Personal Banking E-Newsletter - April 2012
Three Key Retirement Income Considerations
There are two factors that can determine whether you'll have a comfortable retirement: The amount of money you've saved and how quickly you spend that nest egg after you retire. The rate of annual withdrawals from personal savings and investments helps determine how long those assets will last and whether the assets may be able to generate a sustainable stream of income over the course of retirement. A number of factors will influence your choice of annual withdrawal rate. The following are three key considerations.
Consideration 1: Your Age and Health
As you think about what your withdrawal rate should be, begin by considering your age and health. Although you can't predict for certain how long you will live, you can make an estimate. However, it may not be wise to base your estimate on average life expectancy for your age and sex, particularly if you are healthy. The average life expectancy has risen steadily in the United States, reaching 78.2 years.¹
Consideration 2: Inflation
Inflation is the tendency for prices to increase over time. Keep in mind that inflation not only raises the future cost of goods and services, but also affects the value of assets set aside to meet those costs. To account for the impact of inflation, include an annual percentage increase in your retirement income plan.
How much inflation should you plan for? Although the rate varies from year to year, U.S. consumer price inflation has averaged under 3.25% over the past 30 years.2 So, for long-term planning purposes, you may want to assume that inflation would average in the range of 3% to 4% a year. If, however, inflation flares up after you have retired, you may need to adjust your withdrawal rate to reflect the impact of higher inflation on both your expenses and investment returns. Also, once you retire you should assess your investment portfolio regularly to ensure that it continues to generate income that will at least keep pace with inflation.
Consideration 3: Variability of Investment Returns
When considering how much your investments may earn over the course of your retirement, you might think you could base assumptions on historical stock market averages, as you may have done when projecting how many years you needed to reach your retirement savings goal. But once you start taking income from your portfolio, you no longer have the luxury of time to recover from possible market losses, as retirees and near-retirees during this latest market downturn have experienced firsthand.
For example, if a portfolio worth $250,000 incurred successive annual declines of 12% and 7%, over a two-year period, its value would be reduced to $204,600, and it would require a gain of nearly 23% the next year to restore its value to $250,000.3 When a retiree's need for annual withdrawals is added to poor performance, the result can be a much earlier depletion of assets than would have occurred if the portfolio returns had increased steadily. While it's hopeful that your portfolio will not experience any losses and will even grow to generate more income than you expected, it's safer to assume some setbacks will occur.
Your financial professional can help you determine a withdrawal strategy that seeks to minimize the drain on your portfolio.
1Source: Center for Disease Control, March 2011 (based on 2009 preliminary data).
2Source: Bureau of Labor Statistics, January 2011.
3Example is hypothetical and for illustrative purposes only. Your results will vary.
© 2011 McGraw-Hill Financial Communications. All rights reserved.
Bad Money Habits You Give Your Kids
You might think your credit and financial habits are nobody's business but your own. But like it or not, your kids -- especially teenagers and young adults -- watch your financial behaviors and learn a lot from you.
For better or worse, our offspring often mimic our financial traits and money-management patterns in ways both large and small.
So how can you be sure you're setting a positive financial example when it comes to credit?
Despite your best intentions, you may be sending subtle, negative messages about the proper use of credit cards and debt.
Here are three bad credit habits you don't want to pass along to your children.
1. Maxing out credit cards
Remember that time you and the kids were out shopping and your credit card got declined? Not only did the customers behind you see what happened, so did your kids.
You might have indignantly stammered something about having paid the bill already, but the truth is that your card was likely rejected because it was maxed out. When you overspend, you send your kids the wrong message: namely, that a credit card gives you carte blanche to get what you want -- even when you can't truly afford it.
So instead of making minimum payments on that MasterCard, or instead of running up your credit to the limit, ease up on the credit cards. Then explain to your children that you're giving the credit cards a break in order to pay down your balances, use cash more often and get a tighter grip on your finances.
