Archives for October 13, 2019

A recent survey showed more than half of U.S. investors have provided or currently provide financial assistance, personal assistance or both to their adult children or extended family members — and that’s excluding tuition payments.

So how does one save for retirement while helping out the family financially?

The regional president of Wells Fargo Advisors’ Northern Region Mary Sumners shared her tips with FOX Business:

1. Save for unexpected health care costs

“Individuals are living longer [and] health care costs are rising,” Sumners told FOX Business.

Sumners is right, according to the Wells Fargo survey. Over half of investors were estimating they would pay less than $200,000, but the estimated costs are more than $300,000, which includes long-term care and does not include what Medicare would cover.

Sumners suggested setting up a realistic expectation of how much health care will actually cost when you retire and then building a plan to make sure you can pay for that later.

“Have those conversations about whether something like long-term care insurance or longevity insurance fits into the picture, something that can help not only your parents but may protect you because it is a situation that none of us want to fall into where an aging parent might need long-term care and that can quickly devastate your savings if you’re not prepared for that,” Sumners said

2. Get better at saving in general

“Let’s be honest, Americans aren’t the best savers in the world,” Sumners explains. “Every time you get a raise, put half of it toward your savings. It feels a lot easier to save money you’ve never seen. If you get a bonus, put that toward your savings or a big part of [your] tax refund.”

“You’ve got to pay yourself first. You really do have to take care of yourself.”- Mary Sumners, Wells Fargo Advisors

Sumners said putting bonus money toward savings is better than trying to reducing your discretionary spending.

More importantly, Sumners said it’s about saving early and often, planning ahead, being disciplined and staying focused.

“The message is ‘get out there, start early saving, put that money aside,” Sumners said. “Take advantage of every tax-advantaged program and account that’s available to you.”

She said it’s crucial to grab all the free money available to you, including an employer match on a 401(k).

3. Be careful about incurring debt

“Be smart about student loan debt,” Sumners said. “Really be smart about credit-card debt.”

Sumners said it’s important that when we make big purchases that we’re keeping our ultimate financial goals in mind.

“I think as the population ages … investors are watching their parents who maybe haven’t saved enough, they watch students [and] adult children come out of college with student debt,” Sumners said.

Debt can lead to stress, which Sumners emphasized is something a person can eliminate by planning.

“If you’re stressed out about making financial decisions, you make significant mistakes.”- Mary Sumners, Wells Fargo Advisors

4. Ask yourself: How do you want to live while you’re retired?

“Six out of 10 respondents said the experience of caring for a family member changed how they wanted to be cared for,” Sumners said to FOX Business. “So many of them … said it’s going to influence their own saving rates in order to make sure that they don’t fall into the same situation later in life.”

Sumners said while there’s no hard-and-fast rule for how to save enough for retirement, it’s good to ask yourself what you want to accomplish while you’re retired.

“What are your hopes and dreams?” Sumners suggests asking. “What do you want your money to do in the future? Do you want to buy a home? Do you want to buy a car? That vacation that you might want to take? Travel the world? Support grandkids in college?”

It’s only after you get all of those goals written down and documented that an adviser can help you look at the path that will help you get there, and the path that will help you to not only get there but keep you on track.”- Mary Sumners, Wells Fargo Advisors

5. Plan, plan and then plan some more

“If the individual doesn’t have a plan themselves, and they’re reacting to these needs coming at them day-to-day, they might not even realize that it’s impacting their long-term financial stability,” Sumners advises.

She said it’s critical for people to try to understand the importance of having a comprehensive financial plan to work toward their retirement savings goal.

“I think it’s really just about discipline. It’s about having a plan, having a way to amass that wealth and put that money aside.”- Mary Sumners, Wells Fargo Advisors

Sumners said it’s a shame the school system doesn’t emphasize financial education and that burden often falls on parents, who might be struggling with their own financial literacy themselves.

“Sometimes parents try to have the conversation, but kids don’t necessarily hear the conversation and sometimes, it’s too late,” Sumners said. “But I would say, it’s never too late.”

Sumners admits sometimes it’s hard to get people to picture themselves in the future, so planning for that can be difficult.

“If we can get people to visualize themselves in their later years, I think they’ll understand the importance of stepping into that saving role,” Sumners said.

6. Educate yourself

Unfortunately, since the schooling system so often falls short in teaching everyone how to be more financially sound, it’s important to do as much research as you can, Sumners mentioned.

“I don’t know why the education system leaves it out,” she said.

But Sumners said one thing parents can teach their children when trying to increase their financial literacy is the idea of helping yourself before helping others. Sumners compared it to when you’re on a plane and the flight attendants recommend securing your oxygen mask before helping others.

We need to make sure to instill in our children the importance of helping others from a position of strength of stability.”- Mary Sumners, Wells Fargo Advisors

“It’s the analogy that comes to mind for me is someone who, without a life preserver, is perhaps trying to save somebody who’s drowning,” Sumners said. “You run the risk of drowning yourself if you’re not protecting yourself.”

Sumners said there are many online resources people can use that can help people set financial goals and stick to them. But if you’d rather have someone in person, there are options for that, too.

