Archives for December 26, 2019

The year 2020 is just around the corner, which means countless Americans are gearing up to improve their finances once it kicks off. Here are Americans’ chief financial goals going into the new year, according to a survey by Marcus by Goldman Sachs — and what you can do to achieve them.

1. Save more money

We all need savings on hand, both for emergencies as well as retirement. If you don’t have enough cash reserves in the bank to pay for at least three months of essential living expenses, then building your emergency fund should be your primary financial goal for 2020. Once you have that cushion, you can begin setting aside funds in an IRA or 401(k) as retirement savings.

Of course, coming up with that money to save is easier said than done. To that end, one of the best ways to help yourself is to set up a budget. That way, you’ll see what your expenses cost you month after month, and you’ll have an easier time identifying which ones to cut back on.

And to be clear, you most likely will need to reduce your spending in certain categories to free up money for savings. That could mean dining out less frequently, canceling a gym membership you don’t use often, or cutting the cord with cable and signing up for a low-cost streaming service instead.

Another great way to drum up extra money for savings? Get yourself a second job. These days, you can turn a host of hobbies into a side hustle, and that way, you’ll get paid for doing something you love. You can also try consulting in your current field on weeknights and weekends (for example, if you’re a web developer, take on a few private clients) or monetizing your vehicle by signing up to drive for a rideshare company. There are plenty of options to consider, but if you earn money outside your regular paycheck, you’ll have the option to save all of it (minus taxes, of course).

2. Pay off debt

Debt tends to fall into two categories — the healthy kind and the unhealthy kind. Mortgage debt and student loans belong in the first category, while credit card debt very much monopolizes the second. If you’re loaded up on credit card debt, you can shed it more quickly by following the aforementioned advice — organize your expenses in a budget, cut back on spending as much as you can, and get a side gig to boost your income. At the same time, you’ll need a solid debt payoff plan to ensure that you’re tackling that burden efficiently.

One good way to pay off debt is to take a look at your various obligations, see what they cost you, and pay them off from highest interest rate to lowest. For example, if you have one credit card balance in the amount of $2,000 with a 12% interest rate attached to it, and another $7,000 balance with a 16% interest rate, you may be inclined to tackle the $2,000 balance first, since it’s much smaller. But actually, what you should be doing is chipping away at the $7,000 balance first, since its interest rate is higher.

Another option? Transfer your existing balances onto a single credit card with a lower interest rate. Some cards even give you a 0% introductory rate, which you may very well qualify for if you have good credit. There’s also the option to consolidate your different balances into a loan with a more favorable interest rate to avoid having to keep up with multiple payments each month.

Saving more money and paying off debt are two critical goals that Americans are setting for themselves in 2020. If your bank or retirement account needs a boost, and if you’re tired of walking around saddled with credit card balances, then you’d be wise to add them to your list of resolutions as well.

Social Security can be complex and confusing, and there are so many factors to consider before you start claiming benefits. What age should you begin claiming? How big will your monthly checks be? How much will you be able to depend on your benefits in retirement?

Although it’s confusing, it’s important to understand as much about Social Security benefits as you can. Most retirees rely on their benefits for a good chunk of their retirement income (in fact, nearly a quarter of married couples and close to half of unmarried beneficiaries depend on their checks for at least 90% of their income in retirement, according to the Social Security Administration), so any mistake you make could have a significant effect on your future. There’s one common mistake that research shows could lead to big regrets down the road.

Age is more than just a number when it comes to Social Security benefits

The age at which you start claiming benefits will affect the amount you receive each month for the rest of your life. The only way to receive the full benefit amount you’re entitled to is to claim at your full retirement age (FRA), which is age 67 for those born in 1960 or later, or either 66 or 66 and a few months for those born before 1960.

