Five Ways to Kick Your Retirement Savings Up a Notch

Ever get the feeling you’re not saving enough to meet your retirement income needs? You’re not alone. The Employee Benefits Research Institute’s 2017 Retirement Confidence Survey found that 59% of workers have never tried to calculate how much money they will need to save to live a comfortable retirement lifestyle.1

So how much should you be saving in your retirement accounts?

There’s no one-size-fits-all answer and there’s a lot to think about. For example:

  • How much you’ve already saved
  • How many years before you’ll need your savings
  • Your income before retirement
  • Your income goals in retirement
  • How much risk you can tolerate in your retirement portfolio

But the short answer for most people is this: Save as much as you can.

Here are five money-management tips that can give you a better chance of hitting a realistic retirement savings target.

Ramp up contributions.

Increasing retirement plan contributions — even 1% a year — can help get you into double-digit savings territory before you know it. If your employer’s plan offers matching contributions, start by saving to the match. Adding 1% a year to your savings rate after that can help you get to a healthy savings rate. The year that you turn 50, you can ramp up even faster by making catch-up contributions.

Redirect extra income.

Put a percentage of every salary raise, bonus, tax refund and monetary gift or prize into your retirement plan.

Spend less.

Create a household budget to track where your money is going. Cut out unnecessary expenses, like a gym membership you don’t use, and move the found money into savings. A budget can also help you reduce your debt. Carrying balances on high-interest credit cards eats into your monthly income. Pay down those cards or consider consolidating several debts into one lower-interest loan. Once you pay off a credit card or loan, keep making those payments—but direct them to your retirement plan instead.

Negotiate expenses.

A phone call to customer service can often lower service contracts like cable TV or annual fees and interest rates on credit cards. You can usually reduce insurance premiums by consolidating insurance policies such as auto and home with one company.

Pay the doctor with pre-tax dollars.

Does your employer offer a Flexible Spending Account (FSA) or Health Savings Account (HSA)? You may be able to direct pre-tax dollars to help pay for qualified medical expenses like co-payments and prescriptions. Just make sure you plan your yearly expenses carefully because in some cases, any unspent money in these accounts at the end of the year may not roll over into the next year.

Make a commitment to save.

Once you make saving for retirement a priority, you can approach these tactics almost like a game. Once you see how much extra money you can carve out to help build your future financial security, it may inspire you to find other ways to fund your future. You may have to make a few sacrifices, but several small changes in how you manage your money now can help you reach your savings goals later.

 

1 Greenwald, L., Copeland, C. and VanDerhei, J. (21 March 2017). The 2017 Retirement Confidence Survey—Many Workers Lack Retirement Confidence and Feel Stressed About Retirement Preparations. Employee Benefit Research Institute Issue Brief, no. 431.  Retrieved May 15, 2017, from https://www.ebri.org/pdf/briefspdf/EBRI_IB_431_RCS.21Mar17.pdf

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How to Manage if Your Spouse Enters Long-Term Care

Millions of Americans provide unpaid medical care to spouses or partners. For many, it can be a rewarding experience.1

But what happens when you can no longer provide the kind of care your spouse or partner needs?

Many people look to long-term care facilities and nursing homes to meet those needs. And that decision can have lasting effects on both finances and emotions.

Let’s start with the numbers.

Long-term or nursing home care isn’t cheap. If you decide on one of these options, you’ll want to know the costs and services that go along with each.

Nursing homes provide daily activity care to residents through professional and non-professional medical staff.

  • It’s generally the most expensive long-term care option available, ranging from $6,800 to $7,650 monthly.2
  • Nursing homes aren’t government-regulated or Medicare- or Medicaid-certified. Often, you must pay for a stay.

Expenses are lower for assisted living facilities. They average about $3,800 per month. Residents can generally get help with daily living and basic health services. They can also enjoy recreational and social activities. Costs include monthly rent with some extra fees, depending on the guest’s needs.3

Paying for care with…

  • Medicaid. You may be able to get help to pay for your spouse’s care if you qualify for Medicaid and the facility you’ve chosen accepts it. Unfortunately, not all nursing homes and long-term care facilities do. Medicaid eligibility can be complicated and is different in each state, so it’s a good idea to know the rules. Before you make any decisions, you may want to contact your state’s Medicaid office for more information.
  • Long-term care insurance (LTCI). Generally, LTCI covers nursing-home or long-term care for people over 65. It can also cover people with a chronic or disabling condition that need constant supervision.4 If you’re thinking about a LTCI policy, shop around and make sure it covers as many types of long-term care as possible. Also, check your current life insurance policy. It may already have an option for long-term care. Carefully read your agreement to see if you’re covered, or give your agent a call to walk through it.
  • Personal savings. You can always use your personal savings to pay for nursing home or long-term care. It works well if you have the assets; it can be a burden if you don’t.

