Archives for December 12, 2019

Few things in life are guaranteed. The old adage says only death and taxes are promised us. Besides that, the future is never guaranteed — even when you solemnly swear “’til death do us part.”

No one plans to get divorced. We can, however, rescue our retirement plan after a divorce. There are many factors to consider on your journey to retirement after divorce, such as taxes, children’s college funding, credit changes, and your own retirement dreams, goals, and desires.

Having personally been through this life event, one of the most important things you can do is take stock of what you have once the dust settles. Having a plan to get you where you want to go needs to start with where you are now. 

A New Start

Taking a fresh look at all your assets, whether investible or not, will give you a clear direction for rebuilding or optimizing what you have. If you find your retirement accounts have been reduced by half, then taking an in-depth look at each account’s investment allocation will help you decide if you need to be more aggressive. 

Most employer plans offer a full spectrum of investment options, from low-risk to fixed income bond funds to higher-risk international funds. You should review your positions every 90 days under normal market conditions. With increased volatility in the markets becoming the new normal, it is wise to review your underlying investment rate of return and adjust with market trends accordingly. The key is to actively engage in your retirement accounts moving forward. That way, you can harvest any gains from investments or mitigate any significant drawdowns like we saw in 2008.

You’ll also want to look at the costs associated with these investments. Many times, you can increase your return up to 2% by simply moving away from target date funds and into low-cost indexed funds, which are becoming more prevalent in employer plans.

Reassess Your Goals

Once you have a good picture of your financial foundation, it is time to reassess your goals. Let’s say you are 40 years old, have $100,000 left in your retirement account, make $80,000 a year, and still want to retire at age 65. You would need to save an estimated 10% of your income, or approximately $703 per month, in order to keep the same income in retirement paired with Social Security income.

You may think, “I won’t need the same amount of income when I’m retired because I won’t be going out to lunch with co-workers or buying that coffee and bagel on the way to work.” You may not be driving to work, but you will be driving somewhere! Maybe you’ll be taking grandkids to the mall, or buying them lunch, or investing in hobbies you didn’t have time for before retirement.The point is retirement costs money, and it probably costs more than you think.

Plan Your Way There

Now that you have a known goal, you can dive into a detailed income and expense plan to optimize what you can put away. Looking intently at what truly is a “want” and a “need” and adjusting your lifestyle to that perspective will give you a boost. With a good plan, the retirement you desire is still achievable. 

This stage is also a great time to look at what your new tax bracket will be and how to offset the higher limits imposed on single filers. Tax saving vehicles like health savings accounts, flexible spending accounts, and college plans can be key to reducing the amount of taxes you owe to the government.

Up to age 50, there is an annual maximum contribution to a 401(k) plan. After age 50, you can make annual catch-up contributions in addition to the maximum contribution. If you find yourself in an income bracket to max these out, adding the maximum contribution to a health savings account can not only reduce your taxable income but also give you a tax-deferred bucket to pay medical expenses in retirement.

Flexibility Is Key

As you begin to walk your new path toward retirement, keep in mind it needs to be flexible. This is not something you can set and forget. As you continue through life, markets will change, as will your dreams, goals, and desires.

While your goal should be reviewing your retirement accounts quarterly, it isn’t all about the numbers. We recommend reviewing beneficiaries on all accounts at least annually. Also, take a look at beginning your estate plan.

Most of us don’t like to think about what happens when we’re gone, but it becomes even more paramount after a life-changing event like divorce. Having a trust designed to your specific estate plan can help you dictate what happens to your assets should another major life event occur. You can ensure a plan is in place to pass your assets to whomever you want, however you want, whenever you want.

While a traumatic life event like divorce can create a lot of stress and anxiety about your future, sitting down with an advisor who can offer a unique perspective on rebuilding and refocusing your new life goals should be one of your first steps toward your new retirement dream. You have worked hard for your assets, and it’s time we work just as hard for you.

The Federal Reserve’s decision Wednesday to keep interest rates steady put the cap on a tumultuous year for consumers.

After raising the federal funds rate nine times in three years, with the last hike just one year ago as financial markets were melting down, concerns about a slowing economy and a looming U.S.-China trade war then caused the U.S. central bank to reverse course and cut rates three times over the last five months.

