Financial Planning

Allow me, if you will, to offer the following definition of retirement. Retirement is the state of having separated from one’s paycheck-to-paycheck job. The “paycheck-to-paycheck” description is important. The majority of people who retire to incomes lower than their pre-retirement levels are paycheck-to-paycheck employees. Chances are, since you’re reading this article, you’re one of the paycheck-to-paycheck people.

Let’s say this is you: You’ve got a decent job, maybe a good one. Most of your paycheck is being eaten up by life’s necessities, but you manage to put away as much as you can into your 401(k) retirement plan. Retirement is looming in the not-too-distant future, and the prospect for accumulating enough savings or investments that will equal your present income by retirement age seems very bleak indeed. Still, you get serious about saving for retirement. You might even engage the services of a Certified Financial Planner. Part of your plan is based on maximizing Social Security benefits. Now what?

Financial planners rarely, if ever, plan for you, the client- retiree to retire financially independent (with the exception of the few high income clients). What most financial planners don’t tell you is they target a 20-35% decrease of income to you in retirement. The decrease may be as high as 50%! That’s not a knock on financial planning or financial planners. Most of them are doing the best they can with what they have to work with. There generally is simply too much month at the end of each paycheck for most people.
Herein is the age-old problem: Most people in the United States of America, I repeat, do not earn enough money to live comfortably during their pre-retirement years and retire comfortably as well. That means any financial planning you do is being done to target a decrease in your living standards by 20 to 50 % in retirement!

Remember, you do not have to live on less in retirement. No matter where you are right now financially, you can build and enjoy a retirement lifestyle you desire. Peace.

With pensions fading away and 401k’s becoming one of the major reliance’s of retirement planning everyone wants to know the best setup for their 401K. While the best setup is generally what you mentally feel comfortable with saving for retirement, we can offer a few general tips and guidelines to help you choose. Please remember higher risk has potential for greater gains and losses, while lower risk is the opposite.

Portfolio Selection

Typically all 401K plans offer the following categories when choosing funds to place your money in: growth, capital preservation, income, balanced, and sometimes stock in the company for which you work.

Capital Preservation Funds

Capital preservation funds are designed to preserve your savings principal. They typically invest in government securities with a predictable rate of return. This is the lowest risk category with the lowest returns. The returns have been known to under perform inflation, which means you could lose buying power in any given year. For example, if the economy inflates at 4% and you get a 3% return on your savings, then you have 1% less buying power than the previous year. Simplified, a TV costs $100 this year and after inflation of 4% the TV costs $104 ($100*4%). Your savings account with $100 had a 3% return leaving you with $103 ($100*3%).

Income Funds

Income funds usually diversify your money into various bonds and are typically for long-term gains. While the exposure to any type of loss is very rare, it is not impossible. With the low amount of risk that comes with income funds you will generally see a lower return then the average of the New York Stock Exchange.

Balanced Funds

Balanced funds try to get the best of all worlds by diversifying between international stocks, domestic stocks, and fixed income securities. These funds are very reliant on the fund managers to choose the right mix to protect and grow your savings. If you are unsure which percentage of your funds you wish to devote to the various other funds, then you may want to consider a balanced fund. Before placing your money into one of these funds, please ensure that you research the funds management history and current manager.

Growth Funds

The “riskiest” of all investments is the growth fund, but it also has room for unimaginable returns. Over the long run these funds typically out perform the stock market because they are invested in international bonds and markets, small cap stocks, and emerging markets of developing nations. It is not uncommon for the annual returns to follow a pattern as such: -73%, 115%, 50%, -33%, 83%. These funds are subject to a variety of factors that some funds are not such as: oil prices, civil wars, and medical epidemics.

Company Stock

Everyone remembers the Enron scandal where thousands of employees lost all of their retirement savings in less than a year. While this is not always the case with companies and some may be very well and dependable, please keep situations like the above-mentioned in mind and take proper precautions to protect your finances. I do not recommend placing more than 10 percent of your savings portfolio into your company stock; however, the choice is completely up to you.

Choosing the Right Mix

With so many options it is hard for an individual to make a choice between various funds. Because everyone has different financial needs and situations the worst thing you can do is pick the same options as your co-workers without giving it a second thought. Before placing your money into any of the categories you will want to consider the following:

Years before retirement How much money you need Your reaction to sudden market drops
How many years before you retire?

