It’s Time to Look Back and Look Forward

As 2016 quickly becomes a fading memory, are there some things that stick out in your mind from the past year? Like that $1.5 billion Powerball jackpot (a U.S. record) that you thought for sure you would win last January? Or U.S. stocks reaching all-time highs this past month – which is like winning the lottery for your 401k?

Hopefully this past year opened your eyes to some financial insights that could be of benefit in 2017 and beyond. And if you could use some more, it’s your lucky day! Over the next several weeks, we’ll offer several tips to help get you on track. Here’s a sampling:

  1. Set realistic and achievable short term and long-term financial goals.
  2. Maximize your tax return.
  3. Check your credit reports.
  4. Keep your finances safe in the cyber world.
  5. Plan ahead financially for a summer vacation.
  6. Study your spending habits over a week or month, and then decide which are good and which are bad.
  7. Devise and implement a plan to ditch those habits that are bad.
  8. Draw up a personal financial statement – assets vs. liabilities.
  9. Assess and, if necessary, alter your retirement portfolio to make it more profitable.
  10. Review your insurance coverages and make changes where necessary.

We hope these will help you get started off on the right foot in 2017. And even though you didn’t win the “big one” in 2016, maybe your Powerball luck will change in the New Year!

A To-Do List Before 2016 Fades Away

Where did the year go? It’s hard to believe that 2016 is going to be nothing but a passing memory in a couple of months. But chances are you have more than a few loose ends to tie up before 2017 arrives.

Not sure what we’re referring to? Here are some clues:

  • If you’ve met your medical insurance deductible for the year, consider making some doctor’s appointments soon to address things you might have put off because of the added expense.
  • On a related note, if you have a flexible spending account, check the balance to see if there’s any money remaining. And evaluate whether you’re putting too little or too much in the account, then make adjustments for next year.
  • Is benefits enrollment time coming up where you work? If so, carefully review what benefits you have and check whether any premium increases are on the horizon. If you’re anticipating a jump in price, consider making some adjustments in coverage to offset the increase.
  • Do you still have vacation time and/or personal days hanging out there? If you have a use-or-lose policy at work, then you probably should schedule some days off soon. Or you may be among the lucky ones who can roll over a week’s worth of vacation into the next year. Of course, if you have more than a week, plan now to squeeze those extra days in during the next two months.
  • If you have a 401(k) retirement account, think about increasing your contributions before the end of the year.
  • Now’s a good time to take inventory of your cold-weather clothes. Do you have items that are worn out or just don’t fit anymore? Are you looking for some new styles? If you have stuff that’s still in good shape, donate it to your nearest shelter.
  • Are you in line for a year-end bonus? If you already know how much it will be, you can start making plans now on how to spend it. From a summer vacation to paying off bills, you probably have plenty of options to consider.
  • Assess your holiday decoration needs. Replace any decorations that are broken or worn out. And look for sales on new ones – they usually pop up around this time of year.
  • Speaking of the holidays, have you prepared a gift-giving list? Now’s a great time to get a handle on who wants what and just how much you can afford to spend this year.

Making the Most Out of Your Tax Refund Dollars

If Uncle Sam has bestowed you with a significant tax refund this year, what do you plan to do with it?

Before you quickly book a vacation to Cancun, consider how that money could have a more lasting impact on your life. Maybe a baby’s on the way and you need to transform a spare bedroom into a nursery, or perhaps you need to catch up on some outstanding bills; whatever your current situation, you can find ways to stretch those refund dollars.