"Having to physically part with money is harder than just charging it," says Jesse Ryan, managing director at Accounting Principals. "Paying cash helps you stay on a budget, because you will think twice before buying what could be an impulse purchase."
It may seem embarrassing to have such a candid conversation with a 16-year-old, and practically impossible to follow through in both word and deed. But in the long run you're actually doing yourself -- and your kid -- a favor by being more responsible and showing restraint.
Let's hope that's a skill -- let's call it the art of delayed gratification -- that your child will remember, develop and emulate when he or she is an adult.
2. Accepting store credit cards
Another shopping-related credit blunder that can send the wrong message is constantly saying yes to offers of retail-store credit cards.
That application for a new card will generate an inquiry on your credit report, which can temporarily lower your FICO score. Equally troublesome is that if your kids are in the mall with you while you go on these credit-hunting binges, they'll pick up the not-too-subtle message that department-store credit cards are the quick and easy way to get what you want when you lack cash.
Again, this mindset won't encourage them to save money or to learn to say no. Instead, it promotes excessive consumption.
"It's not necessary to have more credit cards than you need, because not only will it present temptation, but it may also lower your credit rating," says Gabe Albarian, the author of "Financial Swagger."
So here's a better strategy: Say "Thanks, but no thanks" to those department-store credit card offers. Then turn around and explain to your kids that applying for new credit can lower your credit scores, and that if you can't pay the bill right away you can quickly get into trouble because retail cards generally charge interest rates that are higher than you might find with Discover, MasterCard and Visa.
3. Ignoring your bills
When the mail comes to your house, do you simply toss aside credit card statements? Or perhaps you flat out refuse to open your bills or make comments like "Ugh. Nothing but bills."
Be careful what you say in front of your kids, because they may pick up your habit of ignoring or disregarding bills. That's a definite no-no.
Such sentiments suggest that repaying bills isn't a priority. Your actions also send the message that you don't believe it's important to keep your good credit intact by promptly opening bills and paying them on time.
So rather than lamenting about that next credit card statement, go ahead and make a minor production out of opening the bill while your kids are watching. Then, instead of groaning about the balance, say something like "I think I'll pay this balance off in full this month" or "I'm going to pay two times the required payment on this bill." Next, turn to your son or daughter and add: "I want to practice good credit habits. And when you get a credit card or a loan, I hope you will, too."
Rise in Identity Fraud Tied to Smartphone Use
The rise in the use of smartphones and social media by incautious consumers fueled the increase in identity fraud, and 2011 was a year of several big data breaches too.
With the rise in credit card monitoring and more sophisticated policing by credit card companies, identity thieves are increasingly targeting users of smartphones and social media, where consumers have a tendency to be less cautious, experts say.
"The message is not that people should let their guard down," Javelin founder and President Jim Van Dyke said. "The challenge that we have is that criminals often change faster than everyday consumers or businesses."
The number of people whose information was accessed in a data breach increased by 67 percent in 2011, largely due to some very high-profile thefts, such as the attacks on Sony Corp's PlayStation network in April.
Someone whose personal information is taken in a data breach is 9.5 times more likely to become a victim of identity fraud, Javelin found.
One heartening finding was that dollar losses by consumers remained stable last year despite the increase in the number of victims. Credit card issuers' policies on fraudulent transactions -- a $50 limit on losses, which is often waived -- and quicker detection has limited out-of-pocket costs to consumers, said Van Dyke.
For the past nine years, Javelin has been analyzing data and survey information about identity fraud, usually defined as the opening of new accounts in the name of a victim.
For every advancement made on the protection side, consumers remain vulnerable due to the resourcefulness of crooks.
"They're doing more and more crime in order to get the same return," said Mike Urban, who analyzes fraud patterns for Fiserv Inc, a consulting company that helps financial institutions defend against crime and other risks. "It's pushing the criminals to work even harder."
In 2011, some of the biggest data thefts ever recorded took place. In the attacks on the PlayStation network, hackers obtained the personal information of tens of millions of users and the credit card numbers of some.
