Personal Banking E-Newsletter - January 2013
Financial Resolutions for the New Year
January is here, which means many people are making their New Year's resolutions now. Losing weight and quitting smoking are the two most popular resolutions, but many consumers also set financial goals this time of year. Here are a few tips to help you make a financial resolution that you can actually keep!
To set a realistic financial goal, you need to have your finances in order (this might even be a mini-goal within your overall resolution). Organize all financial documents by year, including bank statements, tax returns, insurance papers, receipts and loan agreements, and then store them in a safe place. Be sure to keep tax records and supporting documentation for seven years in case you're ever audited.
Assess your situation
Now that you have the documentation you need to see an accurate picture of your current financial situation, determine the amount of debt you carry. As you're adding it up, look at credit cards, student loans, car payments, your mortgage and any other recurring debt payments. Check the interest rates. Consolidate loans or switch to a different credit card if you can get a better rate. Always focus on paying down the debt with the highest interest rate first.
Examine your spending
Take a long look at your spending habits. Keep a "spending diary" for a month or two to show you exactly where your money goes. Keep track of cash, check and credit purchases. Decide which purchases you can eliminate without making a drastic lifestyle change. You're more likely to stick to your resolution if it doesn't require a major overhaul of your life. For example, you can stick to a resolution that requires you to make a bag lunch everyday more easily than one which would require you to get rid of cable and your cell phone plan.
Now it's time to make your resolution. Make sure this goal is both realistic and specific. You've done the work of organizing and analyzing your finances, so you know how much you can afford to realistically put away each month towards your goal. Rather than say you're going to "save money" this year, choose a specific dollar amount to save. You may even want to open a separate account at your bank to put the money in automatically each month.
Finally, stay committed. Even saving $25 a month will net you $300 at the end of the year. Good luck!
Source: WBA Consumer Column 12.14.12
Maximize Your Retirement Income
You want to not only have enough money to live comfortably when you retire, you also want a little bit more. Maybe you want enough to travel, start that side business you always talked about or purchase your dream home since you'll have time to enjoy it. Whatever your retirement dreams are, maximizing your retirement income can help. Here are some ways to do just that:
Start saving as soon as possible
You've no doubt heard of the benefits of compound interest. The key is that the sooner you start saving, the sooner you start gaining the interest and the sooner that interest can start compounding. Two years makes a difference, but five or 10 years makes an even bigger difference in the amount you end up with upon retirement. If you're on a tight budget, you can still stash at least a little bit away in a retirement account. Have a set amount automatically deducted from your paycheck, so you're not tempted to spend it. You're investing in your own future.
Start saving with a lump sum
This one isn't always possible, but if you happen to have a nice lump sum of money come into your possession, consider using it as the base of your retirement fund. Graduations and weddings often result in gifts of cash, so use these as the seed of your retirement account for increased compound interest and a larger return when you retire.
Figure out which account works for you
According to David Braze of The Motley Fool, there are several types of individual retirement accounts. For example, the spousal IRA allows for contributions for your non-earning spouse to a separate IRA.
Get matching contributions
Two types of IRAs, the Simplified Employee Pension (known as a SEP-IRA) and the Savings Incentive Match Plan for Employees (known as a SIMPLE), allow employers to contribute to employee IRAs. Obviously, having an additional or matching contribution to your IRA will increase the value, so be sure that you ask your employer to do so.
Avoid getting overtaxed
Different tax laws govern different types of IRA and 401k accounts; the traditional IRA allows for some deductions on qualifying contributions, but withdrawals are taxed. The Roth IRA, on the other hand, does not allow for tax deductions on contributions, but it does provide for tax-free on qualified withdrawals.
After age 59.5, for example, you can withdraw money from your Roth IRA tax-free. You can also look into transferring money from a traditional IRA to a Roth IRA; doing so would allow you to withdraw the money earlier and use it on a purchase such as a retirement home.
Talk to a pro
It's a good idea to do your own research, educate yourself on your options and make informed decisions. You can get advanced help from a financial professional whose education and career focus on planning and saving for retirement. Get the most out of a financial consultant by doing your homework first. Come to the meeting with some basic understanding of the options, your own financial goals and your specific questions about how best to achieve those goals. With your consultant's insight and your own intelligence, you'll be able to find the best strategies for maximizing your retirement income.