You can claim earlier than your FRA (as early as age 62), but your monthly benefit amount will be reduced – those with an FRA of 67 will see their benefits reduced by 30% if they claim at 62. On the other hand, if you wait until after your FRA to claim, you’ll receive additional money each month on top of your full benefit amount – you can receive up to 24% more if you have a FRA of 67 and you claim at age 70. These extra benefits cap at age 70, though, so while you can claim later than that age, there’s no financial incentive to do so.

In theory, it shouldn’t matter what age you begin claiming because your lifetime benefits should be relatively equal. You’ll receive smaller checks if you claim early, but you’ll collect more of them over the years. If you delay benefits, your checks will each be bigger, but you’ll receive fewer of them in total. Over a lifetime, your overall benefit amount should be roughly the same regardless of when you claim.

Life doesn’t always work out so perfectly, and research shows that claiming early might result in more financial struggle later in life. A report from the National Bureau of Economic Research found that claiming benefits at age 62 was associated with a greater probability of living in poverty late in life.

That’s not to say that claiming benefits early is always a bad decision or that you’re destined to struggle financially if you claim at 62. Sometimes, it may be the best choice. But in other instances, it could be a major mistake.

Is claiming early the right choice for you?

62 is the most popular age to claim Social Security benefits: 48% of women and 42% of men claim at this age, according to a report from the Center for Retirement Research at Boston College. It’s easy to see why so many people claim early; when you’ve been working for about four decades and are itching to retire, it’s tempting to claim benefits as soon as possible. But just because you can claim benefits doesn’t necessarily mean you should.

There are a few situations in which claiming early may not be the best choice, and the first is if you expect to live a longer-than-average lifespan. Again, your lifetime benefits are designed to be relatively equal no matter when you claim, but that assumes you’ll live an average lifespan – which is about 85 years old, according to the Social Security Administration. If you live longer than that, you’ll actually receive more money over a lifetime the longer you wait to claim. Those bigger checks will add up over time, so if you end up living into your 90s or beyond, you can potentially receive tens of thousands of dollars more if you wait until age 70 to file for benefits.

Another situation in which it pays to wait is if you don’t have a robust retirement fund. If you don’t have much saved, there’s a good chance you’ll run out of money early in retirement and will be forced to rely on your benefits to make ends meet. If you claimed at 62, those smaller checks will make it difficult to pay all your bills. If you had delayed benefits, the extra few hundred dollars you’d receive each month could go a long way.

Who should claim at 62? If you have a healthy retirement fund and can afford to make do with smaller checks, claiming at age 62 might allow you to retire earlier and make the most of retirement while you’re relatively young. If you have reason to believe you’ll live a shorter-than-average lifespan, claiming early might be the best decision because you’ll probably receive more money overall than if you wait to claim benefits.

Choosing when to claim Social Security benefits is one of the biggest retirement decisions you’ll make, and if you claim at the wrong age, it could seriously hurt your chances of enjoying your golden years comfortably. The more knowledge and understanding you have about how age affects your benefit amount, the more likely you are to make the best decision for your future.

If there’s anyone you should turn to for honest and objective money advice, it’s a financial planner.

Certified financial planners have a fiduciary responsibility to provide guidance and recommendations that are in your best interest — not theirs, their company’s, or anyone else’s.

That said, financial planners can still offer sound and actionable advice when they’re not sitting with a client one-on-one. Here’s some of the smart money advice financial planners have shared with us:

1. ‘Work hard and save most of your money’

Renee Kwok, certified financial planner and the CEO of TFC Financial, a $1 billion financial planning and asset management firm based in Boston, tells her young daughter to “work hard and save most of your money,” she told Business Insider.

But, Kwok added, how much you save is almost as important as where you put it. “You can’t collect interest or grow your stacks of cash if they are sitting in an envelope in your desk drawer,” Kwok tells her daughter.

A high-yield savings account or money-market account is often the best place to keep savings so it grows, but remains easily accessible. While you won’t wreck your financial life by not storing savings in a high-interest account, your money will almost certainly lose value thanks to inflation. Online savings accounts, as opposed to big retail banks, usually offer the best rates, which can be up to 200 times more than a checking account.