Also last year, hackers stole millions of names and email addresses from Epsilon, the marketing division of Alliance Data Systems Corp. That firm sends email marketing information on behalf of major banks, retailers and hotels, among others. Citigroup Inc also reported a large data theft.
About 7 percent of all smartphone users fell victim to identity fraud in 2011, according to Javelin. Smartphone users were about a third more likely to become victims than non-users. Javelin found 62 percent of smartphone users do not use password protection for their home screens; this allows anyone who finds or takes their phones to have access to the contents.
Fiserv's Urban said downloaded apps are often a problem, too. The lure of a free game, particularly one not vetted through a company-operated site such as Apple Inc's iTunes, can result in users having programs that collect and distribute their personal information.
Javelin also found that many social media users reveal too much personal information, including their birth dates, where they went to high school, their phone number and other information used to verify identity.
"You don't leave your money lying on a table," said Urban. "You don't want to leave your important information out there."
Here are some tips from Javelin to avoid becoming an identity fraud victim and mitigating losses:
- Password protect your home and mobile devices. Avoid exposing personal information that can be used by someone else for identity verification.
- Be careful about the apps you download. Only download through a service that monitors the apps, such as iTunes.
- Share information carefully when you are on a public wifi network.
- Monitor your credit cards by checking their use online or reading the statements carefully. Quickly report to your credit card issuer if you see any suspicious transactions.
- Take data breach notifications seriously. If your data has been accessed, consider subscribing to a credit-monitoring service, which is often offered for free for a year by the company that had been breached.
The Benefits of Online Bill Pay
Since most of us are indebted to one creditor or another, we know that it can sometimes be difficult to manage debt effectively and keep our financial matters in order. With all the paper clutter that daily life produces, it is no wonder we have a hard time staying organized and exercising good debt management skills. It is so easy to get bogged down with endless bills and mounds of paper, and not managing your debt properly can lead to other money problems down the line–missing a payment here or a bill there does not cast a favorable impression on creditors.
As credit counseling services advise, the first rule of thumb for maintaining a successful financial situation is to get organized. Using online bill pay can help you pay down debt, manage your money, save money and reduce stress.
What is Online Bill Pay and How Does it Work?
Online bill pay is becoming increasingly popular with individuals who want to exercise good debt management skills, and save time and money in the process. So, what is it exactly? Basically, online bill pay is a method of payment which allows an individual to issue payment instructions to a creditor electronically via a computer program. Online bill pay can virtually eliminate errors, making the management of your debt that much easier. And it is a much faster payment method than mailing checks.
There are two basic categories of online bill payment methods – those that are offered through a banking institution, and those that are offered through a service provider, such as a phone credit card company. Personal finance software programs such as Quicken or Microsoft Money have been created to assist consumers manage their debt.
Online bill pay is generally designed to be quick and easy to use. Most major banking institutions and businesses now offer this service free of charge. You can either choose to manually enter your payments each month, or set up for automatic withdrawal from your account. With automatic withdrawal, you can set up your payments in advance of their due date, and won’t have to worry about giving manual instruction to make your payment each month. The creditor will transfer funds directly from your bank and apply those funds to your account without any action required on your part.
If you are currently enrolled in a debt management program through a credit counseling agency, it is all the more important that you make your creditor payments on time. If you don’t, you risk the chance of being dropped from the debt management program. Fortunately, most consumer credit counseling agencies offer a method of automatic bill paying called ACH (Automatic Clearing House), which ensures that your monthly debt management payments will be made on time on a monthly basis to all of your creditors. Learn more about the benefits of ACH from a certified credit counseling agency such as ClearPoint Credit Counseling Solutions that offers ACH as a quick and error-free monthly payment method.
Benefits of Using Online Bill Pay
You can save time by using the online bill pay feature. Rather than writing out checks, licking stamps, and filing piles of papers, you can set up an online account that will eliminate all of those steps. Management of your debt will become so much easier – and faster.
If you ever need to review past bills, you won’t have to spend time searching for them since all of your account information is in one centralized location.