Look outside the box
Don't be afraid to look at other options for raising and saving your retirement income. You can invest in real estate, become a venture capitalist, raise interest by lending your own money, or invest in items that have appreciable value in order to grow your retirement income. The best thing to do is become active in overseeing how your retirement income grows. Passivity is deadly. Get interested, get involved, educate yourself and start managing your future now.
The bottom line
Having enough money to live comfortably when you retire isn't enough for most people. It's also important to have a little extra so you can fulfill some of your lifelong dreams like traveling when you retire. Whether it be getting advice from a pro or saving earlier, there are many simple ways to make sure you're financially prepared for retirement.
He Wants to Retire...but She Doesn’t
The odds are your spouse won't feel the same way you do about when to retire. A recent study by Fidelity Investments found that well over half of couples—62%—disagree on the timing of their respective retirements.
Consider Deborah Ewing, a 55-year-old attorney practicing family law, and her husband, Patrick Hickey, 62, a tax-software programmer. Mr. Hickey has a two-hour-plus daily commute from their home in Palos Verdes Estates, Calif., to his job in Los Angeles, and says he feels tired. He would like to retire "as soon as possible."
No go. "I have told him he has to stay working until the last kid is out of college in four years," Ms. Ewing says. "For me it would be annoying not to have someone pulling their weight. I realize he's older. But on a personal level, I don't see it as positive. My perspective is he would putter around the house."
Having watched her own father retire, she also thinks it's healthier to keep working. "I think when people retire they slow way down and become less productive, less interesting, less healthy, less financially robust," says Ms. Ewing. "I plan to work as long as I can."
Mr. Hickey sees it differently. "Her perspective is a little bit warped," he says. "She sees me riding in the saddle until the very last day when I drop from the saddle. My body feels the way it feels. She can't really know how I feel and function."
The New Par
So the debate is at a standstill—at least for now. "She is worried that I will quit too soon and start having fun and we won't have sufficient funds," says Mr. Hickey. "There may come a point when I retire even if she doesn't want me to."
The days when a husband automatically retires at 65 with a corporate pension and his wife dutifully follows him to a golf course in Florida are officially over. Most women approaching retirement age are now working, and many have their own retirement savings—and viewpoints.
"Many women have entered the work force later and are at their peak when men slow down and want out," says Dorian Mintzer, co-author of "The Couple's Retirement Puzzle." "The timing can create some struggles."
Only about half of couples retire within two years of each other, says Richard Johnson, a senior research analyst at the Urban Institute, a social-policy think tank in Washington, D.C. Men approaching retirement age are, on average, almost four years older than their spouses, he says. And the larger the age difference between spouses, the less likely they are to retire at the same time.
"There's a lot more for a couple to negotiate now," says Maximiliane Szinovacz, a professor of gerontology at the University of Massachusetts Boston. "It's no longer one retirement and one drastic transition." Indeed, some negotiations seem to go on and on, since many baby boomers expect to work longer and retire gradually, taking on a series of jobs or part-time work.
Talking About Everything
The talks about when to retire seem much more sensitive and difficult than the question of where to retire. The question of when involves focusing on money, age differences, job satisfaction and gender roles—often all at the same time. Not to mention marital happiness and the prospect of more time together.
Therapists, not surprisingly, stress the importance of planning, clear communication and compromise. "In order for it to work well, each person needs to clarify their own vision of what's important and learn to talk with each other," says Ms. Mintzer, the author, who is also a retirement coach.
"Sometimes it's agreeing to disagree," she adds. "People get stuck in positions—it's my way or your way. That doesn't work so well." Ms. Mintzer and her co-author, Roberta Taylor, lead groups in which they try to help couples approaching retirement reach a "shared vision."
Lynne Berrett, 73, retired as a therapist last year when her sister became ill. She had hoped her husband, Joshua Berrett, now a 74-year-old music professor at Mercy College in Dobbs Ferry, N.Y., might retire four years ago at age 70. He didn't.
When she first broached the subject, she recalls her husband said, "I just can't talk about it right now."
"It's not an easy thing," says Ms. Berrett. "I would like us both to be freer." The couple, who have been married for 47 years, have grandchildren in California and Washington, D.C., and she would like to go on extended visits—with her husband.
But Mr. Berrett loves teaching music history and music appreciation. "I'm very passionate about what I do," he says. "I'm living my love. It's so vital to me." He sees himself making a "gradual transition" and says he may be ready to retire in another year.
"I'm a little bit skeptical," says Ms. Berrett. "We'll see." She did say that after listening to his side of the interview, she better understood his position, adding, "It surprised me."
