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Monday, June 29, 2015
your retirement nest egg, you need to change your investment strategy. The idea is to withdraw enough to help you get by now while holding enough in reserve to finance the rest of your life.
Making the transition to investing in your 60s and beyond requires a new way of thinking about investments. Here are 11 pointers:
1. Estimate how long your savings must last
You can’t plan effectively without an idea of how long your money should last. Of course you can’t know how long you’ll live, so we’re talking here about estimating the longest you might live, so you won’t run out of money.
A 65-year-old woman can expect to live to nearly 87, and a man the same age will live, on average, until 84, says the Social Security Administration, whose Life Expectancy Calculator gives a rough idea of expected lifespans. Or use The Wharton School of Business’ Life Expectancy Calculator for more-specific estimate based on your answers to questions about behavior, family history and health.
2. Calculate annual expenses
To plan your finances in retirement, you’ll need to know how much you need to live. Especially if money is tight, you’ll need specific spending data, not estimates. If you budget and have tracked your spending, you’ve got the data you need. If not, start now. Automatic tracking is simple with free tools like one from Money Talks News’ partner PowerWallet. But a notebook or spreadsheet, to name a couple of alternatives, also will do — as long as you keep it up. After tracking for a few months, you’ll begin to see where your money’s going and can decide how much to withdraw from investments.
3. Fully fund emergency savings
Keeping a cushion of savings in cash or short-term CDs lets you ride out market downturns without selling stocks at low valuations. Some experts advise having an emergency fund to support yourself for a year and a half to two years.
4. Plan your withdrawals
Retirees need a system for regular cash withdrawals. For example, one popular system suggests withdrawing 4 percent of your initial savings balance each year, then adjusting that amount annually for inflation. The creator of this approach, William Bengen, says savings split equally between stocks and bonds should last at least 30 years with this system. While, as he recently told The New York Times, the 4 percent rule “is not a law of nature,” it does provide a framework. The key is to adopt a system, then adjust it as necessary.
5. Seek safety
How much you will keep in CDs, bonds and high-yield savings accounts depends somewhat on how much safety you require. Intelligent risk is necessary with part of your investments if you don’t want inflation to erode your portfolio’s value.
Many retirees follow this rule of thumb (called the “glide-path” rule):
- Subtract your age from 100. The resulting number is the percentage of your investments you should hold in stocks.
- Invest the remaining amount in bonds and money market funds.
If you’re 70, for example, keep 30 percent of your portfolio in stocks, including mutual funds and ETFs, and the remaining 70 percent in bonds.
Does this rule provide enough growth to keep a portfolio going strong? Experts disagree. Writes CNN Money:
[W]ith Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age. That’s because if you need to make your money last longer, you’ll need the extra growth that stocks can provide.
Take a look at the results of various asset allocations at Vanguard’s portfolio allocation models. These illustrate the performance of various stock-bond mixes since 1926.
6. But don’t neglect growth
The other end of the retirement seesaw is the need to grow your nest egg, at least a little.
Unless you have so much money that you don’t need to worry about inflation, you’ll need some growth investments. Usually, that means stocks and stock market mutual funds and ETFs. Learn more about growth investing here: How to Get Into the Stock Market — Safely.
How much of your portfolio to devote to growth? Again, there is no single approach. Travis Sollinger, director of financial planning at Fort Pitt Capital Group in Pittsburgh, tells US News’ Kira Brecht that he advises retirees to allocate 60 percent of their portfolio to stocks and 40 percent to bonds because “your years in retirement will still be significant.”
“If you have a well-diversified portfolio with a heavy equity exposure, you should see annual returns of 6 percent, 7 percent or more,” Sollinger says.
7. Plan for required minimum distributions
After age 70 1/2 the Internal Revenue Services requires savers to begin taking minimum annual withdrawals from IRAs, 401(k)s and other non-taxable accounts into which you contributed funds before taxes. The IRS requires you to pay tax on the income.
(Note: The rules, penalties and taxes on withdrawals from Roth IRAs are different from regular IRAs and 401(k)s. Be sure to check the specifics of your Roth account.)
These minimum withdrawal amounts are calculated by the IRS based on life expectancy and account balances. The IRS rules are specific and inflexible about how much to withdraw and when. Ignore them, and you could face stiff IRS penalties. For example, if you were supposed to withdraw $4,000 and didn’t, you could owe a $2,000 penalty, writes the New York Times.
Here’s an IRS worksheet that shows when to make withdrawals and how much to withdraw.
Financial discipline is crucial if you are to outlive your money. Take an unsentimental look at your spending, decide how much to withdraw annually from savings and investments and stick to that plan through bad times and good.
9. Get help now and then
When you manage your own money it’s a good idea to pay an expert for an independent review at least occasionally. Bengen, who came up with the 4 percent rule, tells The New York Times that even he uses financial advisers:
“Go to a qualified adviser and sit down and pay for that,” he said. “You are planning for a long period of time. If you make an error early in the process, you may not recover.”
Hire a Certified Financial Planner who works on a flat hourly rate to review your retirement plan, income and expenses. A CFP adviser must put your financial well-being ahead of their own.
Money Talks News founder Stacy Johnson discusses when and how to find a trustworthy financial adviser. Consumer Reports tells how to shop for a financial adviser and what their credentials mean.