“Even in today’s low interest rate environment,” Kwok said, earning some interest is far better than none. And if you have an established emergency fund, consider investing in index funds to grow your money even more, she said. 

2. Tackle your ‘bad debt’ first

Debt isn’t a death sentence, but it can certainly hold you back. To help people balance their debt and savings goals, personal-finance company SoFi created a three-step method, Lauren Anastasio, a certified financial planner at SoFi, told Business Insider.

“We call this the ‘debt fireball method,’ and that’s where we attack the highest interest rate debt first, the bad debt,” Anastasio said. That means putting as much as you can toward credit card debt and high-interest rate personal loans, while still paying the minimum on all other balances.

“Once you’ve eliminated that high interest rate debt, even if you have student loans or a car loan or a mortgage, focus on funneling as much cash as possible toward your savings,” Anastasio says. Savings goals should first and foremost include building an emergency fund and saving for retirement, and perhaps also putting away money for a down payment or travel.

“Having cash on hand, having liquidity, is hugely important, especially during times of uncertainty,” Anastasio said. “Then, only once we’re truly satisfied and feel secure with that savings should we consider making extra payments to pay other debt off sooner.”

3. ‘Bucket’ your savings goals

Luis Rosa, a certified financial planner who founded the firm Build a Better Financial Future, suggests managing your savings goals with a “bucketing” method. After you’ve listed out all your fixed and variable expenses for the month, put “goal-specific money” — think: funds for a vacation, wedding, or down payment on a house — in various “buckets,” Rosa previously told Business Insider.

Ideally, these are high-yield savings accounts at different banks or even the same one, as long as they’re not lumped together with your spending money. After separate accounts are set up, decide how much you can afford to contribute monthly to each goal and set up auto deposit. If it helps, think of savings as an expense, at least for your highest-priority goals, even if it’s just $10 a month.

Rosa said he likes bucketing because it makes tracking savings progress even easier. “This also helps with the motivational aspect of staying the course,” Rosa said. “Some days when you ask yourself ‘Why am I working so hard?’ you can see how much progress you’ve made toward a future goal and it reinforces the behavior. You’re more likely to stick to your goals if you can track its progress.”

4. Avoid ‘lifestyle creep’

“Live below your means” is perhaps the most repeated financial advice of the modern era, and for good reason. You can’t get ahead if you’re spending all your income, but it’s easy to get caught up when your friends are hitting milestones or you begin to earn more money yourself. 

“I always refer to it as ‘lifestyle creep’ because one of the big things that people can do — that’s an advantage to them — is keep their fixed expenses somewhat stable and reasonable for what they make,” Katie Brewer, a Dallas-based certified financial planner and founder of Your Richest Life, previously told Business Insider.

Brewer says that working on stabilizing fixed expenses is something she regularly helps her 30-something clients with, many of whom are working couples and couples preparing for kids.

Of course, Brewer said, if you’re making good money you should have the freedom to spend it how you wish, as long as your lifestyle doesn’t overtake your income.

5. ‘Don’t wait’ to buy life insurance

Not everyone needs life insurance, but if you assume you don’t need it only because you’re young, you could be sorely mistaken, certified financial planner Jeff Rose wrote in an article for Business Insider. The purpose of life insurance is to provide livelihood for a person or multiple people who are dependent on your income. It can also be incredibly useful for repaying outstanding debts after your death. 

“If you do have one or more people who are dependent on your income, or other financial obligations that may become the responsibility of someone else upon your death, you’ll need to have a policy,” Rose wrote.

“If so, don’t wait! Life insurance coverage will never be less expensive than it will be in your 20s. You’re young and probably in good health, and that’s the absolute best time to buy life insurance,” he said.

The average American estimates retirement will cost around $1.7 million, according to a survey from Charles Schwab.

