Equifax Finance Blog » Retirement

Investing Tips: When to Talk to a Financial Planner

Jeff Rose — Tue, 15 May 2012 13:08:59 +0000

A financial planner is your partner in all steps of your financial planning, offering you investing tips and advice on a variety of money topics and retirement goals. If you need any kind of financial assistance, then the time to consult with an advisor is now.
It’s important that you do your homework on multiple advisors in your area before choosing one. Make sure you ask about all the fees a financial planner may charge before you sign a contract with him or her.

Why you might seek a financial planner

You may choose to hire a financial planner because you are seeking one or more of the following:

Investment advice
Budgeting help
Help with paying off debt
Savings assistance
Retirement account management
Advice about your mortgage or real estate investments
Tax preparation
Personal insurance guidance

The most common time to consult with a financial planner is when you are in the middle of your career, whether you are single and looking to start up an investment portfolio or you are settled with a family and need a wide range of financial advice.

While a financial advisor can help you build wealth throughout your working years, this kind of money professional is just as important to consult when you reach retirement age. Retiring usually comes with a set income, and you will likely need someone to help you manage your funds so that you don’t have to go back to work. An advisor will also help you determine when you should withdraw from your investments, as well as how much.

How can a financial planner help you?

A financial planner isn’t just there to help you with plotting your investment strategy; he or she can also assist you in determining how to pay off debt to make it easier to invest and to save your money for the future. Before getting too involved with a retirement investment strategy, a financial planner will make sure that you have a good budget and enough savings to begin investing.

Investing tip: Don’t overlook a financial planner’s services

One reason why many people skip out on professional financial advice is because they feel they can’t afford it. Retirees are especially wary of spending more money than they need to because they are on fixed incomes. However, financial advisors are worth the cost when you consider the amount of money you can save in the long term. Don’t be afraid to ask for help. You don’t have to wait until you have a lot of money to invest or are approaching retirement—it can be beneficial to consult with a financial planner at any life stage.

In the end, the best investing tip I can give for finding a financial planner is this: Shop around for quotes—and choose wisely.

Jeff Rose is a certified financial planner and author of the blogs Good Financial Cents and Soldier of Finance. Learn more about his Roth IRA Movement that has inspired over 140 personal finance to educate young adults on the importance of saving.

Retirement Advice: Setting up Joint Accounts

Jeff Rose — Tue, 08 May 2012 13:47:27 +0000

Investing is one of the most efficient ways to save for retirement; Social Security benefits are not enough to cover all of your living expenses, especially when you consider inflation. People most often seek retirement advice about whether they and their spouse should share a retirement account or if it’s best for them to open separate accounts. The choice ultimately depends on your situation, your goals, and your personal preferences.

Investing before marriage

The earlier you start investing in your retirement, the better off you will be financially when the time comes. Because many people concentrate on their careers before getting married, it’s reasonable to expect your future spouse to already have retirement accounts set in place before you exchange vows with him or her. It doesn’t make sense to wait to start saving until after getting married unless that is your only option.

When you get married, you’ll need to decide whether or not you should combine your retirement accounts. Depending on the kind of accounts you each have, the two of you also have the option of keeping your individual savings in place and opening a new account together. This helps to further increase your savings while maintaining your comfort level.

Work statuses

In some cases, one spouse is the sole breadwinner while the other is the homemaker. Although the homemaker helps to save the family money on costs related to childcare and cleaning, this doesn’t mean that he or she is not able to also have a retirement account.

If you are the sole provider for your family, you should strongly consider adding your spouse to your retirement account. This will allow you to maximize the tax savings on your account, and the two of you will be covered when the time comes to withdraw the funds.

Possible risks of combining retirement accounts

There are always risks when you combine money, which is one of the reasons why people hesitate to have joint retirement accounts. If you ever get divorced, your spouse may be entitled to some of the funds, even if you contributed most of the money.
This is a serious subject to talk over with your spouse. You may even consider getting a prenuptial agreement to err on the side of caution.