Save on the cost of postage stamps – they can really add up! Since the average household receives 15 bills per month, that’s about $70 a year in postage costs alone.
Avoid late charges that can be incurred when a payment is received after its due date. Missed payments could result in any of the following:
- Higher interest rates
- Late fees and over limit fees
- If the payment is already past due, your account may go to a collection status
Want a more convenient debt management solution? Create an automatic online bill pay account that will allow you to set up recurring payments to be withdrawn from your account on a regular basis. You can reduce the chance of late or lost payments, and save time in the process.
If you find that one of your bills is due the next day, online bill pay is the best way to ensure that your payment will be posted on-time.
What should consumers look out for?
There is always an element of risk involved when any transaction is conducted electronically. Although minimal, this risk is steadily increasing due to more sophisticated hacking techniques being developed.
A technique known as “phishing” has become a major issue over the past few years. Phishers send out fraudulent messages (either in the form of an email or a web page pop-up) that are designed to trick you into sharing your personal account information. These messages often appear to be legitimate, (complete with company logos) and can deceive a consumer if they are not careful. In a recent study conducted by the Gartner Group, it was determined that 57 million Americans have received phishing emails and, of that number, nearly 2 million have been deceived into willingly providing personal account information to a bogus source.
How to Protect Yourself From Scams
Follow the tips below to help protect yourself from online scams:
- Regularly review your online banking transactions to ensure that no suspicious activity is occurring.
- Change your online passwords every 30 to 60 days. Make sure the password contains a combination of upper and lower case letters as well as symbols so as to minimize the chance that it could be guessed.
- Look out for fraudulent emails – Although an email may appear legitimate (complete with logo) it may be coming from a fraudulent source. If the email requires that you update or verify your personal account information urgently, DO NOT respond to the request.
- If you receive an email from an unknown sender, delete it. If you do open the email, make sure that you do not click on any links. You could be downloading a virus to your computer. If you think the email could be legitimate, it is better to type the web address into your browser rather than clicking on the link.
- Maintain the anti-virus and anti-spam software on your computer. This will help to block out unwanted spam and junk mail.
Believe it or not, online banking is often considered safer than paying by check. In fact, as a result of their findings in a 2011 Identity Fraud Consumer Report, Javelin Strategy & Research, researchers suggest that, as a method of reducing ID theft, consumers “Request electronic statements and use online bill pay whenever possible.” The dangers of sending checks through the mail have been well-documented. Just make sure to use strong passwords (with letters, numbers and symbols, if possible).
Financial Spring Cleaning Tips
The weather is warming up, so it's time to open up the windows and do some spring cleaning. As you scrub and organize, don't leave out your money. Tidying up your finances can help reduce stress during tax season, too! Here are a few tips to keep in mind:
Throw away old paperwork. Shred ATM receipts and bank deposit receipts once the transaction appears on your bank statement. Utility statements don't need to be kept once they've been paid. Shred credit card statements once the balance has been paid, as well. This helps protect you against identity theft as well as clutter. If possible, switch to e-statements to reduce the amount of paper lying around. Save pdf files or copies of the e-statements until they have been paid, then archive or delete them.
Sort out your credit cards. Cut up and cancel cards that you haven't used in 6 months or more, especially if they carry an annual fee or have a higher interest rate than your other cards. You'll have more space in your wallet and fewer bills to worry about. Using less plastic may also help to improve your credit score. If you're trying to eliminate debt as well, try to stick with just one or two credit cards or a debit card.
Check beneficiaries. Look back at insurance and retirement account policies to make sure the beneficiaries are current. If your marital status recently changed or you experienced the loss of a spouse or child, it is especially important to update your beneficiary information. Make sure the money will go where you want it to go if it gets distributed today, not where you wanted it to go when you first signed the policy.
Speak to your local banker if you have questions about your money or want more tools and ideas for organizing your finances. Many financial institutions offer budgeting and tax tip tools to help you de-clutter.