Tara Unverzagt July 5, 2016 No Comments

I Want a Carefree Retirement

Knee deep in debt, Bob and Carol were trying to decide if they should raid their retirement account to pay for the rest of the kids’ college education or if they should take on more student loan debt. Both choices made them sick to their stomach to think about. Either way, they couldn’t see a comfortable retirement in their future. It’s a situation that’s all too common today.

Life was different during our grandparents’ era. My grandfather, for example, went to college and paid for it himself. He became a civil engineer. My grandmother owned a beauty salon and together they raised three children. All three kids went to college, paid for with cash from my grandpa’s job and savings and their children paid for part of the expenses with summer job money. All three kids went on to live very nice middle class lives. Grandpa retired to a life of leisure full of golf. Grandma’s retirement revolved around church, singing in the choir, helping her friends, and taking care of the house. They liked to travel, especially to Florida for the winter.

It would be lovely if that was how our lives went, but it isn’t, we’re more likely to be in Bob and Carol’s situation. In Grandpa’s days, having debt would have been an embarrassment as well as scary. Coming out of the Great Depression, you might buy something on lay away, where you paid a little every week until you fully paid for the item and took it home. Otherwise, owing someone money was frowned upon.

Somewhere along the way, the finance companies talked us into thinking it was ok to use debt to pay for everything. You could buy anything on a credit card and make low monthly payments. Nowadays, many don’t even own their car. You carry the debt for the car that’s owned by the dealer. [Debt can be helpful see Use Debt to Your Advantage]

Grandpa had it right by not using debt to pay for goods. Using debt to buy consumables like a car or everyday items will make you poor. Once you take on debt, your expenses go up with debt payments. A $25,000 car turns into a $450 per month payment for five years or over $28,000 total. If you saved that $450 per month BEFORE you bought your car and invested it, you would only need to put aside $22,500 and you could do it in just over four years. That’s almost a $6,000 difference. What could you do with $6,000?

For many of us, our retirement years will be very different than our grandparents’ retirement. My grandpa had a pension, plenty of savings, Social Security at 65, he didn’t have to deal with high health care costs, and was debt free his whole life. I don’t have a pension, won’t be eligible for full Social Security benefits until 67, will have to pay for more of my health care costs, and cope with a home mortgage. And many will be dealing with their kids’ college debt as they try to retire. We will have to work a lot harder to get that comfortable, carefree life, plus we will live much longer lives than previous generations. How will we fill all those extra years and how will we pay for them?

Some people don’t want to retire at 65, they love what they do. My advice to these people is keep working. There’s a good chance you can work until 70 or even 80 and still have plenty of years to relax in retirement. The extra money will help finance those extra years. If you’re to the point where you need a change, consider a completely different job using the expertise you’ve gained. For example, you could teach math instead of working as an engineer. You could also consider a more relaxed job involving a hobby. One of my clients loved playing tennis and ran the club house at his tennis club when he retired. He was able to see his friends, make a little money, and play tennis for free. Or if you’ve saved enough to last a long retirement, you could consider volunteering at a charity that inspires you. You won’t make money, but will have purpose in life which research has shown is a key component to successful aging.

So why do we need to work longer these days than in Grandpa’s time? A lot of factors come into play. The only retirement plan most of us have today are the ones we fund. Companies decided they didn’t want to take on the risk of investment markets not doing well, so they pushed the risk on their employees. Healthcare costs have gone up and companies push more of the cost to the employees. More people are self-employed where you pay for everything and everything is going up in price.

Life has become much more complicated to manage. Today, we expect to have choices. Some people want to be able to pay more for insurance to go the doctor of our choice while others want to save money on their insurance and don’t care which doctor they go to. While choices are good it can be hard to know which choice is right for you.

The truth is, your retirement success is not affected as much by the outside world, as by your spending and saving habits. Just like always, spending less than you make leads to financial success. If you lose a job, you have to cut back. If college is too expensive, you can to consider a less expensive college, try two years at a community college (no one asks where you completed your Freshmen and Sophomore year), or have your child participate in a work/study program to help pay the cost of college. A much bigger part of your paycheck goes to healthcare which means you have to cut back somewhere else. Your car? Your home? Your hobbies? You have to choose insurance and retirement programs to meet your needs. That takes education and planning.