Playing a New Role
Men tend to be older than their wives, so they typically become eligible for retirement benefits, including Medicare, first. But their wives may want to keep working because their income is important to the family, and they often need to maintain their own health insurance.
Traditional gender roles—a sensitive subject—also complicate the discussions. Men who retire first may find themselves thrust into the role of househusband. Their wives often expect them to cook, clean and have dinner waiting. And since many husbands aren't used to scheduling social activities, they may find themselves home alone a lot.
"One of the interesting things you find in the data is that men who retire before their wives tend to be less satisfied with retirement than those who retire together," says Mr. Johnson at the Urban Institute. "Men seem to have more trouble retiring alone than women." As a result, he says, men who are more than five years older than their wives tend to work longer.
While baby boomers have redefined traditional Ozzie and Harriet gender roles, it isn't yet clear just how much.
Robert Kalayjian, 66, an anesthesiologist in Long Beach, Calif., says he would "retire in a minute" if his wife, Pat Kalayjian, 64, retired. But she likes her work as an associate professor of interdisciplinary studies at California State University, Dominguez Hills. She has a flexible schedule and says retirement would feel "unproductive."
So instead, Dr. Kalayjian has cut his schedule to two or three days a week. That has allowed him to practice yoga; he's also working on a patent for a meditation bench.
Dr. Kalayjian admits he would feel funny about retiring first. "It's kind of a cultural thing. The man is supposed to bring home the bread."
Cutting back did lead to adjustments, since Ms. Kalayjian sometimes works from home. "The question of who is responsible for lunch comes up a lot," says Dr. Kalayjian. The solution: Each is now responsible for his or her own lunch.
Some women, particularly those who have been home alone for years, become downright panicked at the prospect of their spouse joining them—day in and day out—with nothing to do. "It often does play out along gender roles," says Ms. Mintzer. "Sometimes the expectation is that the husband will do more with the spouse—and the spouse has their own life." As a retirement coach, she works on getting couples to clarify how much time they will spend together and apart. She also suggests they focus on what they want to retire to as opposed to what they are retiring from.
It helps to have an advance strategy.
David Slade, a lawyer in Boston, planned to retire last summer on his 65th birthday. But as the birthday approached, his wife, Judy Slade, 71, who retired nine years ago and was facing a health issue, encouraged him to wait. "He was ready to leave work, but he needed something else; 65 is still young," she says.
Ms. Slade says she was concerned about both of them being at home—without a plan. "I have my domain at home, and I have my activities. I really enjoy and treasure my time alone," says Ms. Slade. "If he didn't have something he was invested in, it wouldn't be a good situation."
Mr. Slade says his wife's concern, her health issue and economic uncertainty all led him to delay retirement. "I wanted to be sure we were going to be financially sound," he says.
The couple began to work with Ms. Mintzer and Ms. Taylor, the retirement coaches, in a couples' discussion group. "I'm not looking to play golf or shuffleboard," Mr. Slade says. "I was an attorney for 32 years." He is now considering working with orphans in Nepal, along with other volunteer opportunities.
The debate over when to retire is often mixed up with all sorts of other debates. It's hard to agree on when to retire if you aren't sure you can afford it. While selling your house might help you afford retirement, you may not agree on whether to sell, or where to go if you do.
It's no wonder some debates go on and on—and on.
Gail Brewer, a 56-year-old nurse and lawyer, says she would like her husband, Jim Katz, a 57-year-old cardiologist, "to retire right away." She has been managing his medical practice in Los Angeles for several years, and she would like to retire along with him. "We are totally in disagreement," she says.
Dr. Katz, who was recently diagnosed with malignant melanoma, says he wouldn't mind retiring "sooner rather than later," partly due to the uncertainty about his health. But he's concerned about financing retirement. "I'm no different than every other American, worrying about the worth of their nest egg," he says.
Dr. Katz likens their debates to a ball that's kept in a closet. "Every once in a while you take it out and throw it back and forth," he says. "Then you put it back in the closet."
And in the meantime, they both keep working.
5 Rules for Managing Your After-Christmas Bills
Snow, lights, tree decorations, ribbons and bows. All very pretty. After-Christmas bills. Not so pretty.
Every season, many people tend to get in a little over their heads thanks to the magic of the credit card combined with the magic of holiday cheer. Hey, it’s a time for giving. But you don’t want to keep giving interest payments to your credit card company for the next six months afterwards.
