Personal Banking E-Newsletter - February 2013

Retirement Errors Good Savers Make

With so much data pointing out the inadequate savings levels of average Americans, it seems like almost everybody needs to save more for retirement. But it's also possible to take retirement saving too far and ruin your current quality of life in the process. Here are four mistakes that diligent retirement savers should strive to avoid:

Don't become obsessed with retirement guidelines
 Many retirement savers are familiar with the 4% safe withdrawal rule. But it's important to remember that while aiming for a fixed number aids planning, you may need to adjust your strategy in retirement. Coming up with a fixed withdrawal percentage the day you retire and then religiously taking an inflation-adjusted amount each year no matter what happens in the markets is too rigid a strategy for most people to adhere to. In addition, a person who strictly adheres to the 4% rule will deem his or her portfolio as falling short whenever expenses exceed 4% of the portfolio balance. This can cause anxiety, even when the portfolio is likely still adequate for supporting the retiree's lifestyle.

Don't sacrifice too much now for tomorrow
While saving too little for retirement can lead to disaster in later years, many savers sacrifice too much today in hopes of a better tomorrow. Remember that today is also important, and take everything in moderation. After all, money is for spending, too.

Don't call it quits too early
If they sacrifice too much, many savers can come to feel burned out. They may end up retiring from their job too early and missing out on peak earning years that may also turn out to be their most satisfying years at work. Some people may even realize, years into retirement, that they need to get back into the game because they underestimated how much money a multidecade retirement requires. Even if finances aren't a problem, some retirees simply miss the social aspects of a work environment. Sure, it's hard to imagine right now, but can you guarantee that you won't miss work after 10 or 20 years or retirement.

Don't start thinking money is all you need after retirement
A healthy retirement is much more than having enough money to live on. Many savers spend far too much time planning and thinking about money. Through their working years, they sacrifice their health for a bit more money. They sacrifice their time and their relationships just to work a few more hours. Family, friends and hobbies are among the things that are as important as money for a comfortable retirement. Don't neglect other areas of your life as you strive to put more cash in the bank.

Most people definitely need to save more, so don't use the advice above an excuse for excessive spending. But if you take saving and planning too far, your retirement may not be all that rosy, either.


Get Ready To File Your Taxes

It's time to start thinking taxes.  January 30 marked the beginning of tax season, when most Americans can submit their returns to Uncle Sam.

The IRS had originally planned to kick things off on Jan. 22, but the fiscal cliff debate forced the agency to push the official start date back eight days.

Certain taxpayers will still need to wait to file, however. Tax returns claiming the American Opportunity Tax Credit or the Lifetime Learning Credit, two popular education credits, won't be processed until mid-February.

This means the roughly three million people who typically file returns claiming these credits before mid-February will likely have to wait longer for refunds this year.

Other filers with more complex returns, including those claiming residential energy credits and general business credits, will need to wait until late February or March for their returns to be processed. The full list of forms being accepted in late February or March can be found on the IRS website.

If you're a victim of identity theft, you may also have to wait for your refund. The IRS has been struggling to keep up with surging tax fraud, and identity theft victims often experienced delays of at least 180 days last tax season, according to the Taxpayer Advocate Service.

Otherwise, you can generally expect to receive a refund within three weeks after the IRS receives your return. Last year, more than 110 million taxpayers collected an average refund of $2,803 a piece.


What is a Reasonable Amount of Debt?

It really depends on numerous factors - what stage of life you are at, your spending and saving habits, the stability of your job and your career prospects, your financial obligations and so on. But to keep it simple, let's assume that you are employed in a stable occupation, have no extravagant habits and are considering the purchase of property.

A good rule-of-thumb to calculate a reasonable debt load is the 28/36 Rule. According to this rule, households should spend no more than 28% of their gross income on housing expenses (including mortgage payments, home insurance, property taxes, and condo fees), and a maximum of 36% on total debt service (i.e. housing expenses + other debt such as car loans and credit cards).

So if you earn $50,000 per year and follow the 28/36 Rule, your housing expenses should not exceed $14,000 annually or about $1,167 per month. Your other personal debt servicing payments should not exceed $4,000 annually or $333 per month.

Further assuming that you can get a 30-year fixed-rate mortgage at an interest rate of 4%, and that your monthly mortgage payments are a maximum of $900 (leaving $267, or $1,167 less $900 monthly towards insurance, property taxes and other housing expenses), the maximum mortgage debt you can take on is about $188,500.

If you are in the fortunate position of having zero credit card debt and no other liabilities, and are also thinking about buying a new car to get around town, you can take on a car loan of about $17,500 (assuming an interest rate of 5% on the car loan, repayable over five years).

To summarize, at an income level of $50,000 annually or $4,167 per month, a reasonable amount of debt would be anything below the maximum threshold of $188,500 in mortgage debt and an additional $17,500 in other personal debt (a car loan, in this instance).