Take a moment to visualize your future self. What do you want your life to be like? Feel how comfortable life would be if you could choose to work, play golf, or travel. Then look at what could get in the way of getting to that retirement. What can you do now, in the next year that is totally achievable to help make sure you achieve that retirement? Is your comfortable retirement worth enough to make a commitment to your one year plan? When you’re tempted to spend money on those lower priority items, think about your future self and consider “paying” him/her by putting that money in your savings account instead.

Control your spending and save for your future. Think about working a little longer since you’re going to live a little longer. You too can have that comfortable retirement that my grandparents lived.

Contact me if you’d like a carefree retirement.

To find out ways to invest for retirement, check out Part 2: Index funds are safe, right?

Photo by Extra Zebra; https://www.flickr.com/photos/23438569@N02/

 

Plan to Win

I spent last weekend bicycle racing, my favorite activity! It was the Master State Championship, so considered a “big race” to some and a stepping stone to the National Championships for others. Thinking about how racers deal with “big races” whether it’s the local weekend race or the World Championship, I realized how similar it is to investing and financial planning.

Everyone approaches both with wishful thoughts of “making it big”. Some are instantly pulled back by fear. Fear and doubt can make even the fastest person a loser. Often, fear prevents a racer from even showing up to the race, which is a guaranteed way to not win. Life is risky. That has to be accepted first. Then you can start looking at ways to limit failure and maximize gains.

Having a plan is a great way to start. But a plan that is ignored will get you nowhere. In bike racing, many people hire a coach to help make and execute a plan. I can’t tell you how many great racers will start to change their plan or equipment as they get closer to the “big race”. Change at the last minute is usually a great way to fail at meeting your goals.

Why do they do it? Fear. They think that if they work harder, longer, or have better equipment, that would guarantee a win. It usually leads to overtraining, poor recovery, bad form, and discomfort in the big race. If they worked their plan that is making them stronger and faster, they would actually be enhancing their chance of success far more. Coaches can be great at helping you stay focused on the plan, if you listen to them.

So how does this relate to investing? Many times people don’t make a plan because they’re afraid to think about that big college bill or if they’ll have enough money to live the way they’d like in retirement. Face it head on with a plan outlining how you’re going to make it happen. If you can’t do everything you want, it’s best to know that up front and get the most you can. Without a plan you are likely to miss out on goals that you could have achieved if you had a plan.

People also often invest emotionally. You want to buy low and sell high to be successful. While people know this intellectually, they often do just the opposite. They get excited as an investment price or the stock market goes up. As the prices go down people get scared and want to get out of the scary situation. Before you consider making a change to your investments first stop and think through whether you are making decisions based on emotions or information.

A solid plan will help you figure out where you are going and how you will get there. A financial advisor can help you build a solid plan and help you relax so you can maximize your plan with periodic reviews. Just like a training schedule, the plan is going to be different during different seasons (diversification targets will need to be updated occasionally). Your advisor can help you adapt your plan for the seasons as well as to address your personal goals in a thoughtful way. With or without an advisor, make a plan. Remember “not showing up” is a guaranteed way to not win. The more you follow and trust your plan, the more likely you are to win.

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Tara Unverzagt February 19, 2016 No Comments

What’s up with 529 plans?

Let’s explore college planning for your children or grandchildren. There are so many great questions about the “best way” to get ready financially for college, but the answers are very complicated. There’s no way to cover this vast topic in one shot, so let’s look at one college saving method: the 529 plan.

If you haven’t heard of 529 plans, they are college saving accounts that are run by states. You can invest in the state where you are a resident or most any other state’s plan. Most people only look at their state, but if you are considering a 529 plan, it’s a good idea to look at what plan fits your needs best. That may be your state’s plan or another state’s plan.

I’ll use Illinois and California as examples of the differences between states. California has one 529 plan which is a savings plan. Illinois has four different plans which include saving plans and pre-paid tuition plans. I’ll just be addressing the Illinois Bright Start program here which is a savings plan similar to the California 529 plan.