Care in a long-term facility or nursing home can be costly financially – but the emotional toll can be equally as costly.

It’s not uncommon for a caregiver to experience strong emotions after a spouse moves to long-term care. In fact, it’s natural.

There are ways to manage those emotions. Here are a few strategies you can use to help handle the stress:

  • Make your spouse’s living arrangements as comfortable and homey as possible. Bring photos, paintings, knick-knacks or even a favorite chair from home for his or her new living space. This can help soften the impact of the change.
  • Visit often, and when you do, make your time with your loved one special. Activities can include:
    • Playing games
    • Telling stories
    • Sharing the latest family and neighborhood news
    • Taking walks
    • Spending time outside if you can
  • Talk to someone – formally or informally. You’d be surprised at the amount of support you may have available to you. Friends, other family members, your church or even the staff at your partner’s long-term care facility can provide you with guidance or just time to listen, if you ask.
  • Be an advocate for your spouse or partner. Making sure your loved one is well-served in his or her new home can help you emotionally, too.

The decision for a spouse to move into long-term care doesn’t mean your relationship is over, it just means it’s changed. The better you can manage it both financially and emotionally, the better off your loved one and you will be.

 

1 (2016). Caregiver Statistics: Demographics. Caregiver.org. Retrieved May 06, 2017, from https://www.caregiver.org/caregiver-statistics-demographics

2, 3 (2016, April). Long Term Care Costs 2016. Genworth. Retrieved January 15, 2017, from https://www.genworth.com/about-us/industry-expertise/cost-of-care.html

4 (2005, March 08). Long-Term Care (LTC) Insurance. Investopedia.com. Retrieved January 15, 2017, from http://www.investopedia.com/terms/l/ltcinsurance.asp

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Sell in May and Go Away? Not So Fast.

If you turn on almost any financial TV or radio show this month, you’re likely to hear people discussing the “sell in May” saying.

It’s an old piece of advice that reporters tend to rehash each year. The saying comes from a long-held misconception that it’s a good strategy to sell assets at the beginning of the summer and then re-invest when the winter months begin (usually in November). Yet this is far from a sound approach.

To begin, let’s look at how the saying started. In the early days of Wall Street, the original adage was “Sell in May, go away, come back after St. Leger day.” St. Leger is a popular horse race in England that’s run in mid-September. While we don’t know exactly when the saying became popular, the St. Leger race started in 1776. It seems pretty safe to say that basing your investment strategy off the timing of a horse race that began centuries ago isn’t exactly rational.

Some investors who follow the saying’s advice may argue that historically, market rallies (gains of 10% or more) are more likely in the winter months and market corrections (losses of 10% or more) are more likely in the summer months.

In this context, summer months are considered to be May through November and winter months are considered to be December through April. It’s important to keep in mind a few things about these trends:

  • These summertime figures are skewed because some of the more recent major market losses happened during the summer: The largest-ever Dow Jones Industrial Average point drop happened on September 29, 20081 and Black Monday’s 22% crash happened on Oct. 19, 1987.2
  • Markets ebb and flow over the long term, and these movements aren’t tied to the seasons. They’re tied to much greater factors such as economic developments and political changes.
  • Every investing adage has exceptions. For example, take the “Santa Claus rally,” which says stock prices increase over the final five days of trading each year (generally between Christmas and New Year’s). This didn’t happen in 2015, and markets got off to a rocky start in 2016—quite a deviation from the so-called “norm.”

It all comes back to trying to time the market. As we’ve said before, timing the market should have no place in your investment strategy.

It’s nearly impossible to do, even for the most seasoned financial experts with access to the best economic forecasts and market analysis. It’s so hard because you need to be right twice. Not only do you have to get out at the right time, but you need to get back in at the right time, too. Instead of using the “sell in May” saying to time the market, stick to your strategy and keep a long-term focus.