Meanwhile, everyday Americans have been caught in the middle.

The Fed’s recent moves impact consumers in many ways. On the one hand, lower rates have meant cheaper loans, which can impact your mortgage, home equity loan, credit card balance, student loan tab and car payments. But savers are also likely earning less interest on their savings accounts and, in some cases, losing buying power over time.

As the year ends, it’s a good time to consider whether your financial picture has improved over the last year, said Greg McBride, chief financial analyst at Bankrate.com.

“Look at your savings now versus the beginning of the year and your debt now versus the beginning of the year and asses whether you’ve made progress.”

With interest rates holding steady, “this is the time to pay down debt and boost savings,” he said.

Here’s a breakdown of how the Fed’s decision can help.

Credit cards

Most credit cards have a variable rate, which means there’s a direct connection to the Fed’s benchmark rate.

On the heels of the previous rate moves, credit card rates now stand at 17.4%, on average, down from a record high of 17.85% when the Fed started cutting rates in July, according to Bankrate.

When the Fed cut short-term rates, the prime rate lowered, too, and credit card rates followed suit. For cardholders, that means they likely saw reduction in their annual percentage rate within a billing cycle or two.

However, “the recent rate cuts have only trimmed $2 per month off the minimum monthly payment towards the average debt,” according to Ted Rossman, industry analyst at CreditCards.com.

For those still struggling to pay down credit card debt, shop around for a zero-interest balance transfer offer, Rossman advised. “These offers last as long as 21 months and can be a tremendous tailwind for getting out of debt quickly at the lowest possible cost,” he said.

At any time, cardholders can also reach out to their issuer directly to request a break on interest rates

“People would be surprised how often that works,” said Matt Schulz, chief industry analyst at CompareCards.com.

Savings

As a result of preceding changes in interest rates, savings rates — the annual percentage yield banks pay consumers on their money — are now as high as 2%, up from 0.1%, on average, before the Federal Reserve started increasing its benchmark rate in 2015.

Still, “most savings is sitting in a bank paying 0.1%, and that’s losing buying power,” said Greg McBride, chief financial analyst at Bankrate.com.

With the Fed holding steady for now, savers won’t continue to see the same upward momentum, but they can still reap the benefits of those significantly higher savings rates by switching to an online bank, McBride said.

Online banks are typically able to offer the highest yields because they have fewer overhead expenses than traditional brick-and-mortar banks.

With an annual percentage yield of 2%, a $10,000 deposit earns $200 after one year. At 0.1%, it earns just $10.

Alternatively, consumers can lock in a higher rate with a one-, three- or five-year certificate of deposit (top-yielding rates average 2.1%, 2.1% and 2.25%, respectively) although that money isn’t as accessible as it is in a savings account and, for that reason, does not work well as an emergency fund.

“There are still some pretty good deals out there,” said Ken Tumin, founder of DepositAccounts.com. “Consumers should not think they missed the boat. ”

Mortgages

The economy, the Fed and inflation all have some influence over long-term fixed mortgage rates, which generally are pegged to yields on U.S. Treasury notes.

As a result, mortgage rates are already substantially lower since the end of last year. The average 30-year fixed rate is now about 3.9%, down from 4.9% one year ago, according to Bankrate.

That means that if you bought a house last year, you may want to considering refinancing at a lower rate, McBride said, which would save the average homeowner about $150 a month.

“That’s where you get the biggest bang for your buck,” he added.

The Fed’s decision to leave rates unchanged means many homeowners with adjustable-rate mortgages, which are pegged to a variety of indexes such as Libor or the 11thDistrict Cost of Funds, or home equity lines of credit, which are pegged to the prime rate, will see their interest rate and monthly payments remain the same for the time being.

However, when the federal funds rate does move, consumers with HELOCs will feel the effects in their monthly payments within a billing cycle or two, according to Holden Lewis, NerdWallet’s home expert.

While some ARMs reset annually, a HELOC could adjust within 60 days.

Auto loans

For those planning on purchasing a new car, any Fed decision likely will not have any big material effect on what you pay. For example, a quarter-point difference on a $25,000 loan is $3 a month, according to Bankrate.