The bottom line of retirement planning

When it comes to the question of whether or not you should combine retirement accounts with your spouse, there is no right or wrong answer. If you two are already investing in the future, then you are already engaging in the most important factor in setting up retirement funds. The decision to open a joint retirement account is ultimately up to you.

It is also important to keep in mind that you can decide to combine accounts at a later date. To some couples, joint retirement investments are as big of a commitment as getting married. No pressure should be involved when it comes time to decide to combine accounts. If for some reason either one of you is not comfortable with the idea of a joint account, then keep your investments separate. Just be certain that the two of you keep investing so that you can live comfortably together through your golden years.

Preparing for the Worst: Evaluating Your Emergency Fund and Cash Savings

Jeff Rose — Tue, 17 Apr 2012 03:22:21 +0000

Preparing for an emergency is an important part of financial planning and of your retirement strategy. One financial or medical emergency can wipe out years of hard work and retirement planning and retirement savings without an emergency fund in place to take care of expenses. Meanwhile, keeping cash savings means that you can access what you need whenever you need it—without paying the early-withdrawal penalties associated with investment funds.

How much savings do you need?

When meeting with clients, I always recommend that three to six months of your basic living expenses should be saved for emergencies. This will cover you in the event that you have a loss of income. It will also pay for an expensive emergency or two.

However, this is just the minimum recommended emergency savings. It should serve as the basis of your emergency fund and not the end of your savings efforts.

Two emergency funds

One popular method of saving money for a worst-case scenario is to have two emergency funds: a short-term fund and a long-term fund.

The short-term fund can be used for a fender bender or a major appliance that needs to be replaced. This fund can be a specific dollar amount, or you can save a specific amount per month in this account and watch it grow.

The long-term fund is substantially larger and can cover major issues like a hospitalization, lost income, catastrophic home damage, or other large expense. This amount may be tens of thousands of dollars—or more—in order to give you the best protection from financial disasters. Some financial experts recommend picturing three emergencies happening at the same time to help you determine just how much you will need to save in the long-term fund.

Living below your means

Because so many people live paycheck to paycheck, it can be difficult to save much money each month. And when money is saved, it may not seem to add up to much. To make the most of your savings, and to prevent an emergency from wiping you out financially, live below your means. Eliminate expenses wherever possible and be sure that your monthly income is substantially higher than your monthly expenses.

If you have a two-income household, this can mean ensuring that you can make it on just one of the incomes. This creates an immediate emergency fund if one income is lost. If you have a single-income household, keep expenses at least 30 percent lower than your take-home pay to allow for an emergency fund to be built quickly. If your only income is lost, you won’t be faced with foreclosure, repossession, and lawsuits if you have plenty of emergency cash with which to pay creditors until a new income is found.

The most important thing to remember about an emergency fund is that it should be used for true emergencies. Many people start a fund and then dip into it for incidentals, intending to pay back the borrowed money later. Keeping enough emergency savings requires a different mindset. Instead of seeing it as available money to use whenever needed, consider it untouchable money that will never be used unless there isn’t any other option.

Retirement Strategy: Maximizing Your Employer Match

Jeff Rose — Tue, 10 Apr 2012 01:45:45 +0000

I recently read a report suggesting that if you are not saving at least 10 percent of your gross income, then your chances of outliving your nest egg in retirement are great—very great. What does this mean for your retirement strategy?

When your employer offers a matching contribution to your retirement fund, you have an opportunity to greatly increase your retirement savings and to save a substantial amount in less time. If you don’t use the offered money to its fullest potential, you aren’t getting the full benefits from your job.

Find out the maximum contributions

To get the maximum amount of savings matching offered by your employer, you must know how much of your own contribution is expected. If you have a Roth IRA or a traditional IRA, your contribution is capped at $5,000 a year. However, this is only your own portion of the contributions. Your employer can contribute that same amount each year.

With a 401(k), 401(b), a SIMPLE IRA, a ROTH 403(b), and other retirement fund types, annual contribution limits may be as high as $17,000 a year. If you aren’t able to pay that much into the fund each year, find out how much you need to contribute to get the highest possible contribution from your employer. You may find out that the employer’s contribution is capped at a far lower rate.