10. Rebalance your portfolio yearly
You’ve decided what proportion of your investments to allocate to various types of investments but, over time, your investments perform differently, throwing off your original allocation. Once a year you’ll need to adjust, or “rebalance,” your portfolio to restore it to your original allocation choices.
11. Consider other sources of income
Stocks and bonds are not your only investment choices in retirement. Two other possibilities are longevity insurance and annuities.
AARP financial writer Jean Chatzky says that longevity insurance starts payouts when you reach a specified age — 85, for example:
Say at age 60 you buy a $50,000 policy from MetLife. If you live to 85, you’ll start receiving annual payouts of $15,862 if you’re a man, $15,511 if you’re a woman.
No doubt you’ve heard of annuities, which are financial contracts sold by insurance companies. There are several annuity types, as explained in this piece by Stacy: Ask Stacy: Should I buy an Annuity for Retirement Income?
“As with all investments, the more a salesman is trying to jam something down your throat, the more cautious you should be,” Stacy says. If you are considering an annuity, get expert advice, and not from a salesperson but from an accredited financial adviser who charges a flat hourly fee.
Thursday, June 25, 2015
Financial traps lurk around every corner. We fall into these traps when we become a little too smart in how we manage our money. Perhaps we think we can get a great deal with 0% financing. We have a spending plan, but don’t really follow it each month (spending is under control). Or we buy in advance, borrow from our savings with the good intention of paying ourselves back. While on the surface these moves seem harmless, dig a little deeper and you’ll see how they can rob your financial peace.
0% Financing Deals
I know 0% financing seems to make sense and on the surface seems like a great deal! After all, you’re not paying any interest unless you miss a payment. A lot of people use 0% financing for TV’s, appliances and cars. We’ve certainly used 0% financing for items in the past. However, this is never as good of a deal as what it seems. 0% financing is still debt no matter how you look at it. You’re locked into making payments every month until your pay off date and there are typically big penalties if you miss.
The biggest problem with this type of financing, or any financing really, is presuming you will always have the money to make the payments each month. The bigger the payment, the bigger the presumption you’re making. Surprise expenses come up from time to time for all of us and that’s just a fact of life. If money is tight, you might be forced to miss a payment or have to put that surprise expense on a credit card because of your 0% payment obligation. Forget about 0%, avoid the temptation, and simply consider whether or not you want the debt hanging over your head.
Not Following a Spending Plan
We create a budget to plan our spending each month and it would be ridiculous to pretend that we’ll always stay within our budget. As good of a planner as we may be, there are still going to be times we spend a little more than anticipated. Maybe because we bought more groceries than usual or gas prices increased. There are many reasons. But if we consistently ignore our spending plan and don’t correct overspending problems, we’ll dig ourselves into a hole that can be difficult to get out of. Too much eating out? It will eventually catch up. We’re either forced to take money from another budget category to keep our spending in balance, or use a credit card to make up the difference. Otherwise, we won’t have the money to meet other expenses. Don’t beat yourself up about overspending a little, but don’t let it run out of control either. Create a plan so that you have a plan for your money and your money isn’t spending you.
Borrowing from Savings
Borrowing from savings is easy to do sometimes. Perhaps you’ve been told you’re getting a work bonus, but you won’t receive the money for a couple of months. Anyone remember Clark Griswold presuming upon the future and purchasing his swimming pool in the move, Christmas Vacation.
It’s easy enough to spend ahead from savings and then some. But the problem is using money today you may very well need tomorrow. Again, life happens and we all need our savings from time to time, right?
Things get really complicated when you have to put new expenses on a credit card because you’re waiting on the future money to pay back your savings. Borrowing from savings gets more complicated when you borrow based on an assumption that you’ll earn the extra money later.
What happens if you don’t earn that money? Again, you’re forced to swipe a credit card to meet expenses!
Buying a House with Little Money Down
The home of your dreams is certainly enticing, especially when you’re out touring homes on a Sunday afternoon. The bottom line here is that we’ve learned that a house isn’t necessarily a safe investment. It’s subject to economic swings just like the stock market. So, not having at least 20% down for a house potentially costs you more than monthly PMI and a higher monthly mortgage payment. Should our economy go into a recession, you risk being upside down in your investment and either having to short sell or foreclose if you need to get out of it.
Play it safe and rent until you can save for a 20% down payment. There is no shame in renting and having more flexibility, less maintenance overhead and perhaps a more desirable location. Long term, buying a house is a great move, but step into it with financial sense and control dream house emotions.
Not Having a Least $1000 in Savings
“Make sure you have saved at least 6 months to a year in your emergency savings account!” The advice goes something like that. Honestly, I appreciate this advice from many financial gurus, but I sort of snicker when I hear it. I agree with it, don’t get me wrong. Sure, save, save and save to cover your expenses in the event of a job loss or illness. Cover yourself for emergency situations. But truthfully, Americans have a hard time saving, especially, this much. If it’s within your means, please do so. Work hard to put away excess cash and find ways to save money. But, focus on one goal first: save $1000. I’ve met some emergency situations over the years and honestly, most of them are fundable with $1000 or less. I’m not suggesting that’s all you should have, but you’re going to meet an emergency here or there and $1000 is the minimum you need to have stashed to keep the financial peace.
All these things are certainly easy traps to fall into. Believe me when I say my wife and I’ve experienced every one of them and they’ve definitely robbed us of our financial peace, creating some stress and worry.
What do you think about these traps and what traps have you experienced?
Monday, June 22, 2015
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