In addition, auto-loan rates are still relatively low, even after years of rate hikes. Currently, the average five-year new car loan rate is 4.6%, up from 4.34% when the Fed started boosting rates, while the average four-year used car loan rate is 5.34%, up from 5.26% over the same time period, according to Bankrate.

Since new cars are often financed by car manufacturers, these low rates will lower their costs, as well, and could mean car shoppers will see more favorable terms going forward, according to Tendayi Kapfidze, chief economist at LendingTree, an online loan marketplace.

“This means consumers may have an opportunity to not only find a better rate, but also negotiate a better price,” he said.

Student loans

While most student borrowers rely on federal student loans, which are fixed, more than 1.4 million students a year use private student loans to bridge the gap between the cost of college and their financial aid and savings.

Private loans may be fixed or may have a variable rate tied to Libor, prime or T-bill rates, which means that when the Fed cuts rates, borrowers will likely pay less in interest, although how much less will vary by the benchmark and the terms of the loan.

If you have a mix of federal and private loans, consider prioritizing paying off your private loans first or refinance your private loans to lock in a lower fixed rate if possible.

(A college education is now the second-largest expense an individual is likely to incur in a lifetime — right after purchasing a home. The average graduate leaves school $30,000 in the red, up from $10,000 in the early 1990s.)

If you search the internet looking for how much cash you need to retire, you’ll find estimates ranging from $1 million to $10 million. That’s about as helpful as a mechanical pencil with no lead, particularly if your retirement savings are currently well short of seven figures.

A definitive, realistic savings target for retirement is the cornerstone of your long-term savings plan. Without it, you’re flying blind. So grab some lead for that pencil and let’s figure out what your magic number is.

1. Know the 4% rule

As a first step, you should understand a concept called the 4% rule. Financial experts say that in retirement, you can safely withdraw about 4% of your savings each year. If you have $1 million in your retirement plans, you can live off $40,000 annually. At that rate, your risk of running dry is very low. In later years, you can adjust that figure up for inflation.

The 4% rule is not an exact science. It doesn’t account for volatility in the market or your unique financial situation. But it is useful to make ballpark estimates. Know that the numbers will be starting points for retirement planning, and will require adjustment as your finances evolve.

2. Look at your lifestyle

Before you pull out your calculator, think about the lifestyle that you want in retirement. There is an early retirement movement called FIRE, or Financial Independence Retire Early. Proponents of FIRE save high percentages of their incomes so they can retire before reaching 50. There is a caveat, though, and it involves lifestyle. Successful FIRE households live very frugally, which allows them to stretch $1 million in savings out for 40 or 50 years.

If that’s your retirement outlook, awesome. You might consider moving to a city with a low cost of living, such as El Paso, Texas. According to a Move.org study, monthly living expenses in El Paso are just under $1,200. That means you could get by on less than $20,000 a year in income, assuming you have no debt. Using the 4% rule – $20,000 divided by 4% – you can translate that into total retirement savings of $500,000. And if you qualify for Social Security benefits, you’d need to save up even less.

But maybe you don’t want to live out your days in El Paso, eating a brown bag lunch and walking around the park for fun. In that case, use your current lifestyle as a benchmark. Add up your living expenses for a year, and then make some adjustments based on your ideal retirement lifestyle. Will you drive less because you’re not going to work? Gas expenses go down. Will you travel more? Vacation expenses go up. Don’t forget to include income taxes plus any costs currently covered by your employer. Health care costs deserve their own discussion, so we’ll talk about those below. 

Once you have your annual expense total, divide it by 4% to find your ballpark retirement savings target. If your annual number is $75,000, for example, you’d need roughly $1.875 million to support your lifestyle for 30 years. That assumes no Social Security income.

You can account for Social Security by estimating your annual benefit by making a my Social Security account and subtracting your estimated benefit amount from $75,000. Then divide the result by 4% again to get your savings number. Say your Social Security benefit will be $12,000 annually. Your savings then need to support annual living expenses of $63,000, which brings your target savings goal down to $1.575 million.

3. Plan for health care costs

Want to take a guess at what you might spend on health care costs in retirement? Here’s a hint: It will be way more than what you spend on health care today. Fidelity estimated that a 65-year-old couple retiring in 2019 will spend $285,000 on medical costs in retirement. And consulting firm Milliman expects those expenses to be $369,000. 