A common system is to match 50 percent of an employee’s contribution up until the yearly retirement contributions reach 6 percent of the employee’s annual salary. If you have this system, or a similar one, be sure you understand exactly how much you need to contribute in order to get that maximum employer contribution.

Understand your employer’s vesting schedule

Many employers offer matching retirement contributions on a vesting schedule. This means that the amount that the employer contributes is not fully yours until you reach a specific milestone of your employment

If you have been with a company for four years and the vesting schedule requires five years, consider keeping your job for another year in order to qualify for full retirement matching. It may be in your best financial interest to claim this money rather than leave the job for greener pastures. If you do leave early, the contributed money will be taken out of the account, which can leave you with a substantial loss to your retirement savings.

Get the right start with your retirement strategy

If you are just starting a new job that comes with retirement matching, be sure to sign up for this benefit as soon as you are allowed. Many employers have a waiting period until the matching program goes into effect. According to U.S. News and World Report, 29 percent of employers have a one-year waiting period before employer matching takes effect, and 30 percent have a one-month to six-month waiting period.

Find out exactly when you will become eligible, and sign up for the program as soon as you are. Delaying your admission into employee matching will leave you without the free money that your employer is offering.

Saving Money with the Magic of a Roth IRA

Jeff Rose — Tue, 27 Mar 2012 19:25:43 +0000

When it comes to money, some people are savers and some are investors. (Then there also are some who are neither, but that is another post.) If you have always been a saver, becoming an investor can be a scary proposition. The first step in this process is to flip that switch from saving money to implementing an investment strategy.

I see this all the time in my financial planning practice—people who have been diligent about putting money into a low-interest savings account come to realize that if they ever want to retire, they need to do more with their money. But the volatility of the stock market frightens these people, and the hundreds of different financial options can be overwhelming to them. Too often, these savers remain that way, hoping that somehow the money they deposit in the bank each month will magically multiply into an amount on which they can retire.

I have to tell you that no amount of hocus pocus will grow your low-interest savings account any faster than a couple of percent per year. Fortunately, I have a better plan to increase your money into a retirement-worthy sum. Not only that, but my solution will also seemingly magically erase the taxes you would otherwise have to pay on the growth. And yes, this plan is completely legal.

Presenting…the Roth IRA!

This investment strategy involves putting only $5,000 a year (the maximum allowed) into a Roth IRA and leaving the money to grow tax-free until you need it for retirement. Yes, you heard me right. Every penny in your Roth IRA account is yours—you do not have to pay any of it in taxes. And that is not all. Consider the other benefits of a Roth IRA:

You have almost complete control over the way the money in your IRA is invested. A Certified Financial Planner (CFP) can work with you to create an investment plan that matches your degree of risk.
You can withdraw your contributions at any time, without a penalty. Of course it is better to keep your money in the Roth IRA so that it keeps earning, but if you find yourself needing funds, withdrawing part of your contribution is not much harder than going to the bank to take money out of your savings account.
Once you turn age 59½, you can also begin making withdrawals of your interest earnings. And remember, all the money you take out is tax-free.
Unlike a traditional IRA, there is no mandatory distribution age, so if you reach age 70 and you don’t yet need the money in your IRA, you can keep it in there to earn more.

Keep in mind that the contributions you make to a Roth IRA are not tax deductible the way contributions to a traditional IRA are. There is also a maximum income ceiling for eligibility. Once you make more than about $110,000 a year if you are single, or $179,000 between you and your spouse, you can no longer contribute to a Roth IRA. But don’t worry—the money you put in won’t go anywhere. It will keep growing, tax-free as always, until the day you need it to retire. Kind of like magic.

Retirement Planning: Withdrawal Sequencing Strategies

Dan Solin — Tue, 13 Mar 2012 03:29:06 +0000

Withdrawal Sequencing Strategies: Excerpt from The Smartest Money Book You’ll Ever Read

Equifax Personal Finance Blogger Dan Solin is out with a new book, “The Smartest Money Book You’ll Ever Read,” in which he answers some of your top retirement and retirement strategy questions.

