Retirement Archives - The Free Financial Advisor

Mistakes to Avoid in Retirement

May 27, 2020 by Jacob Sensiba Leave a Comment

In many finance websites, blogs, and articles, a lot has been said about how to prepare for retirement, but I believe there hasn’t been enough written about what to do when you get there. More specifically, there’s a lack of content about mistake, or mistakes, to avoid.

In this article, we’ll explore several mistakes to avoid when you reach this milestone.

Spend beyond your means

This seems obvious, but once the psychological barrier of spending versus savings is breached, people (not everyone) develop this mentality of “I saved for 40 years for this moment, why shouldn’t I enjoy it?”

You should enjoy it. You worked your butt off for it, right? There are strategic ways to do this, however. The mistake is going gangbusters right away.

Create a budget/spending plan – Your budget in retirement will be different than your budget before retirement. Create line items for everything, and get real granular with your discretionary spending (i.e. sub line items to breakdown where the discretionary spending is actually going).
Plan for healthcare – Healthcare costs, generally speaking, will be your largest expense in retirement. Plan accordingly.
Income strategy – More than likely, you’ll have a few different income sources (social security, pension, retirement distributions, etc.). Create a line item for each source.
Senior discounts – Take advantage of every single one. There might be a psychological hesitation with this, as it forces you to come to terms with your age/where you are in life
Spoil grandkids – Every grandparent wants to spoil their grandkids to death, but it must be done within reason. Get creative and be strategic about when and how much.

Make Quick Decisions

Another mistake is making quick decisions. Don’t do it. Any decision you classify as BIG needs to be well thought out. This could be anything like moving, downsizing, vacations, or eliminating a vehicle.

I would argue that any decision about an expense that’s not in your budget/spending plan, should be thought about for several days. My rule of thumb is a week. By then, the euphoria of such a purchase has gone away, then you think more logically about it.

Investing Aggressively

Over the years, a big mistake clients make is the desire to invest more aggressively than they should. Oftentimes, this is to compensate for an inadequate savings rate during their working years or a significant market pullback that hurt their portfolio.

While capital appreciation is still an investment objective in retirement, it’s no longer the primary goal.

This primary goal should be capital preservation. Limiting losses on what you have. This has less to do with time and more to do with your decreasing ability to go out and make more money. Allocate your portfolios accordingly.

Ignoring Estate Planning

Estate planning is a key ingredient to your financial planning recipe. It mustn’t be ignored. Every debt and asset you have needs to be accounted for, listed, and given a task for when you pass.

Estate attorneys can be expensive, but I believe it’s 100% necessary to find one you trust, so your estate is well taken care of.

Isolating Yourself

Your social life is more important than ever. Countless studies show that people with strong relationships outlive those that don’t. So the mistake here is not making your social life a priority.

Join a community, volunteer, retain, and nourish friendships. Whatever flavor of social life sounds desirable, make it a priority.

Letting Yourself Go

Taking care of your mind and body is always important, but especially now. It will keep you healthy, therefore, lowering your healthcare expenditures, but it’s also another way for you to meet people.

Go for walks with neighbors and/or friends. Join a gym. Many of which have reduced rates for seniors. Additionally, many health insurance companies have “silver sneaker” programs that offer inexpensive services and programs for seniors.

Expecting it to be easy

This is a BIG life change and the transition will not be easy.

Not only will you shift from saving to spending, but those social connections you developed over your working years can reduce in frequency and strength.

Go easy on yourself and be patient.

Taking Social Security too early

Unfortunately, there are situations and scenarios where taking Social Security Income (SSI) distributions early is necessary. However, for those of you where this does not apply, speak with a trusted advisor about optimizing your SSI strategy.

Getting Swindled

Scammers adapted. They’re smart and they know how to target susceptible people. Unfortunately, elderly individuals are inherently more at risk than the general population.

Any email, phone call, or text that you receive (unsolicited, of course) should be greeted with a fair amount of skepticism. Don’t willingly give out any pertinent information (name, DOB, social security number, etc.).

Doing it alone

A BIG mistake people make is thinking they can plan by themselves. It would behoove you tremendously to consult with several experts. Estate attorneys and financial advisors should be at the top of this list.