Here are some smart ways to spend your tax refund:

  • If you have credit card debt, put money toward paying down those bills, especially for accounts that have high interest rates.
  • Establish a college fund for your younger children, and contribute to it every year you get a tax refund, and more often if you can afford it.
  • Earmark money for a major purchase you plan to make down the road. It could be anything from a down payment on a house or a new car, to installing a pool in your backyard.
  • Put aside money for a “rainy day” or emergency fund – enough to cover three months of fixed expenses including your mortgage, utility bills and groceries. It’s good to know you have that money to fall back on in case something comes up like an extended illness or loss of a job.
  • Donate money to your favorite charity. The organization will benefit from your generosity, and you can claim the donation as a tax write-off.
  • Make an additional tax-free contribution to your retirement account.
  • Invest in your future by taking a continuing education course or two.
  • Make some improvements around the house, such as replacing old appliances with new, energy-efficient ones or converting an unfinished basement into a family room.
  • Invest some cash in a secure account with a solid return, like a Bank5 Connect high-interest savings account or a high-yield certificate of deposit.

It’s always great to get a tax refund, but even better when you can squeeze the most out of each dollar you receive. It may also make sense for you to evaluate your tax withholding if you find your refund is sizable or a relatively large percentage of your income. Rather than wait until tax time each year to get your money back from the government, you can use the IRS’ withholding calculator to determine if any adjustments should be made to your withholding allowances. Once you know, you can file a new W-4 form with your employer, and sit back and wait for your larger paycheck. In essence, you’ll be giving yourself a raise instead of giving the government an interest-free loan! Remember to always consult with a tax advisor before making any major financial decision.

Saving After Retirement

Saving after retirement has become a must-do for an increasing number of Americans. This is an emerging trend. What is driving it is that Baby Boomers are waking up to the reality that is possible to run out of money during those supposed Golden Years.

In essence, there are three reasons why the retired and those near retirement are fearful that they could become destitute.

One is the longer lifespan. According to the World Health Organization (WHO), the average lifespan in the U.S. is 79.8, with 82.2 the average for females and 77.4 for males. When doing the financial planning for retirement, too many did not factor in providing income for so many years.

A second reason for terror among some Baby Boomers is that they wound up with lower-than-projected returns on their investments. The Great Recession took a bite out of their portfolios. In addition, the value of what is probably their biggest asset – the family house – might have depreciated. They do not anticipate it will regain its previous value any time soon.

A third reason for gloom is the ever-rising cost of living. Even in the current low-inflation environment, the price of necessities like food continues to increase. So may property taxes. Healthcare costs not completely covered by Medicare are of concern. They too are going up, not down.

Given these realities, it is obvious that saving for retirement is not enough. During retirement, it is also imperative to save, especially for the unexpected. How can that be accomplished?

To begin with, more money coming in provides more funds to save. The Retirement Confidence Survey from the Employee Benefit Research Institute found that 70 percent of employees anticipate they will have to continue to work for pay when retired. A number of them are already doing that. Although there is a scarcity of traditional full-time jobs, the growth is in contract assignments. Some of those are through the sharing economy (Uber X, TaskRabbit) and freelance placement services such as eLance. In addition, the entrepreneurial types are starting online businesses, buying franchises, and turning hobbies into money-makers.

Additional Income also comes from interest on savings accounts, money market funds, and certificates of deposit. In all three the principal and yields are protected by the FDIC. It also pays off to move funds not needed for monthly bills from the checking account, which does not pay interest, to those accounts that do. The yield on equities can be higher than many kinds of investments, but the risk is also higher. A less lucrative but safer path could be investing in mutual funds.

Another tactic to free up money to save is reducing fixed expenses. Some Baby Boomers move to a smaller house or decide to sell the house and rent. Others relocate to a lower cost of living geographical area. Also, the retired are sharing their lodgings and therefore expenses with roommates who are not relatives. Less dramatic ways to cut back on everyday costs is to create a budget and stick to it. Staying within it frequently requires researching senior discounts, shopping in big box and consignment stores, and purchasing generics instead of brands.

In addition to building up a reserve fund, saving in retirement and saving after retirement can also create peace of mind. Personal emergencies, economic recession, and inflation are no longer so feared.

How Much You Should Save for Retirement?