Most people have their retirement funds in various accounts—401(k) plans, IRAs, annuities, taxable accounts, and pensions. The sequence in which you withdraw funds from accounts can affect how long your money lasts, although sometimes your choices are limited. For example, you must start withdrawals from a traditional IRA at age 70 ½.

Here is the basic order in which you should tap your accounts:

Post-tax accounts, which are funded with money that has already been taxed. Only the gains will be taxed, at the usually lower capital gains rate.
Deferred retirement accounts, such as 401(k)s and traditional IRAs. Withdrawals will be taxed at the income tax rate that applies to you at the time.
Roth IRAs, which are funded after-tax dollars. Withdrawals of principal are not taxed, neither are investment earnings once you reach age 59 ½, if the plan has been in existence for at least five years. These funds aren’t subject to compulsory withdrawals, so this should probably be the last account you tap.

Use these rules of thumb for planning your withdrawal strategy, but modify them for your situation to maximize the life of your money.

What’s the point?

When you retire, you need a plan for withdrawals so your money will last you and your spouse the rest of your lives.

READ MORE:

Retirement Strategy: Pay Yourself First
Retirement Strategy: Planning For Big Purchases
Planning for After Retirement
What’s Happening to the Average Age of Retirement?
Retirement Strategy Beyond the Numbers

Retirement Strategy: Pay Yourself First

Dan Solin — Tue, 06 Mar 2012 14:39:53 +0000

Pay Yourself First: Excerpt from The Smartest Money Book You’ll Ever Read

Equifax Personal Finance Blogger Dan Solin is out with a new book, “The Smartest Money Book You’ll Ever Read,” in which he answers some of your top retirement and retirement strategy questions.

“Putting money away systematically is the best way to “dollar cost average” and save for retirement.”
-Jim Lentini, president, Lentini Insurance and Investments Inc.

Banks have various ways of attracting depositors, and some are more useful than others. Among the most attractive are automatic savings plans, which virtually any bank will set up for you. The bank with transfer specific amounts from checking to savings on specific days of the month. This is the surest way to save money.

Initially, target your savings at least 5% of your income and increase that to 20% (or more) as quickly as possible. The exception would be if you have debt with high interest. Getting that off your balance sheet would probably be the best first step.

Otherwise, pay yourself first. An automatic savings plan keeps money out of your hands. It takes your savings off the top of your income, just like the IRS takes taxes.

Most employers offer direct deposit of payroll checks. This makes having a specific amount transferred to savings on payday a snap. Many employers also offer automatic retirement savings plans, typically a 401(k). Automatic savings, particularly for retirement, is a great idea—especially if there is an employer match.

Make the minimum contribution necessary to maximize the employer contribution. Otherwise, you are passing up free money.

To meet the goals you set in Part One, set up a separate interest-bearing account. You also need an account for emergency or periodic expenses like dental care, car repairs, and replacement of appliances.

Ensuring that the money is there when the transfer is made can require more focus if you’re self-employed and don’t receive regular, reliable paychecks. In that case, just as you pay quarterly estimated income taxes, you have to plan your cash flow to fund the automatically transfer to savings on specified dates. (You also need automatic transfers into an income tax savings account.)

Whether you are employed or self-employed, the key to a successful automatic savings plan is to start with an amount you know you can cover and then periodically increase that amount. Smart small (even if it’s under 5%) and increase the amount as you develop the savings habit.

Retirement Strategy: Planning For Big Purchases

Jeff Rose — Tue, 28 Feb 2012 02:17:27 +0000

It’s safe to expect that you will live 10, 15, or even 20 or more years into retirement. For this reason, most of us know it’s important to save for retirement and to diversify our retirement portfolio. However, relying on Social Security payments and regular savings accounts alone is generally not going to be enough for a long and comfortable retirement.