Do your research, check online reviews, and get testimonials from trusted contacts. Having capable professionals in your corner could set you up for success and put your mind at ease.

How My Finances Have Changed with Covid

May 20, 2020 by Jacob Sensiba Leave a Comment

Aside from the death and illness, it has caused, Covid-19 has done a number on the financial system and the economy.

I’m writing this on May 19th, and up to this point, over 30 million people have filed for unemployment benefits.

In my previous post, which can be found here, I detailed how you can plan in the event of job loss.

Even if you haven’t lost your job, more than likely, your finances have changed. In this article, I want to pull back the curtain on how my finances have changed during this environment.

My Job

Thankfully, I’m still working. I work for my family’s business. Technically speaking, we have four family businesses and I work three out of the four in various capacities.

Two out of those three businesses are very resilient during recessions, so I’m not terribly worried about my income from those two sources.

The last, however, will be influenced by movements in the market. If I do my job well, it shouldn’t vary a ton, but if I don’t, my clients will feel the pain, as will I.

The reason being is I, typically, charge a percentage of the assets under management (AUM). If account values go down, so does the fee I receive. The two go hand in hand, as they should. If I do a poor job, I should make less. It just makes sense.

With that said, my income hasn’t moved too much from the financial advising gig. It dropped a little bit last month, but I imagine it’ll come back up by the end of May, as the market has recovered.

Opinion: The Economy

I don’t know if I’ve mentioned it yet here, but my opinion of the economy is darker than some. I think there will be a cascade of bankruptcies in the public and private sectors.

With regard to the public sector, the companies that are rated BBB are already at record highs. When revenues stop coming in or significantly reduce, it’s hard for companies to make interest payments to lenders (holders of debt).

Companies will start defaulting on their debts, and the ability to pay, as well as other factors, help determine the credit rating. This will cause a slew of BBB rated companies to get downgraded.

Funds

With regard to fixed income mutual funds and ETFs, the vast majority of them have rules they need to abide by. One of those rules could be only investing in investment-grade companies.

Investment grade is anything from AAA to BBB. My fear is that when companies get downgraded from BBB to BB, it’ll cause funds to dump those companies; exasperating the sell-off.

My Finances

With that said, here’s how I’ve adapted.

My finances really haven’t changed much. I’m spending more on groceries, especially right now as I am stocking up on certain goods. The added benefit of that is I’m spending less on food from restaurants, which saves me money and I’m eating healthier too.

So you’re spending more on groceries and less on take-out…what else? Well, given the nature of Covid and the uncertainty that surrounds it, my priorities have shifted a little.

More Cash

I’ve planned my clients’ portfolios with the above scenario in mind. The majority of clients aged 60 and up are positioned more conservatively than normal. With that in mind, all of the portfolios I manage will take a little hit, and my income will drop as a result.

I’ve suspended my retirement contributions, via payroll deduction, until I feel comfortable again. This may seem counterintuitive because of the stress I put on leaving things alone and dollar-cost-averaging as prices go lower.

Due to the fact that my income has some variability, not to mention my rental property and the uncertainty of my renters’ making rent payments (because of talks about forgiving rent payments for those affected by Covid), I have to keep more cash available than normal.

Retirement Contributions

As I mentioned, I stopped my automatic retirement contributions, but I am making voluntary contributions to my Roth IRA when I feel my cash available is adequate.

Other than that, nothing else has changed. Debt payments will continue as planned and saving for a down payment on a house will also continue.

Be advised: Any opinion expressed about the market/economy is strictly an opinion and should not be viewed as a certainty. Additionally, my preparations for said opinions are specific to me. Consult your financial professional about your particular situation.

Investment Tips: How much should I have in my 401(k)?

May 14, 2020 by Susan Paige Leave a Comment

Part of planning for financial freedom is making sure that you are financially protected when you hit retirement. However, only a few know how to maximize their 401(k) in a retirement investment account as part of their overall portfolio.

If you want to explore the basics of investing your 401(k) to increase your retirement benefits, no worries. This article provides you with a summary of the five (5) most useful tips on how your 401(k) can help you retire with more financial security.

What are 401(k) Investments?