How much you should save for retirement sometimes receives the absolute answer: 10 percent of take-home pay. There are also calculators for estimating this. They are available from Bankrate, MoneyChimp, and FireCal.

However, with so much economic volatility, those kinds of responses to the question of “How much?” are just not cutting it with those of you concerned about your retirement.

For example, you know that it’s possible to lose that “good job” before retirement age and not be able to find a comparable one. That changes everything. Also, it is impossible to predict long-term return on investments, rate of inflation, and government tax policies.

Added to those economic uncertainties are, of course, the personal ones. How long will you live? According to the World Health Organization (WHO), the average U.S. lifespan is 78.3 years. That means you might live much longer. Also, catastrophes, such as incapacitating illnesses and accidents, requiring expensive nursing-home care, never were predicable.

However, what is known is that it is necessary to save for retirement. Income from Social Security and any company pensions will likely not be adequate. Already, you are observing a growing number of “retired” Baby Boomers doing minimum-wage jobs just to make ends meet. Yet, according to the Retirement Confidence Survey from the Employee Benefit Research Institute, 60 percent of workers have less than $25,000 saved, in addition to any equity left in their homes after the crash of the real estate sector.

Experience is showing that maintaining your current lifestyle demands that 70 percent of your present income is how much you should save for retirement. That can be reduced through strategies such as relocation to a lower-cost location. For instance, a move from the New York Metro area to southern Arizona could downsize housing costs at least 50 percent, car insurance another 50 percent, and gasoline about 60 cents less a gallon. Also continuing to work at paid employment or owning a business adds income to Social Security and pensions. Still, a nest egg will be needed. Remember, there could come a time when you are no longer able to work. So you cannot count on that.

How to create and grow that nest egg? There is no ambiguity about that. You establish wealth for your retirement through regular contributions to employers’ or self-employed retirement plans, Individual Retirement Plans, age-appropriate risk-taking in investing, automatic deductions from checking account to bank savings accounts and money market funds, incremental income from part-time jobs and side businesses, and selling what is no longer needed.

The size of that nest egg and the speed at which that accumulates primarily depend on how people of all generations approach personal finance. A key best practice is establishing a budget and having a commitment to stay within it. Certainly there will be emergencies. But those end and then it is a return to that discipline of budgeting. Another best practice is to downsize fixed expenses. That might entail buying a smaller house or acquiring roommates who are not relatives to defray the cost. A top-of-the-line car not only incurs a high monthly loan payment, but also expensive insurance.

How much you should save for retirement, as an individual or as part of a couple, really depends on your vision for your quality of life, feelings about continuing to work, and what it takes to bring you financial peace of mind.

Common Retirement Mistakes for Investing

Retirement mistakes for investing are among the most serious in personal finance. That is because they can make the difference between a comfortable lifestyle when you retire and joining the aging poor. Your generation faces what previous ones had not. That is the Longevity Risk. Given longer life spans, the odds are greater that you could run out of money. Fortunately, being aware of the most common mistakes can help you build enough wealth to fund your retirement and prevent those worst-case scenarios.

At the top of the list of retirement mistakes you could make is not planning. Like death, aging can be a taboo topic. Yet, without an overall plan for how to create and protect wealth, you will not do it.

Of course, the planning can be disrupted by emergencies such as loss of a job or medical bills not covered by insurance. However, if you are committed to your plan that “derailment” will only be temporary. Remember, you are in control.

A plan positions you to always be open to investment opportunities. For instance, you will choose to participate in the tax-advantaged 401(k) employer-sponsored accounts. Usually employers contribute to them. Yet, only 20 percent of the workforce signs up for the 401(k), found the Center for Retirement Research at Boston College.

However, contributing to the 401(k) is only the first step. The next is that you have to continually manage what is in the 401(k). A typical mistake is not diversifying according to the level of risk you can tolerate emotionally and which is age-appropriate. For example, you may be putting too much in company stock. A more prudent approach is to only put a small percentage in any one equity, including the stock of the company. Mutual funds and Exchange Traded Funds (ETF) spread the risk. With those, though, you have to monitor the fees. Excessive fees can reduce your earnings.