“Working with an adviser and making sure that you have professional assistance is always a good idea when talking about finances,” Sumners said. “It’s an opportunity for you to benefit from somebody who’s helping lots of other people like you and can help.”

The financially organized person has many hallmarks, including holding little to no debt (or at least a sound strategy to pay down any debt), having a monthly budget, and working actively toward clear financial goals. One of the signs of the truly elite financial managers among us is consistently maxing out one’s retirement accounts every year, but only one in five Americans manages to do this, according to the 2019 TD Ameritrade Retirement Pulse survey.

Perhaps unsurprisingly, baby boomers are the most likely to do this, because at this stage in their lives, there aren’t many financial goals left to save for apart from retirement. Millennials came in a distant second, with Generation X bringing up the rear. This makes sense when you consider the financial obligations many in this generation have to both their children and their aging parents, not to mention their own debts.

Maxing out retirement accounts isn’t easy for a lot of people, but it’s one of the best things you can do for your future if you can afford to do so. Here’s a look at how it can benefit you and where you can find a little extra cash to put toward your retirement.

The difference that maxing out your retirement accounts can make

Most Americans don’t even come close to maxing out their retirement accounts. The average 401(k) contribution as of the end of the first quarter of 2019 was just $2,370, according to Fidelity. This is a record high, but still a far cry from the $19,000 401(k) contribution limit for the year. Adults 50 and older may contribute as much as $25,000. IRA contribution limits are lower — just $6,000 for adults under 50 and $7,000 for adults over 50.

Let’s use the above figures to estimate what difference maxing out your retirement savings could make over time. First, let’s establish the average $2,370 401(k) contribution as a baseline. That comes out to $197.50 per month. If you contributed this amount every month for 30 years and earned a 7% annual rate of return, you’d end up with a final balance of just under $224,000. The average household headed by an adult 65 or older spends nearly $50,000 per year, according to the Bureau of Labor Statistics, so this probably won’t even see you through five years of retirement. Social Security might help you limp along a little further, but you can forget about travel and big-ticket purchases. Just covering your basic living expenses will probably be a struggle.

Now let’s imagine that you contribute the maximum $6,000 to an IRA every year for 30 years with a 7% annual rate of return. That will leave you with nearly $567,000, which is much better than $224,000, but still probably not enough for most retirees.

What if you contribute the maximum $19,000 (about $1,583 per month) to a 401(k)? Over the same time frame with the same annual rate of return, you’d end up with close to $1.8 million. Now that’s a nest egg that most people can retire comfortably on, and it will probably even allow for some travel and maybe some big-ticket purchases.

The above figures don’t account for changing market conditions or the fact that retirement contribution limits change from year to year, but they give you a rough sense of where you could end up based on how much you set aside for your retirement each month.

How to boost your retirement contributions

I hear many of you saying, “That’s easier said than done. I don’t have a spare $19,000 to put toward retirement every year.” And I hear you. It’s not easy for most people. But the good news is that you might not even need to save that much per year to retire comfortably, depending on when you start saving, how long you anticipate your retirement lasting, and how you plan to spend it. 

Before raising your retirement contributions, it’s best to estimate how much your retirement will cost you by multiplying your annual living expenses in retirement by the estimated length of your retirement, adding 3% annually for inflation. Use a retirement calculator to help you estimate your investment rate of return — 5% or 6% is a good starting point — and subtract money you expect from Social Security, a pension, or a 401(k) match to figure out what you must save on your own. If you find you need to boost your retirement contributions, try some of these tips.

If your company offers a 401(k) match, you should also be doing everything you can to take advantage of that. Do whatever you have to — cut back discretionary spending, bring lunch to work instead of dining out, brew your coffee at home or skip it altogether — to free up enough cash to set aside for retirement so you can get your full employer match. This is free money that reduces the savings burden on you. There’s no good reason not to take it, unless doing so would jeopardize your ability to cover your basic living expenses. Watch out for your company’s vesting schedule, though. If you leave before you’re fully vested, you might forfeit some or all of your employer match.

Beyond that, try making some lifestyle changes. Look for ways to reduce your monthly expenses and create a budget you can stick to that prioritizes retirement saving over discretionary expenses. You could also look for ways to increase your income today, like pursuing a promotion or starting a side business. Put the extra money you earn toward retirement first. You won’t miss it because you’re not used to having it. If you do start a side hustle, don’t forget to set some of that money aside for taxes, too. 

Delay your retirement if nothing else works. This gives your current savings more time to grow and gives you more time to save for your future. It can also reduce how much you must save per month to hit your goal. If you wanted to save the same $1.8 million as in our example above, but you had 40 years to do it instead of 30, you would need to save only about $750 per month instead of the $1,583 we used above, assuming the market conditions were more or less the same over this period as in our previous example. 

Don’t get too stressed out if you can’t save as much as you want to for retirement this year. Try some of the tips above until you find a plan that works for you. You could also consider enlisting the help of a financial advisor if you’re not sure how to best manage your money on your own.