Before going into the details, you should know that a 401(k) investment is basically a retirement savings tool sponsored by your employer. This tool allows you to invest a portion of your paycheck into a retirement investment account. Your money will grow tax-free until you are retired, and that’s when you can use it.

The question that many ask is about the portion: how much of one’s paycheck should go into this retirement investment? In addition to that, here are some tips about putting a part of your paycheck to your 401(k) investments.

Invest Early

It is true that you can begin your retirement investment later when you are older. However, the earlier you start investing, the better. In fact, it is best to start contributing to your 401(k) as soon as possible. In doing this, you earn more. That’s just how compound interest works: you gain more interest when you start earlier. If you are a young worker, you have the advantage of the time that older folks will never ever have. Invest early.

See How Much You Can Set Aside

As a rule of thumb, you need to invest a percentage of your earnings that is equivalent to the difference between 100 and your age. For instance, if you are 20 years old, you need to invest 80% of your earnings as savings or into your retirement fund. This is based on the assumption that, at an early age, you still don’t have many responsibilities and can afford to invest more money.

If that amount or percentage is too high, you can decide on a fixed annual amount. For example, you can contribute a max of $19,500 to your 401(k) in 2020 if you are under 50. All you have to do is calculate a fixed amount below the threshold of $19,500.

Hire a Portfolio Manager

Still unsure or want to maximize your investments? You can explore other options such as using a robo-advisor such as Wealthfront or Betterment. This is one of the best options for someone who is unsure or does not know how much they should invest.

The robo-advisor will run the numbers for you to determine the best combination of investments in your 401(k) fund. You can set the target amount you need for retirement and the algorithms will compute how much you need to set aside every month or year so that you can have that amount when you retire.

Match Your Employer

Another way to determine how much you should contribute in your 401(k) is to look at how much your employer is contributing. For instance, if your employer only offers a maximum of 10% of your salary, then you should match your employer and contribute at least 10% as well to get the most out of your 401(k) investments.

Check Investment Types

When you contribute funds to your 401(k), you have to choose which investments it goes to. With each kind of investment, there is a specific percentage of return based on the risk profile. Since the percentage of return is different for each investment, your choice will affect how much you need to contribute in the 401(k) so that you can reach your target retirement funds.

If you have enough in your 401(k), before you start computing, consider the types of investments that you will choose. For instance, if you choose to invest in the stock market, you will earn more and faster but the risk is higher. If you want to do this, you might want to invest a lower amount.

On the other hand, you will have more stable returns if you invest in mutual funds. However, interest will be less so you want to contribute a higher amount to achieve the retirement fund levels that you want.

Takeaways

For dignity and independence, you want to retire with enough funds so that you won’t need to depend on help from your children or other people. With the investment tips summarized in this article, you can think about your best options to save and invest money in your 401(k) for your retirement. The five (5) points summarized in this article should help you begin to find the answers to all your basic questions and concerns.

For more great articles from The Free Financial Advisor, consider these:

Financial Planning Basics – The Financial Pyramid

How Long Should You Keep Financial Records After A Death

What Advantages Are There To Saving Money In The Bank?

How To Recover Paystubs From Your Old Job

Best Gold IRA Companies of 2019

December 12, 2019 by Susan Paige Leave a Comment

Source: Pexels.Com

Birch Gold

Birch Gold offers different types of coins and items for customers. Its customers may acquire items such as American Gold Buffalo uncirculated coins. Birch Gold Gold IRA account holders are able to purchase gold, silver, palladium, and platinum.

The organization has been operating since 2003, setting its pace as a dealer of physical precious metals in the US. It has a team of wealth managers, commodity brokers, and financial advisors to support customers in their investment decisions.

Goldco

Goldco helps its customers to set up a gold IRA to protect their investments and prepare for retirement. Account holders with Goldco need to adhere to minimum purity standards set by the IRS. Gold must be at least .995 pure while silver must be .999 pure, and platinum .9995 pure.

Goldco promises to keep precious metals in secure depositories that are licensed and insured. Representatives from Goldco may contact an individual to help them get their account set up and funds transferred.

Noble Gold

Noble Gold is known for its strong emphasis on honesty, penchant for client rapport, and its commitment to providing expertise on precious metal investments. It is on a mission to preserve wealth.