What are the advantages of saving for college in a 529 plan?

  • On the state level, there are often tax advantages on contributions.
  1. California does not have a tax advantage for California residents.
  2. Illinois has a deduction of up to $20,000 of Illinois income for a married couple. Illinois businesses can also get a tax break for matching contributions. And there’s a tax break for rolling over another state’s program into Illinois.
  • On the federal level, 529 accounts are somewhat like a Roth IRAs. Contributions are after-tax dollars while the account’s earnings and growth are tax free.
  • The accounts are professionally managed. If you don’t have an investment advisor or you aren’t comfortable managing your own investments, 529 plans can help you with investment decisions.

Are there disadvantages to investing in a 529 account verses other investment accounts?

  • At the state level, some of the advantages mentioned above can come back to haunt you.
  1.  If you rollover your Illinois account to another state, it will be included in your Illinois income.
  2. Since California doesn’t allow deduction on contributions, there is no recapture if you move the funds to another state.
  • Most 529 plans have low fees, but each plan is unique. Illinois has the same plan via advisors and direct with the state. The Advisor version can have almost 1% higher fees than the direct plan. If your account has $100,000, that’s almost $1,000 per year going to fees!
  • Most plans are with a particular investment company (for example, TIAA-CREF or Fidelity) and you will be limited to the investment options they allow. This doesn’t always represent the best choices for you.
  • On the federal and state level, if you don’t take the funds out to pay for qualified expenses, you may pay taxes on the earning and a penalty. I’ll discuss this further later.

What if my child doesn’t go to college or goes to a cheaper college than we expected?

  • Non-qualified distributions (distributions not used for tuition or fees) will be taxable and have a 10% penalty on the earnings if withdrawn.
  • You can use the funds if your child wants to go to graduate school or take vocational/advance skills classes.
  • You can change the beneficiary and use it for someone else’s educational expenses. Haven’t you always wanted to go to culinary school?
  • You can save it for the next generation’s education.
  • There are exceptions that can eliminate the penalty (but you will still pay taxes on the earnings), including: the beneficiary dies or becomes disabled, goes to a US Military Academy, or receives a scholarship.

How does a 529 account affect federal financial aid?

  • A 529 account is counted as an asset of the parent. Federal financial aid considers 5.64% of parents’ assets and 30% of their income “available” to pay for college and 20% of a student’s assets and all their income over $6,260.
  • A grandparent can also start their own 529 account for a grandchild. That account is not included in financial aid reporting.
  • The catch with a grandparent’s account is that the distribution is included in the child’s income the following year.
  • If a grandparent plans to have a 529 account with one year of tuition and fees, your grandchild could save it for their senior year. The funds would never be counted as assets or income for financial aid.

What are the advantages of using a retirement account to pay for college instead of a 529 account?

  • A Roth IRA or Roth 401(k) makes a good college saving tool. You don’t pay taxes or penalty on Roth distributions for principal that has been in the plan at least 5 years.
  • Retirement accounts aren’t counted toward assets for financial aid.
  • If you distributed the taxable earnings from a Roth IRA or Roth 401(k) or from a traditional IRA or 401(k), the funds distributed won’t be penalized (they will be taxed though)

What are the disadvantages of using a retirement account to pay for college instead of a 529 account?

  • The limit for a Roth IRA or Roth 401(k) contribution is $5,500 ($6,500 if you’re over 50) in 2016 and phased out for higher incomes.
  • Each 529 plan has its own limits, but many will let you contribute $300,000 or more at one time.
  • Grandparents should remember you will have to pay gift tax for contributions over $14,000 ($28,000 for married couples) to each beneficiary or up to $70,000 each using a special 5 year exemption, but requires a Form 709, Estate & Gift Tax form, to be filed for each grandparent.
  • Distributions will count as income towards financial aid the next year.