Social Security is funded by payroll taxes, and all workers are subject to them up to a certain limit. That limit can change from year to year to reflect overall wage growth, and in 2020, higher earners can expect to have more Social Security taxes taken from their paychecks.

How Social Security taxes work

The current Social Security tax rate equals 12.4% of your earnings, up to the annual cap. If you’re a salaried worker, you pay half that amount (6.2%) yourself, and your employer pays the other half. If you’re self-employed, you pay the entire 12.4% tax on your own.

For the current year, the wage base for Social Security purposes is $132,900, which means earnings above that threshold aren’t subject to the 12.4% Social Security tax. But the wage base is climbing to $137,700 in 2020, which means higher earners will lose more money in the coming year.

All told, workers earning at least $137,700 will need to pay $17,074.80 in Social Security taxes. If you’re salaried, you’ll be responsible for $8,537.40, and if you’re self-employed, the entire $17,074.80 is on you.

When we compare these numbers to what high earners are forking over in 2019, it means you’re looking at an extra $595.20 in Social Security tax in 2020 if you’re self-employed. If not, you’ll only pay an extra $297.60.

Keep in mind that the wage cap applies to Social Security taxes only; Medicare taxes apply to all of your earnings. The Medicare tax rate is 2.9%, and self-employed workers pay that entire sum themselves. Salaried employees pay half, as is the case with Social Security.

Are Social Security taxes fair?

The fact that very high earners don’t pay Social Security taxes on all of their income is a point of contention among workforce members and politicians alike. After all, workers earning less than $137,700 will pay Social Security taxes on all of their income, while those earning $1 million will be spared those taxes on the bulk of their income.

But it’s important to realize that Social Security also has a maximum monthly benefit that seniors are allowed to collect. Therefore, while a person earning $1 million will pay the same amount of Social Security tax next year as someone earning $137,700, those two individuals will have the same wage amount for the year factored into their benefits calculation. In other words, the ultrarich can’t get more from Social Security in retirement than moderately high earners whose wages hit the annual tax cap, so to make them pay more into the system isn’t necessarily the fairest solution.

Get ready to pay more taxes

If you’re a higher earner, prepare yourself to fork over some extra money in Social Security taxes next year. And if that’s problematic, try lowering your tax burden in other ways. Contributing to a tax-advantaged retirement plan, like a traditional IRA or 401(k), can lower your taxes, as can selling investments at a loss. It’s never fun to have to pay more taxes, but that’s the reality, so the best you can do is devise a strategy to compensate.

“What goes up must come down” isn’t just how gravity works—unfortunately, it also applies to the United States economy. It can’t be bull markets and rainbows all the time, sadly. If you’re someone who got excited about high yield savings account interest rates that were inching above the 2% mark until just a few months ago, it’s time to start recalibrating your expecations.

Notice I didn’t say “panic and move all your money this instant.”

For so many years during and after the recession, we had this mutual understanding that savings interest rates were simply not good. But over the past few years, as the Federal Reserve called for nine consecutive rate increases, banks have gradually rewarded customers with higher rates on high-yield savings accounts. In June, the average savings APY for online banks (the ones usually offering the highest of high-yield interest rates) was 1.69%.

But the handy chart above stops keeping track just a month before the Federal Reserve started to walk back those interest rate hikes. It cut rates in July for the first time since 2008. And so high-yield savings customers have started to see notifications that their interest rates are dropping.

What to do if your high-yield interest rate is going down

Just as it’s not worth switching banks for a minuscule increase in interest rate, it’s not worth switching banks to avoid a slight decrease, either. That new bank could end up adjusting its rates at any time, leaving you with another lackluster interest rate.

Yes, I watched with glee as my online savings APY went from 1.8%, to 2%, to 2.3%. Now, I’ve been watching it drop to 2.1%, and then to 1.9%. But my rate of saving hasn’t changed. I still have the same auto-transfer set up. The money I’ve already saved isn’t losing value–it’s just gaining value more slowly. And because I’m not expecting my money to turn into millions with a 1.9% interest rate, it’s safe to say I’m comfortable waiting out these rate fluctuations.

If sitting on your hands is not your preferred course of action, you have a few options.

First, you could move some of your money into a CD. Since CDs have a fixed term, you get the same interest rate for the entire time period (six months, a year, whichever option you choose). The longer the term, the higher the interest rate. But you can’t add money to a CD after you’ve funded it, and you can’t take money out in the middle of the term without paying for a hefty fee. The exception to this is the no-penalty CD, which typically has a slightly lower APY than a regular CD, and allows you to take all the money back at once if you choose.

Another option is to invest more of your money. For all the worries about the economy, the stock market is still in good shape. You could add to your tax-advantaged retirement account or put more into a non-retirement brokerage account. There’s more risk, but also more potential for long-term growth.

But if, like me, you use your high-yield savings account for your emergency fund, a traditional CD and investments aren’t going to be too helpful in the event you need to get liquid, fast.

For money that’s easy to get your hands on in a matter of a few days, it’s probably best to leave it in that high-yield savings account. Even if the interest rate has dropped to less than 2%.