The reality is that your car might not last 15 years, your roof might need repairs, or you might want to vacation during your retirement years. Planning for purchases of big-ticket items and making sure you can cover unexpected large expenses in your retirement strategy is just as important as your actual retirement savings.

What are the keys to a stress-free retirement? Have a 401(k) or similar retirement savings plan, invest in mutual funds, and maximize matching contributions and savings in addition to regular savings accounts and Social Security.

Make a list of big-ticket expenses

Sit down with your spouse, family, friends, or other retirees and brainstorm a list of needs and wants in retirement. For example, if you know your car is 10 years old and has 120,000 miles on it, you’re probably going to have to replace it soon. If you’ve always wanted to travel to Rome and plan to do so in retirement, research the approximate cost of the trip you envision.

Next, think about your living expenses. Will you keep your home and the maintenance expenses that go with it, or do you plan to move to an apartment or retirement community?

Then consider the additional surprises that may come along, such as a furnace replacement, a broken window, or tree removal from storm damage, and factor in those costs. Everything you imagine is not going to happen, but keeping a few unexpected expenses in mind is just smart retirement planning.

Remember, regular living expenses, normal home maintenance and utilities (or rent), medical care, and transportation are not included on this list. Hopefully, you have already considered how much those things will cost you and have planned your retirement savings accordingly. Once you’ve come up with your big-ticket list, add up the cost of those items and figure out how much extra you’ll have to save to be prepared for those expenses.

Make adjustments

If you find that you’ve made your list and have reviewed your portfolio and there isn’t going to be enough money to allow for big-ticket purchases or sudden expenses, then it’s time to make changes.

Consider cutting back on non-essential expenses now to save more for your future. Decide if purchasing some of those big-ticket items, like a new refrigerator, ahead of time would be more affordable while you still have a paycheck than after you retire.

Think about working for a few more years while living on your retirement budget, and put the additional money into your emergency fund. Consider a part-time job that might act as a safety net for unexpected expenses. I’ve suggested this to several of my clients who didn’t have enough retirement savings to take care of their spendinghabits. A part-time job allowed them to “semi-retire,” walk away from the jobs they hated, and be much happier.

In the end, planning ahead for big-ticket expenses is critical to ensuring you have enough money to live comfortably and stress-free in retirement.

Jeff Rose is an Illinois Certified Financial Planner. He blogs at Good Financial Cents and Soldier of Finance. He loves Crossfit workouts, writes about Roth IRA rules and craves In-N-Out burger. You can follow his updates on Twitter.

Planning for After Retirement

Jeff Rose — Tue, 21 Feb 2012 01:13:20 +0000

You’ve probably imagined that the first day of your retirement life is going to be wonderful. No alarm clock waking you up, no deadlines, nowhere to be. You can enjoy your morning coffee at your leisure, take a sunrise stroll around the neighborhood, create a new morning routine—essentially, you can do anything you want.

The former 40 hours a week you used to give to your employer will soon be yours to do with what you wish. That’s a lot of free time, and travel and hobbies can be expensive on hard to fit into a retirement budget. However, if you plan ahead with your retirement savings, you’ll have plenty of things to fill your spare time and plenty of funds to do it.

Time to fill during retirement

At first, not having to get up for each day for a job can be liberating. You can relax—perhaps complete some small projects around the house or have lunch with friends. It may feel like being on vacation but without a plan and ideas to fill the time your job used to take, even the best of us can get bored during retirement.

If you have adequate savings, retirement can be the chance to explore opportunities you missed while working. Perhaps there is a hobby you once loved but didn’t have time to pursue. You can join a group or club that didn’t fit with your work schedule. There are limitless options from trying a new sport to volunteering in your community.

Take some time to consider what you enjoy, what your interests are and find opportunities that match. Make a list of options so that as you approach retirement, you can get started on your new ventures.

Fund your hobbies and travel

While plans are important, you also need to remember retirement savings and expense planning often only account for regular living expenses. Unless you already belong to clubs, participate in groups or hobbies, or travel regularly, those additional expenses aren’t going to be factored into your retirement income.