One of the most important factors is how many years you plan to continue working. If you have a long time left to work (over 10 years) then a good idea may be to place the majority of your assets in growth funds. The longer you have left to work the more aggressive you should be while saving for your retirement. As you get closer to your retirement age (less than 10 years) you will want to consider starting to migrate some of your growth funds into balanced or conservative funds so your nest egg has less sensitivity to market drops

How much money do you need?

How much money you need goes hand-in-hand with how many years you have left to work. A lot of financial planners can assist you with determining how much money you should place into your savings each month based off these two factors. You can estimate this yourself by doing the math or using an online financial calculator. I recommend an online calculator or use of a Microsoft Excel spreadsheet to save yourself the time. Here is an example of what the math would look like. Take your expected rate of return on your savings and multiply it against the amount you save each year so that the first year looks like this:

Year 1: $4,000 (your yearly savings) % 1.08 (8%) = $4,320
Year 2: $4,320 (previous balance) + $4,000 (annual addition to savings) = $7,320 * 1.08 = $7,905
Continue to do this formula until you reach the year you desire, there are calculators that can do the math for you. Just type in “retirement calculator” in Google and you are sure to get results.

If the market crashed…would you care?

The #1 determining factor of where people place their retirement savings is mentality. Regardless of what you should and shouldn’t do with your retirement fund, if you are not able to mentally handle the results then it is not worth doing. I would never recommend to someone to place all of their money in growth funds if they would not like the idea of losing half of their money in a single month. Whatever you decide to place your money into, please ensure that you are okay with the decision. Remember, it’s never a real loss until you sell, any growth fund capable of losing half your nestegg in a year or less is also capable of returning it.

Tax Deferred or Taxed Contributions?

Another important determining factor is whether or not to save with after-tax contributions or before-tax contributions. Unlike regular savings accounts, 401K’s have the option putting money into them without being subject to federal income tax. Here is a list of things you should consider before choosing either option:

Your tax bracket If the money will be used for emergencies
What is your tax bracket now and what will it be?

Generally speaking if you are in a high tax bracket and plan on making less money when you retire than you would want to consider tax-deferred contributions. Tax-deferred contributions are deferred on taxes up until the point when you start withdrawing the money. If you are currently making enough money to be in let’s say, the 33% tax bracket, but when you retire you only plan on being in the 25% tax bracket, then you should definitely consider placing your money into your 401k as tax deferred. By deferring taxes until you withdraw the money after retirement in the 25% tax bracket you would be saving 8% on taxes (33%-25%) and on top by deferring you have 33% more money in your fund that can grow tax deferred. If you tax deferred $5,000 a year into your 401k and it grew at 8% a year for 30 years; you’re ending balance would be about $611,729.34 which you would draw out in monthly payments that would be taxed at 25% or whichever bracket you fall into after retirement. If you took that same $5,000 dollars but put your money in after tax your final balance for the same scenario would be about $409,858.66, the difference is that you would not have to pay taxes on this money because you have already paid them. You would have about 50% more money in your account after 30 years.

The opposite also holds true. If you are currently in a 15% tax bracket but plan on retiring and being in a 25% bracket, then you may opt to place after tax money into your 401k.

Please keep in mind everyone’s situation is unique and that you should find yourself a good financial advisor or planner if you are unsure of which is best for you.

Is this money going to be used for emergencies?

If you are using your 401K as an emergency buffer account for things that ARE NOT: Primary Residence purchasers, Medical Emergencies, and things of this nature and plan on USING it for things such as credit card debt, paying late bills, and other things related, then you will definitely want to take into consideration the 10% tax penalty and tax consequences of making a withdrawal for these things.

If you take a withdrawal on a tax-deferred 401K that is a non-emergency than you will be subject to not only income tax on that money but a 10% tax penalty as well. Please take that into consideration before making any unnecessary withdrawals. Also, you can always get a loan from your 401K but it is not recommended because you lose savings principal to earn interest on and you have to pay it back at an interest rate probably around 8%.

During our working lives, many people fail to realize the importance of saving for retirement. In order to live the lifestyle you desire after you quit working, it’s important to build a nest egg prior to your retirement years that you can support yourself on. It’s never too early to start saving, and the longer you wait the less money you’ll have accumulated by the time you reach your golden years. In order to ensure a comfortable lifestyle once you retire, it’s important to take steps now to save the money you’ll need to support yourself for the rest of your life.

In order to start saving money now, it’s important that you create a budget and stick with it! Living within a budget is one of the most effective ways to save money and plan for the future, because it allows you to live within your means without going overboard. By creating and maintaining a budget, you know exactly how much money is coming in and how much money is going out. Cut back on unnecessary expenses and consider setting that money aside in a retirement savings account.