Not to worry. There are a few rules you can take advantage of that will help out immensely. These are the 5 rules for managing your after-Christmas bills:
Put some thought into the gifts you buy. Time equals money. It’s easy to buy stuff that’s hot, cool, trendy and so on. It’s also usually more expensive. It’s supposed to be the thought that counts. A little thought will help you find the perfect gift and save you a few dollars at the same time. Besides, all the latest IT stuff on the shelves is usually follow-the-crowd and impersonal anyway.
Make a budget. If you’re strapped for cash, then make up a list of people you have to buy gifts for and assign a budget for each person. If you go over budget on one gift, try to trim the budget on another gift. Expand your budget to include whatever decorations, holiday festivities, and however many tons of chocolate you also plan on buying. Then expand your budget some more and make sure your Christmas budget fits into your personal budget. Save all your receipts.
Get involved with your budget. The biggest mistake is to not look at how much you’re spending. There are people who earn thirty dollars a day that manage to save for the future, and there are those who earn thirty dollars a minute who can’t save a dime. The numbers might be really scary. Face the fear and keep track of all your earnings and your expenses. People always struggle because they don’t want to think about the numbers. Poor people that win the lottery become poor again because they don’t want to think about at the numbers. Be aware. Look at your budget. Plan ahead. Make sacrifices. Creating wealth is a mindset, and so is wasting it.
Lower your interest payments. Department store credit cards charge the highest interest rates. Next are regular credit cards like Visa, Mastercard and Amex. There are other options, and some great ones. You can sign up for a new credit card. Figure out if you can pay off the entire balance before interest charges start and look at what the rate will be once the interest charges do start. Another option is to get a line of credit from your bank and use it to pay off your credit cards. Often, you can get an LOC that only charges interest at prime plus 1 or 2%.
Get great advice. If you’re not a financial guru, then find one. Talk to your wealthy friends or family members and tell them you need help figuring out the best way to attack your bills and win. Read some financial books. Surf the internet to find great advice from respected money gurus. If you get a variety of opinions from different sources, you can use them to form your own perfect plan of attack.
4 Good Money Resolutions (and 4 to Avoid)
It's that time of year again, when we promise ourselves to be better -- smarter, thinner, richer, or perhaps more charitable -- in the coming year.
Some New Year's resolutions are definitely better than others, particularly when it comes to paying down debt, building wealth and getting results. Here are four good and four bad financial resolutions for 2013.
Keep in mind that any resolution you pick should be measureable, attainable and worthwhile -- the SMART approach. "Make more money" is too vague. "Selling DVDs you haven't watched in three years" is something you can accomplish with decent results.
4 Good Money Resolutions
1. Unless you can pay off the balance each month, stop using credit cards. There are disturbing indications that people put more of this year's Christmas spending on credit cards than they did last year. Remember, if you're paying only the minimum balance due on your cards, this could be dangerous. Freeze them in a block of ice, if you must, to limit your access.
2. Up your contribution to your retirement account. OK. Now up it again. The sad fact is that many people aren't saving enough to keep themselves in the style to which they've become accustomed when they're no longer earning a paycheck. Unless you're fine with surviving on Social Security, saving for retirement should be your top priority once you've paid off consumer debt. It should even trump saving for the kids' college funds.
3. Put the money you've "saved" into savings. That money you didn't spend at the grocery store because you wisely stacked store sales and coupons isn't really saved if you spend it on something else. The blogger at Budget Glamorous mentions this as one of her "budget hypocrisies."
If it's sitting there in the account, my mind doesn't remember that $47.50 is extra happy money for paying down debt. I just breathe a sigh of relief that my grocery bill has a little extra padding this month! Or worse, get all excited and buy something I don't need because I think I have the money for it.
Apply it to debt -- that's called "snow flaking" in the personal-finance blogging world -- or set it aside for your retirement account.
4. Change your withholding. For a variety of reasons, the average tax refund last year was just over $3,000. Couldn't that kind of money -- it is yours, after all -- have been used to pay down debt or boost a retirement account through the course of a year? Getting it in one lump sum in the form of a tax refund could be temptation to spend it.
4 Money Resolutions To Avoid
1. Take up serious couponing. Couponing consumes a lot of time that for many folks could be better spent doing something else.
As an alternative, Paula recommends getting a discount gift card for the stores where you regularly shop.
2. Join an expensive gym. This could be valuable if you have the willpower and drive of J.D. Roth of Get Rich Slowly, who raves about his Crossfit training. But, let's be realistic here. Joining a gym is serious business, according to the Chicago Tribune.