It’s time to do a little simple math. Consider how much the things you would like to do in your retirement will cost and for how many years you’d like to be able to afford to do them. For example, a membership to the golf club might cost $100 annually, and you may plan to do that for the next 15 years, so that’s at least additional $1,500 you will need to put aside. It’s probably safe to assume that the dues will go up over the next 10 years, so you’ll want to factor that in as well. On the other hand, a trip might be a one-time expense for which you budget ahead of time.

One couple I advise recently retired. They always wanted to travel to Egypt, but they were worried about the costs. After a quick review, I showed them that they had plenty saved to make their dream happen. I’ll never forget how excited they were before and after the trip. They’re a great example for others working on a retirement planning strategy.

Make your retirement strategy work for you

Whatever your hobbies or interests, you’ll need to build extra savings into your retirement strategy to be able to enjoy them. You can also make a plan to have a part-time job or some type of self-employment in retirement to supplement your income. As a bonus, you’ll have the chance to learn something new, and such a job can fill your time and give you a sense of purpose.

With a little advance planning, you can make retirement the start of an exciting new chapter in your life.

What’s Happening to the Average Age of Retirement?

Jeff Rose — Tue, 07 Feb 2012 03:00:23 +0000

Retirement strategy now is nothing like it was 100 years ago, and for today’s college graduates the retirement outlook is even more uncertain.

Gone are the days of relying on Social Security to provide for a comfortable retirement. For many of my baby boomer clients, Social Security provides a nice cushion for retirement savings but nowhere near what those clients need to survive.

With the life expectancy age ever increasing and the retirement age decreasing (or is it?), we have to fund our retirement years for longer than ever before.

Current average age of retirement

Statistically, we can look at the Social Security Administration’s guidelines for retirement. The full retirement age is currently 65 for most people (those born before 1937) and somewhere between 65 and 66 for those who reached retirement in the past 10 years. This is the age when folks can begin to collect their full Social Security benefits.

Does this mean that everyone automatically retires at age 65? Not at all.

It’s almost impossible to figure out the real average age of retirement because it varies by gender, by profession, and by personal circumstance.

Some people choose to retire in their 50s, either because they are financially secure and can do so or because they are forced to do so by job limitations or other circumstances. Others work into their late 70s or 80s because financially they need the income or because they just enjoy working. The majority of people retire somewhere between the ages of 55 and 70.

My clients who retire before reaching the reduced Social Security age (commonly 62) find that this choice puts a greater strain on their retirement portfolio. I typically recommend that they work to at least the reduced Social Security age so that they have a greater chance of not outliving their nest egg.

Without the proper retirement savings nest egg, you’re going to be facing some tough financial times in your retirement and your credit could start to suffer.

How has retirement strategy changed?

If we look back about 100 years, the average life expectancy for an adult male was 50 years old. Most people didn’t retire because they didn’t live long enough to do so. For those that did live a long life, the age of retirement was 74, and most people who reached that age and retired didn’t live long afterward. At that time, one percent of the population was at retirement age.

Fast forward to the year 2000, when 15 percent of the population was at retirement age. Two factors played into this huge increase. One, the average life expectancy had jumped to 73, and the retirement age had dropped to about 62. A lot more people were living longer into retirement and, as a result, relying on pensions, employee-sponsored retirement plans, and Social Security.

Jump to current day, when the economic crisis has raised many questions about retirement. Many companies are no longer offering retirement plans, pensions are virtually non-existent, and many question the stability of the Social Security program. Life expectancy is still increasing, and now the age of full retirement is going up. Those now in their 30s and 40s won’t reach full retirement until age 67.

What should today’s college graduates expect for their retirement?

There is only one thing that is certain: Today’s college graduates need to begin planning and saving for retirement sooner rather than later. They should expect to have to help fund their retirement with personal savings, and they can’t rely on pensions or Social Security. With inflation, increasing life expectancy, and the age of retirement benefits increasing, today’s college grads don’t have a choice but to begin planning their retirement savings now.