and jumped 12.3% from the year-ago quarter.

Another surprise was which accounts made more trades. Advised accounts averaged 9.8 trades in the second quarter, compared with 5.7 trades by non-advised participants. Overall trading volume was very similar to last quarter and last year.

Schwab is a financial services company that offers 401(k) plans, mutual funds, ETFs and one of the largest platforms for low-commission trading. So, one needs to be aware the data comes from the approximately 142,000 retirement plan participants who currently have balances between $5,000 and $10 million in their Schwab Personal Choice Retirement Accounts. Hence, the majority of assets in Schwab funds.

The SDBA Indicators Report said it tracks a wide variety of investment activity and profile information on participants with a Schwab Personal Choice Retirement Account (PCRA), ranging from asset allocation trends and asset flow in various equity, exchange-traded fund and mutual fund categories, to age trends and trading activity.