Although the exact amount you’ll end up spending in retirement will vary from person to person, you’ll likely need several hundred thousand dollars stashed away if you want to enjoy your golden years comfortably. Most of today’s workers no longer have a pension to count on, and the average Social Security benefit amount is just $1,471 per month — which is hardly enough for most people to live on.

However, many workers are nowhere near reaching their retirement goals. Even among Americans who are only a few short years away from retirement, savings are drastically lower than they should be: The median amount that workers age 56 to 61 have in savings is just $21,000, according to a report from the Economic Policy Institute. For most people, that money will only last a year (or even less) in retirement.

If your savings look better than the average worker’s, you’re not necessarily off the hook yet. It’s important to figure out what your savings goal is before you can determine if you’re on track.

How much should you save for retirement?

Your retirement goals will likely be different from those of your neighbors, friends, and coworkers. So, while comparing your savings to what others have stashed away may give you a general idea of where you stand, it won’t paint the full picture of whether you’re on track to save enough.

To determine how much you should save for retirement, there are a few pieces of information you need to know. First, think about how much you expect to spend each year in retirement. This number might be similar to what you’re spending now, or it might be significantly more or less. Factor in all of your everyday living expenses, and don’t forget bigger costs like travel and healthcare. You won’t be able to predict all of your future costs, but the more accurate your estimate is, the better off you’ll be.

Next, factor in your Social Security benefits. You can see what your future benefit amount will look like by checking your statements online, but keep in mind that the age you begin claiming will affect the amount you receive. If you claim before your full retirement age — which is either age 66, 66 and a few months, or 67 — your checks will be reduced by up to 30%. Claiming early isn’t necessarily a bad thing, but make sure you know how it will affect your monthly checks.

Once you know what you’ll be spending and how much help you’ll receive from Social Security, you can figure out how much money will need to come from your personal savings. For example, if you estimate that your total retirement expenses will come out to $60,000 per year, and you’ll be receiving $20,000 per year from Social Security, that means $40,000 per year will need to come from your savings (assuming you don’t have a pension or any other sources of income).

One other important factor to consider is your life expectancy. Americans are living longer than ever, with one-third of today’s 65-year-olds expected to live to age 90 or beyond, according to the Social Security Administration. And the longer you live, the more you’ll need to save. Unless you have a crystal ball, there’s no way you can know your exact lifespan. However, you can estimate it the best you can based on your overall health and family history. If you have reason to believe you’ll live a longer- or shorter-than-average lifespan, that can dramatically affect how much you need to save.

Once you have all of this information, plug your numbers into a retirement calculator. This will give you an idea of how much you need to save by the time you retire, plus the amount you should be saving each month to achieve that target.

What if your goals are too challenging to reach?

If you’re one of those people in their late 50s with only $21,000 saved, there’s a very good chance you won’t be able to boost your savings by hundreds of thousands of dollars in just a few years. If that’s the case, you have a couple of options: Work hard now to save as much as you can, or adjust your retirement expectations.

No matter how you look at it, you’ll need to make sacrifices somewhere — either now or once you retire. If you want to seriously beef up your retirement fund, you may choose to cut your budget down to the bare bones and work a few years longer than you expected. You might also pick up a part-time job in retirement to help your savings last longer.

Even if you’re doing everything you can to save more, you still might have to adjust your retirement expectations. If you have little saved, you may not be able to afford to travel the world or pick up expensive hobbies. That doesn’t mean you can’t experience an enjoyable retirement, though — it just means you’ll need to get creative and learn to live a more frugal lifestyle. For example, you may sign up for free classes in your community to learn new things on a budget, or you could downsize to a smaller home or move to a more affordable city to stretch your dollars even further.

If you’re falling behind on your savings, it’s important to realize that sooner rather than later. The more time you have before retirement, the easier it is to make adjustments and get your savings back on track. Even if you’re significantly behind and can’t afford to save as much as you need, you should still try to boost your savings as much as you can. Doing something is better than doing nothing, and every little bit counts.