Noble Gold is the first and only custodian-approved gold dealer storing in the new Texas depository. The depository is the third IRS-approved gold IRA rollover depository in the US. Only clients of Noble Gold have access to it.

JM Bullion

JM Bullion likes to keep its net wide, making its best efforts to supply a wide variety of precious metals. It helps customers to invest in such metals for the purpose of enhancing their IRAs.

JM Bullion offers discounts and sales for customers, giving them a chance to set up accounts and make purchases at lower costs. The organization processes 30,000 transactions per month from its headquarters in Dallas.

Lear Capital

Lear Capital has shown time and time again why it is considered a leader in the gold IRA industry. It has spent over two decades creating stellar customer experiences for investors in precious metals. Market Business News confirms the good reviews which customers have for Lear.

In 2019, Lear Capital continued to set the pace for its industry with over $3 billion in investments in precious metals. Its wildlife series of gold and silver coins has taken the markets by storm, peaking the interest of both new and veteran precious metal buyers. In September, 2019 Lear Capital reported a year on year increase in the demand for its wildlife card series of gold and silver coins.

Just Entering The Workforce? Let’s Talk About Retirement

December 10, 2019 by Susan Paige Leave a Comment

Can you remember the first day you worked and earned money? It might have been babysitting for your neighbor’s kids or a retail job at the local mall. As a kid, you might have imagined your parents going to work as something that just happened. You didn’t think of the financial ramifications or why going to work was important.

The older you got, the more likely you were to start seeing the value of money. Want to go to the movie with your friends? Want to purchase a new video game? All those things cost money.

So, you got a job and chances are, you weren’t the best saver. Money was for activities and fun.

But now that you’re entering the real workforce, there are lots of other things your money is going to such as rent, groceries, utilities, and retirement.

Retirement? But you just started working!

Even though you might be 40+ years from retiring, it’s never too early to start thinking about the day when you hang it up. Below, we have some tips and questions you should be asking yourself and those around you when it comes to your retirement.

Does Your Work Have Retirement Benefits?

While a pension was the norm for your grandparents and maybe even your parents, roughly just 54% of businesses these days offer pension plans for their employees. While that may seem like a solid number, the financial crisis of 2009 put a real dent in those numbers and they have been slow to recover.

While your work may not offer a pension, they may offer other benefits like a 401(k) or a 401(a). 401(a) plans are typically offered by government or nonprofit institutions and participation in these plans is often mandatory. Contributions are determined by the employer and can be either pre or post-tax.

401(k) plans are the opposite. They are more popular in the private sector, don’t have a contribution limit, and participation is not mandatory (although it might be).

Contribution is pretty simple, that you take X amount of money out of your paycheck and put it towards these plans each month. Money accrues and grows over time.

Let’s say you need the money, can you take it? Of course, it’s your money but it comes at a cost. The IRS will take a 20% as a penalty for early withdrawal. There are certain stipulations to withdraw money without the penalty, but they are never guaranteed.

Your Personal Savings

Hopefully, you aren’t living paycheck to paycheck and you’re putting away a certain amount of money each month. That could be saved for an emergency or saving up to make a big purchase.

It’s important to set up a personal savings plan because that money could be put into an individual retirement account (more on that later).

Budgeting is boring but highly necessary. Whatever you’re putting away each month should be treated like your 401(a) or 401(k). It should be untouchable. Make sure to take a certain percentage of your savings and plan to put that towards your retirement.

Individual Retirement Accounts

You might have seen this written as IRA and they are pretty common. The idea is that you yourself put money into a non-Roth or Roth IRA each year (up to $5,500 maximum) and that money is invested.

Many people seek out the advice of financial planners to help them plan a strategy for their IRA. The biggest difference between the two lies within the taxes.

Traditional IRAs mean your contributions are taxed in the year they are made. With a Roth IRA, you’re not going to be taxed when you start making withdrawals.

It’s important to note that not everyone is eligible to contribute to a Roth IRA and access can be restricted if you are using a 401(k).

The best thing to do is to meet with a financial planner and discuss your options. Ask your parents or others who might have a contact they can set you up with. They can help you do much more than just manage your retirement, but help manage your entire portfolio as well and give tips on sound money management policies.

Even though it may seem silly, it’s never too early to start thinking about your retirement.