In terms of aligning risk with your age, one guideline for equities is to subtract your age from 110. What is left represents the percentage of equities in the portfolio. Being too risk-averse could prevent investment yields from keeping up with inflation. Although stocks are among the riskiest investments they can have among the highest yields.

Also, your portfolio should be balanced through what is known as “asset allocation.” That would include a percentage in bonds and other investment vehicles. However, only invest in what you understand. That is the Oracle of Omaha Warren Buffett’s first rule of investing: Stick with what you know.

Along those same lines of tax-advantaged opportunities is the individual retirement account (IRA). Financial services organization TIAA-CREF found that a whopping 80 percent of those surveyed did not have an IRA. As with the 401(k), you must continually evaluate your investments in the IRA.

Not maximizing wealth and/or losing money also can result from ignoring “unsexy” investment vehicles such as Certificates of Deposit (CD), I-bonds and individual Treasury Inflation-Protected Securities. During periods of high volatility in the stock market, they could provide a safe harbor. However, it could be a mistake to leave the funds there long term. You must continually manage investments.

The good news is that if you plan and are alert to changes in the risk/reward ratio for diverse kinds of investments, you can prevent many of the common retirement mistakes. In addition, you will have the confidence to do course correction on those parts of your investment plan which are underperforming.

How to Save for Retirement in your 40s

How to save for retirement in your 40s is really a mindset. You make up your mind that you will be in control of your financial future. This is the ideal period in your career to be making that commitment. You are in your peak earning years.

Once you have decided that you are in charge, you develop a plan for what lifestyle you want in retirement and when you will stop doing paid work. If you intend to maintain your current lifestyle in essentially the location you are now in, that will require about 70 percent of your present income. The amount could be more if you are relocating to a more expensive area or less if to a less expensive one. Even if you are determined to continue with paid work after 65, you will likely still need a substantial retirement nest egg. That is because human beings are living longer and longer. That makes it possible to actually run out of money.

Some financial planners recommend you save at least 10 percent from what you take home monthly. Others estimate 15 percent. Meanwhile, you should be paying off debts, especially student loans. According to the Federal Reserve Bank of New York, more than 2 million Americans age 60 and over still carry the burden of those loans. Since they cannot usually be discharged in bankruptcy, what is not paid off will be deducted from your Social Security payments and any tax refunds.

If you are employed and your employer provides a tax-advantaged 401(k) you should contribute the maximum. The fund grows quickly if the employer also contributes. In addition, you can open a tax-advantaged individual retirement fund (IRA). The self-employed have choices among a number of tax-advantaged retirement accounts.  Some select two.

Both groups have to actively manage those investments. Fundamental asset allocation guidelines for those in their 40s are for a high percentage of the portfolios to be in equities. There is what is called the “110 minus your age” rule. The percentage of equities for a 47 year old would be 63. The risk inherent in equities can be reduced by choosing mutual funds instead of many individual stocks, including that of your company. The rest of the portfolio could include bonds, commodities, and currencies. Stick with what you understand but do not be too conservative.

Other ways of saving for retirement include savings accounts, money market funds, certificates of deposit (CD). and annuities. You also have to evaluate if you can depend on your house to be an appreciating asset. If so, it is in your financial self-interest to hold on to it. If not, when you can sell it at a break-even price, do that and consider renting. Residential property which is not a productive investment eats away at income. You can also invest in commercial real estate.

You will have more money to save if you can generate more funds coming in. You might consider getting a better job, finding a part-time job, starting a side business, expanding your current business, and selling unneeded possessions.

Financial emergencies do happen. Treat them as temporary setbacks and return to your original savings plan as soon as possible.

We hope you find that these tips helped you learn how to save for retirement in your 40s, or any other age.