Whether you should use a 529, a Roth IRA/401(k) or other saving plan depends on your needs and expectations. You also need to think about everyone’s tax situation, likelihood of wanting financial aid or need based scholarships, and flexibility. There’s not one right answer for everyone.

admin January 26, 2016 No Comments

Financial Planning Girl Scout Style

People don’t normally think about Girl Scouts and financial planning together. Common thoughts are more along the lines of cute little girls in green, camping, and of course cookies. But a lot goes on to make those camping trips happen. And cookie sales are really an owner-run small business. Like any family or business, a troop has chores to do, conflicts to overcome, projects to plan (that might require buying insurance in case anything goes wrong,) and a budget to balance.

As a Girl Scout leader for twelve years, I most enjoyed watching the girls learn financial planning, Girl Scout Style. I knew they’d apply these financial skills in their personal lives in the future. Here are the key lessons learned by Girl Scouts.

  1. The girls learned that it’s ok to dream about fun adventures. We started each year determining what the troop wanted to do.
    1. Financial planning starts with a desire to buy or experience something.
    2. Write down your goals and dreams, short term and long term.
  • What are your daily/weekly/monthly expenses? Girl Scouts pay for snacks, meeting supplies, field trips, badges. Families have food, shelter, clothes, medical expenses, and transportation. These are actually just short term goals.
  • What are your required long term expenses? In Girl Scouts, there are handbooks & badge books to buy at each level, replacing/repairing tents for camping, and ceremonies. In a family you have cars and appliances to replace, a roof to replace/repair, college education, retirement. These areas need to fit in the budget too.
  • Most people, whether Girl Scouts or not, want to help their community or a charity by donating money, time, or talent.
  • After making sure the basics are covered, it’s nice to have a reward to look forward to. Both Girl Scouts and families dream about going trips, making big purchases, and having money for extras/luxuries. It easier to get through the day to day expenses if there’s a fun dream to look forward to.
  1. Look at what your income sources are. Are you able to make more money? Do you want to?
    1. Girl Scouts income sources include dues, fall product sales (nuts, magazines, and/or calendars), cookies sales, money earning projects (babysitting nights, carwashes, etc). Family income sources include jobs, investments, pensions, and inheritance.
    2. The girls and their chaperones can work harder at the Girl Scout fundraisers or do more money earning projects to increase their income. Families can choose to work longer hours to get more income, invest in more education to get a better job, or save money to buy investmentsthat provide more money in the future.
  2. The fun part of money is obviously spending it. Really, the main reason we work, Girl Scouts or family members, is to make money to spend.
    1. When choosing how to spend money, have a plan based on your goals. All stakeholders need to be involved, including Girl Scouts, Leaders, and parents in a . Involve all members in the family, including kids, in family financial decisions.
    2. It’s easier to make choices and sacrifices if everyone is involved. You may have to cut back on eating out to buy the clothes you want. You may want to cut back on the short term goals to get to your long term goals faster.
    3. Set realistic goals based on realistic income – you can’t spend more than you make in the long run.
    4. Don’t waste money because you don’t have goals. It’s easy to mindlessly buy things. With a goal, you can ask “do I want this or do I want more money in the Dream fund?”
    5. Understand the value of money when you make purchases. With your goals in mind, you can determine if a purchase is appropriate. Is the item you want to buy worth more than progress towards your Dream?
  3. Monitor, Celebrate, Reflect, and Plan your next Dream
    1. Monitor your progress and adjust income and/or expenses to stay on track.
    2. Periodically revisit the dream goal to ensure it’s still what you really want. Is it worth the sacrifices you may have to make?
    3. After you realize your dream goal, celebrate successfully reaching your goal.
    4. Reflect on what went right, wrong, how you could do better next time.
    5. Once a goal has been completed (short or long term goal), it’s time tolook forward to what’s next.

Remember: to safely navigate your life without emergencies, plan instead of react. As Benjamin Franklin said, “If you fail to plan, you plan to fail.” Guarantee success with a plan in place and track your progress.

Whether you’re a Girl Scout troop, a family, or an individual, setting goals, making a plan, and monitoring progress will help you get what you want out of life. Goals sometimes change and plans shift, but you’re still further ahead than wandering around in the dark. The more focused you are on your goals, the easier it will be to reach them.