The chart below drives home the importance of staying in the market during the summer. It shows the growth of $1,000 following two strategies between May and November. One bought and held an S&P 500 fund from May to November. The other sold the S&P 500 fund in May, invested in Treasury bills through the summer months, and bought again in November. Clearly, the “buy-and-hold” strategy produced greater returns over the longer run.

(Source: OppenheimerFunds, Morningstar Direct, as of December 31, 2015)

This isn’t to say that selling in the summer will never work—sometimes it will, sometimes it won’t. But when it will work is unpredictable. Don’t try to time the market by following apparent patterns that are, in reality, random. Another take-away from the chart is that stocks historically out-perform bonds. If you buy and hold stocks, you’re taking advantage of this trend.

So the next time you hear “sell in May and go away,” remember the realities of it. Don’t base your investment decisions off an old saying about a horse race from the 1700s. Instead, stick to your thoughtful plan and focus on the long-term.

 

1 Amadeo, K. (3 April 2017). Stock Market Crash of 2008. The Balance. Retrieved May 22, 2017, from https://www.thebalance.com/stock-market-crash-of-2008-3305535

2 Stock Market Crash. Wikipedia. Retrieved May 22, 2017, from https://en.wikipedia.org/wiki/Stock_market_crash

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Can You Get a Social Security Do-Over?

Life is full of regrettable decisions. Whether it’s that unfortunate haircut from the 1970s or the ugly matching sweaters you wore in the family photo decades ago, there are choices you wish you could do over. While getting a do-over on something like your cable package could be simple enough, there’s no way you could reverse your Social Security claiming decisions, right? Actually, wrong.

In some cases, you can get a do-over on your Social Security withdrawal strategy.

Let’s start with the basics of claiming Social Security. You’re eligible as soon as you turn 62, although if you start claiming that early, your benefits will be less than if you wait until your Full Retirement Age (FRA). Your FRA depends on when you were born. For most people ready to claim now or soon, it’s between 66 and 67. If you don’t claim as soon as you reach FRA, your benefits will increase by about 8% each year you wait to claim until age 70. Once you turn 70, the benefits stop growing, so there’s no reason to wait to claim.

Let’s say you filed for Social Security at age 63 but realize how much more money you’ll receive if you wait until your FRA or beyond. Is there anything you can do to reverse your decision? Possibly, yes. You can get a do-over if:

  • You withdraw your application within the first 12 months of filing. Note that you can only withdraw your application once. You can’t withdraw, reinstate and then withdraw again.
  • You repay any benefits you and your family received since you started claiming.

With this do-over, it is as if you never filed. So, you get the benefit of waiting whenever you file in the future.

What if you started claiming at or before FRA but having reached FRA you change your mind and want to wait until you’re 70 so that your benefits grow?

Good news: This is a relatively easy process and there are fewer restrictions. All you have to do is suspend your application. You won’t have to pay back any benefits you’ve already received, and you can re-instate your benefits whenever you’d like before you turn 70. Once you turn 70, your benefits will be automatically reinstated.

If you go the Social Security do-over route, there are some things you’ll want to know:

  • If you’re on Medicare, you’ll start paying Part B premiums on your own. This is because Part B premiums are usually taken out of your Social Security check. If you’re no longer getting your Social Security check, that Medicare Part B premium is not getting paid.
  • If you have dependents claiming benefits on your record and you stop Social Security payments to yourself, their payments will stop too with the exception of divorced spouses who will continue to receive benefits.
  • When you suspend your benefits, any benefits you receive on someone else’s record will also stop.

There aren’t many opportunities in life for a do-over. After all, evidence exists of you in that not-so-flattering jumpsuit from back in the day. Fortunately, when it comes to Social Security, there is the chance of a do-over. Be sure to know your options, the requirements and how it might impact other areas of your life.

 

Disclaimer:

Decisions regarding Social Security are highly personal and depend on a number of factors such as your health and family longevity, whether you plan to work in retirement, whether you have other income sources as well as your anticipated future financial needs and obligations.

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Deciphering Stocks, Bonds and Mutual Funds

Investing has its own language — and if you’re a new investor, it’s easy to get confused. Many of the terms may make you feel like you’re ordering off a menu you don’t understand. If you can’t identify the food on your plate, then your appetite — and possibly your health — suffers.