Often times gross income is used to calculate debt ratios, because net income or take-home pay varies from one jurisdiction to the next, depending on the level of income tax and other deductions. Spending habits should be determined by take-home pay, however, since this is the amount that you actually receive after taxes and deductions.

So in the above example, assuming that income tax and other deductions reduce gross income by 25%, the net amount left to manage other household expenses (based on $3,125 of take-home pay - or 75% of $4,167 - and $1,500 in housing expenses and other debt servicing expenses) would be about $1,625.

Of course, the above debt loads are based on the present level of interest rates, which are currently near historic lows. Higher interest rates on mortgage debt and personal loans would reduce the amount of debt that can be serviced, since interest costs would eat up a larger chunk of the monthly loan repayment amounts.

While an individual's preferences ultimately dictate the amount of debt that he or she is comfortable with, the 28/36 Rule provides a useful starting point to calculate your reasonable debt load.


How-To Help Aging Parents with Money Management

Are you in the sandwich generation? Those in the sandwich generation are caring for their own children while also assisting aging parents. This can be a financial stress on you, so it's important that you figure out a plan that helps both your parents and yourself. As with most important financial and personal situations, it’s essential that you and your spouse be in agreement with how to assist your parents with money management.

Analyzing your parents' financial situation

When helping aging parents with their finances, the first step is to understand exactly what their current financial situation is. This discussion is easier if your parents live close to you, but regardless of their residence, talk to them about their finances in person. Understand what bills your parents currently have and whether they are being paid on time, as well as what their savings and revenues are. If everything is in order and your parents aren’t overwhelmed taking care of things on their own, then you probably only need to check on them periodically.

However, if your parents are having financial difficulties, it’s in your family’s best interest to identify the problem and work toward a solution. Determine if the problem is with cash flow, or with the work required to actually pay the bills. These are two very different problems, with very different solutions.

When the problem is lacking the financial means

If your parents do not have the financial means to cover their bills, you’ll have to consider some options, such as selling their home or taking out a reverse mortgage. There is also some financial assistance for seniors available. The National Council on Aging has set up a Web site that offers information on benefits available to seniors. Look into all options before choosing the one that’s best for your family.

When the problem is the work required to pay the bills

Your parents may have the financial means to cover their bills, but could have difficulty with the amount of organization and work required to pay their bills and manage their investments appropriately. In that case, you or another family member may want to consider taking over bill payments. You could set up automatic bill pay for most of the bills, and manually pay the others. For financial advice, consider hiring a personal financial planner.

Regardless of the current situation and solution, you or another family member need to continually assess your parents’ financial standing, as it could change even in a short period of time. Keeping the lines of communication open is the best way to ensure you help manage their situation, and avoid any financial penalties from late payments.



Tax Smart Investing Tips

Savvy investors have long realized that what their investments earn after taxes is what really counts. After factoring in federal income and capital gains taxes, the alternative minimum tax (AMT), and potential state and local taxes, your investment returns in any given year may be reduced by 40% or more. Luckily, there are tools and tactics to help you manage taxes and your investments. Here are four tips to help you become a more tax-savvy investor.

Tip #1: Invest in Tax-Deferred and Tax-Free Accounts
Tax-deferred investments include company-sponsored retirement savings accounts such as traditional 401(k) and 403(b) plans and traditional individual retirement accounts (IRAs). In some cases, contributions to these accounts may be made on a pretax basis or may be tax deductible. More important, investment earnings compound tax deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket.

Contributions to Roth IRAs and Roth 401(k) savings plans are not deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you are over age 59 1/2, have held the account for at least five years, and meet the requirements for a qualified distribution.

Tip #2: Manage Investments for Tax Efficiency
Tax-managed investment accounts are managed in ways that can help reduce their taxable distributions. Your investment professional can employ a combination of tactics, such as minimizing portfolio turnover, investing in stocks that do not pay dividends and selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere in the portfolio. In years when returns on the broader market are flat or negative, investors tend to become more aware of capital gains generated by portfolio turnover, since the resulting tax liability can offset any gain or exacerbate a negative return on the investment.

Tip #3: Put Losses to Work
At times, you may be able to use losses in your investment portfolio to help offset realized gains. It's a good idea to evaluate your holdings periodically to assess whether an investment still offers the long-term potential you anticipated when you purchased it. Your realized losses in a given tax year must first be used to offset realized capital gains. If you have "leftover" losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years.

Tip #4: Keep Good Records
Keep records of purchases, sales, distributions, and dividend reinvestments so that you can properly calculate the basis of shares you own and choose the most preferential tax treatment for shares you sell.

Keeping an eye on how taxes can affect your investments is one of the easiest ways to help enhance your returns over time. For more information about the tax aspects of investing, consult your tax professional.



The information in this article is not intended to be tax advice and should not be treated as such. You should consult with your tax advisor to discuss your personal situation before making any decisions.

© 2012 S&P Capital IQ Financial Communications. All rights reserved.