Before you disregard those figures as ridiculous, consider that a private room in a nursing home sets you back about $8,500 a month. And the cost of a full-time home health aide can be upwards of $4,000 monthly. One health setback can quickly turn into a pretty major financial setback. 

Plan for health care costs by adding $250,000 to $350,000 to your target retirement number. 

4. Add up your debts

Debt repayments can skew your retirement planning because they’re temporary. When we used the 4% rule above, we assumed the $75,000 in expenses would be necessary for the rest of your life. But that’s not the case if $6,000 of that $75,000 is for debt payments. Once you pay off those debts, that expense goes away.

If you do have credit card balances, car payments, or personal loans, pay those off before you’re done working. Same goes for the mortgage if you can swing it. Then recalculate your living expenses again, and the picture will look much brighter.

5. Think about your loved ones

Your number crunching may reveal that you can live exactly until age 87. But consider your family and what you’d like to leave for them. At a minimum, plan on covering your own funeral expenses. But you could also think about things like college funds for the grandkids or ongoing care for a relative with special needs.

You could bequeath your home or other property to your loved ones for those purposes. Life insurance might be an option, too, if the costs aren’t prohibitive. Or you could simply work an extra few years and save more. If you like the last option, increase your target retirement savings number accordingly.

Saving now is key

Knowing roughly how much savings you need to retire is the first and most important step of retirement planning. Your next move is to ratchet up your savings, which may feel like you’re running a marathon. But just keeping putting one foot in front of the other, and you’ll be amazed how much distance you can cover.

There’s no more popular time than the end of a calendar year, or the start of a new one, to contemplate personal finances and resolve to do better. And there’s good news from investment giant Fidelity in this regard: An estimated 78% of Americans expect to be better off financially in 2020 than they are right now. And when you see what steps they’re planning to take to improve their finances, you’ll understand why.

1. Building emergency savings

A good 85% of Americans across all generations plan to establish an emergency fund in the coming year. If you don’t have one yourself, that’s an important goal to add to your list, because without cash reserves, you risk racking up serious debt the moment an unplanned bill lands in your lap.

Your emergency fund should contain enough money to cover at least three months of essential living expenses. For better protection, however, you may want to opt for more like six months’ worth of bills.

Where will the money for your emergency fund come from? You can eke out some savings by setting up a budget, seeing what you currently spend needlessly on, and then reducing those expenses. If you’re really behind savings-wise, you may need to rethink your essentials, too — for example, move to a smaller home to save money on rent so you have freed-up cash to put in the bank.

You can also try getting a side gig on top of your main job to boost your cash reserves. Having a second income stream could also buy you some protection in the event your hours are cut at work, or you lose your job.

2. Increasing retirement plan contributions

It’s encouraging to see that 50% of Americans intend to ramp up their IRA or 401(k) contributions in the new year. The more money you allocate to retirement savings, the more long-term financial security you’ll buy yourself. And if you save in a traditional IRA or 401(k), contributing more throughout 2020 will also serve the important purpose of lowering that year’s tax bill.

The annual contribution limit for IRAs in 2020 is $6,000 for workers under 50 and $7,000 for those 50 and over. The limits for 401(k)s, meanwhile, are much higher — $19,500 for workers under 50 and $26,000 for those 50 and older. Keep in mind that 2020’s 401(k) limits represent an increase from 2019’s, so if you’re maxing out at present, you’ll need to contribute a bit more to max out in the coming year.

3. Ramping up on charitable giving

The more money you donate to charity, the more you stand to lower your taxes, which could explain why 52% of Americans expect to give more to charity in 2020. But tax benefits aside, being charitable is just plain generous, and seeing as how the majority of tax filers don’t itemize on their tax returns anyway, it’s clear that many are making donations out of the goodness of their hearts more so than in an attempt to snag a tax break.

The moves you make during 2020 will dictate whether your finances take a turn for the better, or for the worse. It pays to focus on boosting your emergency and retirement savings, and if you’re able to be more charitable in the process, that’s a great thing to strive for. Ultimately, though, improving your finances could boil down to making smart choices and being mindful of your spending, so take some time to think about your money-related goals and what’s required on your part to achieve them.