When you’re picking investments from your company retirement plan’s menu, you don’t necessarily need to be fluent in investor-speak. But if you don’t know what you’re investing in, your portfolio could get indigestion. Knowing the basics of the most common investment types can keep you from reaching for the antacid tablets.

Investments come in more flavors than what’s in the case at your average ice cream store and have a way of overwhelming many investors. If you’re looking to increase your understanding of investments, a good place to initially focus on is defining and comparing the two main investment categories (known as asset classes): stocks and bonds.

Stocks make you an owner.

Companies sell shares of stock to investors to bring in more money than they can make just by selling their products or services — and they use this money to fund investments or expansion. When you buy stock, you are buying an ownership stake in the company. It’s why stocks are also called “equities.” You’re getting an equity stake in the business.

As a part owner, you share in the fortunes (positive and negative) of the company. If the company does well and grows, your stock shares may go up in value. The opposite can also happen, which is one of the risks of buying stocks — it’s possible (although not very likely in most cases) to lose all your money. This is why diversification is important. What if you have all your stocks in one company or industry and it goes south? You’re at a greater risk of losing everything than if you own stocks of several companies in a variety of industries.

The value of just about any investment will go up and down over short time periods. This is called volatility, and stocks tend to have more volatility than bonds. But this higher volatility also gives stocks the potential to grow in value over time, which is why stocks have had better performance than bonds over the long haul.

Bonds make you a lender.

A bond is a type of “I.O.U.” issued by a government agency or corporation as a way to raise money for specific needs. When you buy a bond, you are lending your money to the bond issuer and in return, you receive interest payments at a specific (fixed) interest rate over a specific (fixed) time period. This is why bonds are called “fixed income” investments. At the end of the bond term, the issuer pays back what you originally paid for the bond.

The known interest payments and terms tend to make bonds less risky than stocks. But bonds don’t have the ability to grow in value the same way stocks do, so their average long-term performance tends to be lower than stocks. A bond’s value also changes over time, but generally not as much as the typical stock. It’s worth noting however, that if a company is in trouble, bond holders are ahead of stock holders in the line to be paid.

Mutual funds are baskets of stocks and bonds.

A mutual fund is a collection (or portfolio) of stocks, bonds and other investments that are managed by a professional team. Individual investors buy shares in a mutual fund and everyone’s money is pooled. The managers buy and sell the investments in the fund’s portfolio with the aim of increasing its value over time.

When you buy shares in a mutual fund, your money gets spread out across all the fund’s investments. Some mutual funds may own dozens of stocks and bonds, some hundreds. Some funds only invest in stocks. Others only invest in bonds. You can research mutual funds online by searching for the fund’s ticker symbol.

Keep your options open.

Stocks and bonds both have pros and cons. Consider including both in your investment portfolio. For many investors, mutual funds are one of the easiest ways to do that.

 

CPY18991

Want to Help your Child Save for Retirement? Consider a Child-Friendly IRA.

We often hear from retirement investors that they wish they’d started saving for retirement sooner.

Does this ring true to you? If so, you might feel compelled to pass that wisdom on to your children or grandchildren — or maybe even start a retirement savings account for them.

Parents can open and deposit money into a bank account for their children with the plan that the funds are for the childrens’ retirement.

This can help teach good saving habits, but the child will not reap as much in the way of compound interest as they potentially could with other accounts. Fortunately, there are child-friendly individual retirement accounts (IRAs), both Roth and traditional, that children can invest in if they have taxable income.1 Many of these are “custodial accounts,” meaning they’re managed by a parent or guardian until the child becomes an adult.2

Note that there are some restrictions on IRAs. For example, there is a limit on how much an individual can invest each year. For 2017, that amount is $5,500 if you’re under 50 years old. You also can’t invest more than your taxable income each year. So if your child earns less than $5,500 per year, they can only invest what they make, not the full $5,500.3

Convincing a child to invest most of their earnings in a retirement savings account might be hard, but there are ways to encourage saving:

  • Match their contributions up to the allowable investment amount if you can. That way they can keep part of their earnings.
  • Ask friends and relatives to contribute to the IRA instead of giving birthday or holiday gifts. Your child can keep their paycheck and still contribute to the IRA.