Image source: Flickr.

How Will You Generate Income In Retirement?

May 30, 2018 by Doug Carey Leave a Comment

How are you planning to generate income in retirement?

The first thing that comes to mind for a lot of people will be Social Security. That’s OK, but most people will need to have more than that if they want to retire comfortably (and there are those who are concerned that at least some of those benefits may not be there for future retirees when the time comes). Other people might be looking forward to pension income, though that’s less common than it used to be.

It’s useful to step back and take stock of the various potential sources of retirement income. Certain sources have more to recommend them, and certain asset class combinations will work better for some folks than others due to the assets’ risk profile, tax characteristics, and other qualities.

Interest

A recent Bloomberg story quotes a chief investment officer at Credit Suisse saying that treasury yields at 3.5% would pull people out of stocks and into fixed income. As we’re writing this, the 10-year Treasury yield is on the rise and the highest it has been since 2011 at nearly 3.1%.

Nobody knows for sure which way treasury rates are going, but those rates are worth paying attention to, for a few reasons. First, higher interest rates almost surely would lead to poor performance for bellwether retirement equity investments, such as those in the utility and telecom sectors. (More on this in a bit.) Second, a risk-free interest rate would be tough to ignore at some level as a source of income in retirement. We would probably put that level at around 4% (after all, why get a bond paying less than 4% when you can buy stocks that pay more than that and have been boosting the payout annually for 20 or 30 years?), but that will vary by individual circumstance and risk tolerance.

Not that treasuries are the only way to get interest income, of course. The best proxy for junk bonds, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), yields 4.7%. The investment-grade version (the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is around 4%.

Dividends

We mentioned utilities and telecoms earlier. These kinds of firms are generally big dividend payers. As such, when interest rates rise, their stocks often sell off, as suddenly there are other, less volatile sources of income–bonds–that compete with those dividends.

Now, if you are able to make ends meet on dividends alone (or close to it), the volatility may not matter. Stocks can bounce up and down and all around, but the dividends will keep coming (and even growing) regardless. In fact, when stocks are down, it could be time to consider adding to those holdings, assuming the companies’ businesses are still sound.

You may not be able to get to a place where dividends are your main source of income. But counting on dividends for some portion of retirement income makes sense for a lot of retirees. The year-in-year-out nature of the payments (for a lot of companies), the potential for growth in those payments, the potential for capital gains on the shares, and, not least, the taxes (which are 0% on qualified dividends for a lot of people) all add up to a compelling income source.

Principal

By definition, at retirement, full-time employment income stops, and it’s probably time to start spending down on all that money you saved over the years. That’s hard for a lot of people to get their heads around. After all, it means making a complete 180-degree turn to what you have been doing for probably decades.

So that’s worth thinking about in advance and preparing for. If seeing that balance dwindle each year is a concern, you might want to start conservatively on how much you plan to take out each year. It used to be a 4% drawdown rate was considered safe for most traditional retirees, but that’s no longer conventional wisdom. You might run some scenarios that target something closer to 2% or 3% and see if that allows you to sleep at night.

As with so much in retirement planning, though, much will depend on individual circumstances and sources of income. Someone with a solid pension and low living costs will probably need to take less out of their principal than others.

Capital Gains from Rebalancing

Rebalancing your portfolio isn’t controversial, though reasonable people can disagree about how often it should be done. Rebalancing refers to the simple concept that, over time, a portfolio of investments will have winners and losers, and the initial (presumably target) asset allocation–this much in growth stocks, that much in short-term bonds, and so on–will get out of whack. So, periodically, a portfolio needs to be put back into whack.

What’s not mentioned as often is that it’s possible to think of rebalancing as a source of income as well. Retirees could keep the piece that is a long-term gain and use it for living expenses, and still rebalance to the optimal asset allocation.

The obvious problem here is that markets don’t just go up; they go down too, sometimes for quite a while. So there’s an unpredictability to this source of income that makes it too undependable to be a core source of income for a retiree. But it is a source, and one that’s sometimes overlooked.

Income in Retirement

In the end, which sources you depend on for retirement income will come down to risk tolerance, personal preference, luck (at least a little bit helps), and how diligent you have been about saving through your working years. Knowing what those potential sources are and planning on how you might use them will take some of the surprises out of the process, and help make retirement go more smoothly.