You’ll also want to review your retirement plan with your company to understand every aspect of the plan and how it will work for you in the future. Whether you have a 401K or another type of retirement plan through your job, it’s important that you know how the plan will work for you. By following these simple steps, you can be well on your way to ensuring your retirement years are comfortable. Preparing for your retirement now will benefit you immensely in the long run by ensuring you have enough money to live on and won’t have to work past your retirement age.

What sort of retirement income will I need? This is a question working people often ask themselves. This is also one of the hardest questions to answer. No one answer is right for everybody. There is a different answer to this based on personal lifestyle and retirement goals. A common rule of thumb is that you will need at least 80% of your current income when you retire.

In determining retirement income, you also need to determine how many years you will live after retirement. A good estimate to make should be 100 years. If you live less than that, you can pass your income on to heirs.

What will your expenses be after retirement is a good question to ask. This is where you project what your lifestyle will be and your wants and needs when you retire. Determine if your retirement income will be enough. Figure out your net worth and compare income with expenses. It is recommended to estimate a 3% higher expenditure. This takes care of inflation

You should never rely primarily on social security. However, it does provide a retirement income other than savings, pension and income from retirement plans. Every year you should receive copies of projected social security benefits. Verify that there are no mistakes and then add this amount to retirement income.

Determine how much money you have in your company retirement account and what it will be worth when you retire. Consult your benefits administrator on how much retirement income you will get from your company. Most companies have transited from pension plans to defined contribution plans. Determine your plans worth when you retire.

If saving for retirement you will be required to start saving from the earliest age possible. The more you save earlier, the better your retirement income later on. Often people who are in their 40s and 50s have not begun to save for retirement. There is still hope for these people. When there is a will there is a way. The first thing these people need to decide is when they will retire.

This is a perennial question, often appearing in the mind on the way to work. When you first land a job and start to work, retirement and retirement income are the last things on your mind. The mind is occupied with the date of the next paycheck and what you will spend it on. The focus is so much on personal goals that any talk of retirement gets thrown out the window. After 20 years of hard work, retirement seems like a great option more and more.

To achieve your dream retirement (studies show this is becoming rarer) start spending wisely. Shop at the supermarket and not at the convenience store. Buy generic products rather than more expensive labels. Invest your money wisely to earn a good retirement income. When you determine that your finances are adequate to sustain this lifestyle, put in your papers and enjoy retirement.

When thinking about retirement, most of today’s generation does not think about how much they will need to live a comfortable life. They only think about the surf and sand and peace and quiet. If you are one of these people, you are not alone. Most people today do not set aside enough for their retirement.

When it comes to retirement, most people do not discuss the issue of saving for their retirement years. You cannot live out your big dreams of sailing around the world or driving around in an RV if you cannot support those dreams. The financial responsibility, if not adequately planned for, can turn into a grave burden during retirement.

There are simple steps to follow when you are saving for retirement.

Needs versus wants: Determine your needs from your wants. Your microwave may break down and you feel that you need a new one. Do you really need it or do you just want it? Yes, they are convenient but convenience does not equal need. Spend wisely and use the extra to save.

Remind yourself why you are saving: Post a picture of something you dream of around the house to act as an incentive. The picture represents your dreams.

Pay yourself first: Many companies offer 401k’s and will match a part of what you put into them based on a percentage. Therefore in order to get the most from your 401k, you should contribute the maximum allowed.

Keep making payments: If you have a loan and pay it off, don’t stop using the amount of the payment. You were already living without that extra income so take the payment amount and put it into your savings account.

Put away the extra: Let’s say you receive some money from a family member’s will or you get a raise at work. Just like above, you already live without that money so unless you really need it, put the extra money into savings.

Lower your withholding: Put your W-4 to work for you. Keep a little extra out each pay period. It is better to have the money now to put away rather than wait for tax refunds to come around.

Make your money do the work: Make sure that your savings account has enough to support you for at least 3 months at all times.

Lower monthly fees: Get rid of all the services you pay for but do not use. Do you have cable but are never home to watch it? Even a $20 a month cable bill adds up to $240 a year.

Do the little things: If you find a coupon you can use, clip it. Pack a lunch everyday instead of eating out. Put the extra money into your savings and see how much, over time, your savings has grown from just the little deposits.

The most important thing to remember is that there is never a bad time to start saving for your retirement. Even if you only have a few extra dollars, putting it into a savings account will help it grow. No amount is too small to be saved.