Gyms are notorious for offering cheap deals to get you in the door, but signing up for a membership can leave you responsible for much more expensive monthly dues that can stretch for years. Make sure you're fully committed to paying the dues in the months or years to come.
If you think making the financial commitment will enhance your desire to go regularly, it often doesn't work like that (although Kate Tormey wrote on Bundle about a gym that will charge members an extra $10 for each workout session they miss on top of the regular membership, which seems to get people's attention). Time says 60% of gym memberships are not used.
You really can exercise on your own, without the fancy equipment. "To summarize: The only thing that has gotten heavier since I quit the gym is my wallet," a blogger known as "Mr. Broke Professional" said. If you must join a gym, pick an inexpensive one and test your commitment to getting in better shape.
3. Get out of debt and save money. This was No. 5 on Time's "Top 10 commonly broken New Year's resolutions" for 2011, and for good reason. It's too big, too poorly defined and, with so many families' personal finances in ruin, unattainable for many. Time instead recommended manageable tasks, like shopping for better insurance rates. (Just remember to use the savings to pay down debt.)
4. Make New Year's resolutions about money. The Wall Street Journal says 88% of resolutions fail. A major reason is that willpower is like a muscle. The article explains:
Most of us assume that self-control is largely a character issue, and that we would follow through on our New Year's resolutions if only we had a bit more discipline. But this research suggests that willpower itself is inherently limited, and that our January promises fail in large part because the brain wasn't built for success.
Set small goals that can be pursued at any time of the year -- particularly ones you can take care of with a simple step, like increasing the amount automatically deducted from your paycheck and placed in your retirement account. Brown-bag lunch one more day a week. Pull your credit reports and make sure they don't contain mistakes.
Calculating Your Retirement Needs
When retirement was years away, calculating how much income you may need may have involved a lot of estimates. Now you can be more accurate. Consider the following factors:
The length of your retirement. The average 65-year-old man can expect to live about 17 more years; the average 65-year-old woman, 20 more years, according to the National Center for Health Statistics. Have you accounted for a retirement of 20 years or more?
Earned income. Working during retirement, even on a part-time basis, can reduce your need to tap retirement assets for ongoing living expenses.
Your retirement lifestyle. Your lifestyle will help determine how much income you'll need to support yourself. A typical guideline is 60% to 80% of your final working year's salary, but if you want to take luxury cruises or start a business, you may need 100% or more.
Health care costs and insurance. Most Americans are not eligible for Medicare until age 65, and even then, Medicare doesn't cover everything. You can purchase Medigap supplemental insurance to cover some of the extras, but even Medigap does not pay for long-term custodial care, eyeglasses, hearing aids, and other ongoing essentials. For more on Medicare and health insurance, visit www.medicare.gov.
Inflation. Because the rate of inflation can vary over time, it's a good idea to tack on an additional 4% each year to help compensate for increases in the cost of living.
Running the Numbers
The next step is to identify potential income sources, including Social Security, pensions, and personal investments. Also review your asset allocation -- namely, how you divide your portfolio among stocks, bonds, and cash.1Are you tempted to convert all of your assets to low-risk securities? Such a move may place your assets at risk of losing purchasing power due to inflation. You may live in retirement for a long time, so try to keep your portfolio working for you both now and in the future.
A New Phase of Planning
Once you've assessed your needs and income sources, it's time to look at tapping your nest egg. First, determine a prudent withdrawal rate. A common approach is to liquidate a maximum of 5% of your principal each year in retirement; however, your income needs may differ.
Next, you'll need to decide when and how much to withdraw from your tax-deferred and taxable investments. Investors are required to take annual withdrawals from employer-sponsored retirement plans and traditional IRAs after age 70 1/2. Be aware that these withdrawals are subject to federal income tax.2
The advantage of maintaining tax-deferred investments for as long as possible is their ability to compound on a pre-tax basis and thus offer greater earning potential than their taxable counterparts. In contrast, long-term capital gains from the sale of taxable investments are currently taxed at a maximum of 15%.
Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. Coulee Bank and Coulee Investment Center are not registered broker/dealers and are not affiliated with LPL Financial.
1Asset allocation does not assure a profit or protect against a loss in a declining market.
2Withdrawals from tax-deferred accounts made prior to age 59 1/2 may be subject to an additional 10% penalty. In the case of employer-sponsored plans, there are special rules that apply to plan participants aged 55 and older who separate from service.
© 2011 McGraw-Hill Financial Communications. All rights reserved.