How Long Are You Going To Live?

May 28, 2018 by Jackie Cohen Leave a Comment

How long are you going to live? Figuring out your life expectancy is arguably the first step in creating a successful retirement plan–and also arguably the toughest number to figure out. [Read more…]

Will Your Retirement Plan Keep up with Inflation?

April 30, 2018 by Doug Carey Leave a Comment

When planning for retirement most people start with the basics: their budget, their retirement age, life expectancy and their expected retirement income. Usually the inflation rate assumption is more of an afterthought. We all know that our expenses generally go up each year when inflation is greater than 0%. What so many don’t understand is that higher inflation rates usually mean higher tax bills.
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Will My 401(k) Last for the Rest Of My Life?

April 23, 2018 by Doug Carey Leave a Comment

If you’re starting to think about retirement, and your career has largely been in the private sector, your 401(k) balance could be the most important factor in determining whether you’re on track to retire or not.

Whether your 401(k) will cover your spending needs until the end of your life will depend on a lot of factors. It’s important to not just pin your hopes on a certain target for an account balance–a million dollars, two million dollars, whatever–and instead look at the whole picture. So let’s start with a few other questions that are just as important.

Are You Saving as Much as You Can in Your 401(k)?

There’s almost no way around it: You have to save money to make money. There is often a bit of a free lunch–call it a free appetizer–when it comes to 401(k)s, though: The amount your employer matches your own contributions. It could be a dollar-for-dollar match up to point, or some percentage of what you contribute yourself that increases over time. Either way, you definitely want to contribute at least this amount, or you’re leaving that free appetizer on the plate.

But that should really only be the beginning of any 401(k) savings plan. Fidelity advises saving 15% of pretax income. If you’re 30 or 40 years old and haven’t given the issue much thought until now, that number should serve as the minimum you should save.

Get into the habit of increasing your contribution percentage each year. Psychologically speaking, if you never see it hit your paycheck (because it’s going straight to your retirement account), you won’t miss it. Set an annual calendar reminder to increase that contribution, even by a half a percentage point. Between the contribution increases and salary increases, you should be able to put your contributions on a sharp upward trajectory.

What Else have You Got?

Once you have your plan for annually boosting 401(k) savings in place, consider what other sources of income you are counting on at retirement. Social Security is an obvious one. If you’re lucky you might have a pension of some sort. Brokerage accounts, rental property, or the planned sale of some asset like a business should all be taken into account as well–and will almost certainly affect how long you can expect your 401(k) will last.

Another reason not to simply come up with an arbitrary hit-your-number mark: Spending matters. At the risk of stating the obvious, your 401(k) and other investment assets will generally last longer if you plan to sip rather than gulp.

You’ll want to have a very solid grip on your plan’s MPG–that is, your projected spending in retirement–to get an accurate reading.

What Is It Costing You?

Even if you are diligent about saving to your 401(k), you probably haven’t considered what the plans might be costing you.

And why would you? The plan administrator’s fees–in addition to the fees paid to the fund companies themselves–are largely out of your control.

But it’s important–especially the further you are from retirement. Fees can really chip away at account balances over time. Consider a 401(k) returning about 7% annually. Here’s what happens if we modify the fees by half a percentage point and assume contributions of $18,000 per year.

Your main recourse here is to talk to your HR department and start asking questions. What are the fees of running the plan? How do they compare with fees offered by other plan administrators for companies of your size? Making sure the HR team has done their due diligence on this could mean tens of thousands of dollars to you.

You can also look at the fees charged by the funds themselves. Funds have expense ratios; actively managed funds generally have higher expense ratios than passively managed funds. To keep things really simple, consider a target-date retirement fund, which shifts its asset classes toward less risk the closer you get to retirement. (And if your plan does not offer a target date retirement fund, it should.)

Your 401(k) Is One Piece of a Larger Puzzle

A large 401(k) balance could have a big effect on when you can retire and your living standard when you do. But looking at it in the context of everything else we’ve talked about here is more important than an absolute dollar figure. Total savings, where you plan to invest your assets, the cost of those investments, and your spending habits are all complementary forces that will factor into a successful retirement plan.