While setting up an IRA for your child is one way to help him or her save for retirement, it’s not the only way. Teaching children financial literacy, the basics of compounding interest and the value of long-term saving can also help set them up for a successful financial future. Even if they don’t open an IRA after receiving their first paycheck, knowing personal finance basics can make a world of difference for your children when they’re faced with financial decisions from childhood into their adult lives.

We’ve said it before: Children learn from you, so leading by example is another good practice.

If you need to improve your financial habits before diving into personal finance 101 with your kids, you’ll want to start by brushing up on the basics. We have a variety of resources to help.

 

1 The Benefits of Starting an IRA for Your Child. Investopedia.com Retrieved May 4, 2017, from http://www.investopedia.com/articles/personal-finance/110713/benefits-starting-ira-your-child.asp

2 How a Kiddie Roth IRA Can Double Your Child’s Retirement Savings. TIME.com Retrieved May 4, 2017, from http://time.com/money/4193253/kiddie-roth-ira-child-retirement-savings/

3 Traditional and ROTH IRAs. IRS.gov Retrieved May 4, 2017, from https://www.irs.gov/retirement-plans/traditional-and-roth-iras

CPY18992

Everyone Needs an Emergency Fund

Stuff happens. And when it does, it usually costs money. Your car’s transmission goes out. Your spouse needs emergency dental surgery. You lose your job. If you don’t have cash on hand to pay for these kinds of unexpected events, it adds financial hardship to the already high emotional and physical stress levels.

This is why most financial experts recommend that you have an emergency savings, or “rainy day,” fund. Unfortunately, half of U.S. adults do not have a stash of cash to buffer them against life’s unpleasant surprises.1 If you’re in this group, it can be beneficial to start working on your rainy-day fund today.

How big should your emergency fund be?

Some experts say you should save the equivalent of three to six months of your take-home pay. If you’re a single renter with a good job and cool parents who would let you move back home in a pinch, then three months may be adequate. If you’re married with kids and paying a home mortgage, six months’ worth or more might be a better target.

A more conservative benchmark is to have enough cash to cover three to six months of your basic living expenses. Obviously, this amount would be less than your income. If you get hit with a job loss, you’ll need to keep paying for housing, utilities, food, insurance, health care, transportation and other life essentials. Use only these critical expenses to figure your monthly emergency needs. You can temporarily do without entertainment, eating out, shopping and other discretionary spending, so leave these costs out of your calculation.

Don’t get discouraged if you can’t reach the three-to-six-month goal right away. Any amount is better than nothing. Even $1,000 in reserve could help you get through a few small bumps that otherwise might require you to use the high-interest credit cards and go into debt.

How can you build it up?

Like any savings plan, you should identify your end goal, start small and save consistently. Here are a few tips:

  • Set a monthly target. Take a percentage of each paycheck and have it automatically deposited into your emergency account.
  • Allocate extra cash. Resolve to put all or part of any extra income, such as a tax refund, a bonus or gifts from grandma into your fund.
  • Trim expenses. Cut back on entertainment spending and funnel the savings into your fund. Tell yourself the scaled-down lifestyle is only temporary until you can build up your emergency savings.
  • Earn extra income. Get a part-time job, find contract work or look for other ways to supplement your income on a short-term basis.

Where should you put your emergency savings?

The whole point of an emergency fund is for it to be available at a moment’s notice, since emergencies rarely give you any warning. Generally, that means keeping your money in a savings account at a bank.

The downside of this tactic is you’ll earn very little interest on your money in today’s extremely low interest-rate environment. In fact, it’s likely that rising expenses and inflation may cause your emergency fund to actually lose money over time. You may need to keep topping it off to maintain your target balance.

For this reason, make sure you don’t save too much in your emergency fund. Think of it like an insurance policy. You may never use it all so there’s no reason to over-fund it when you can put extra money to better use in a retirement fund or other higher-earning investments.

Financial protection against the unexpected.

If life throws you a curve, you don’t want to max out your credit cards, drain your retirement plan or sell investments to cover expenses. Having an emergency fund can give you flexibility and relieve some stress when the unexpected happens. The key is a willingness to sacrifice a little today for more security tomorrow.

 

1 (2017). 2016 FINRA National Financial Capability Study. Financial Industry Regulatory Authority. Retrieved May 4, 2017, from http://www.usfinancialcapability.org/results.php?region=US

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