Al-Huda
Foundation, NJ U. S. A
the Message Continues ... 9/182
Newsletter for January 2017
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Things to Know About Money Before You’re 40
Life gets complicated in your
40s.
Every decade is a milestone of
sorts, but turning 40 should
come with a special, financial
heads up.
If you’re turning 40 soon,
statistically speaking it’s
likely that both your parents
are approaching retirement and
your kids could be a stone’s
throw away from college.
A successful plan is no longer
solely about what you’ve saved.
It’s about pressure-testing that
plan in the face of converging
life dynamics. Your parents,
your kids even your own spouse
or partner have impending
financial needs that likely will
impact you.
You can’t control all the
unknowns of course, so let’s
focus on the doable: a solid
evaluation of your own financial
picture; frank conversations
with loved ones; and assembling
an educated guess it mate of
future challenges.
Here’s the information you need
to nail down before 40:
Your current savings rate and
what you’ve saved thus far
Yes, there’s been good
news on savings rates in recent
years. But the fact
remains that most Americans have
saved less often far less than
they should have. Among 25-45
year-olds, a
solid majority have saved less
than $10,000. Where do
you stand?
As you take stock of how much
you have, and how much you’re
contributing, think outside the
401(k) box. The standard default
savings rate set by your
employer is probably 3%, according
to a PSCA study. Many
plans automatically increase the
rate over time, but it could
take a while to get to 10% the
savings rate that’s more likely
to provide a secure retirement.
And if you’re the primary or
sole provider for your family,
you should aim higher than that,
since you’re saving for two or
more.
What to do? Flash back to high
school physics (or Angry Birds):
just as a small upward tilt can
dramatically change the
trajectory of an object, the
same applies to your savings.
Even a
1% increase in your savings rate each
year can add hundreds of
thousands of dollars to your
nest egg by the time you retire.
How much you can expect from
Social Security
A Gallup poll earlier
this year found that 48% of
people who hadn’t retired yet
expected Social Security to be a
minor source of income, while
36% said it would be a major source
of income. And a shocking 60% of
couples
don’t know what their benefit
will be.
If you aren’t sure, it’s time to
find out. Fortunately, keeping
track of your projected benefits
has gotten easier with my
Social Security, a
free service provided by the
Social Security Administration
(SSA). Still, the whole benefits
system is so complex, as
economist Lawrence Kotlikoff is
fond of noting, it’s wise
to master some basics now—so you
can spend the next two decades
unraveling the particulars.
A crucial point: the
older you are when you claim
benefits the
higher your monthly paycheck
will be. While you can claim as
early as age 62, if you wait
until full retirement age (65 or
67, depending on when you were
born), you’d get more per month.
Hold out until age 70, and your
benefit would be almost 80%
higher than at age 62.
Case in point: Imagine three
people, at those different ages,
who file for benefits this year.
The maximum monthly payout for
the 62-year-old would be $2,025.
A 65-year-old would receive
$2,663. The 70-year-old’s
maximum benefit would be $3,501.
Knowing both the amount and the
timing of when you might claim
Social Security can help clarify
an important piece of your
retirement income puzzle.
Whether you’re on track to have
enough when you retire
How much money you need by the
time you retire is the subject
of much debate. Let’s keep it
simple. What you really need to
know right now is whether you’re
on track to generate, say, your
current income when you retire.
It’s a reasonable target for the
moment; you can always revise it
later.
Plug in the numbers you’ve just
dug up (your current nest egg,
savings rate, expected Social
Security benefit), plus a couple
of others (your expected
investment return, a pension
payout), into this calculator:
How much will I need to save for
retirement?
Or do a quick back-of-laptop
calculation: Let’s say you’d
like to live on $65,000 in
retirement; multiply that by 25
to get $1.625 million. That
amount is based on the idea that
you should probably withdraw
about 4% of your nest egg per
year when you retire: $1.625
million X 0.04 = $65,000. The 4%
rule, as it’s called, isn’t set
in stone. But
again, it’s a place to start.
Now, what if your calculations
show that you’re only on track
to save $800,000 about half your
goal? That $800,000 would
generate about $32,000 annually.
Let’s say Social Security will
supply another $2,000 per month,
or $24,000 per year. Now you’re
up to almost $56,000 a $9,000
annual shortfall. So you can
either save a little more to
close the gap, or consider
living on less.
The good news about doing the
math now is that you have time
to celebrate—or course-correct.
How many retirement accounts you
have
By age 40, there’s a good chance
you’ve changed jobs once or
twice or maybe more, given that
the average worker holds about
a dozen jobs by age 48,
according to the Bureau of Labor
Statistics.
The hazard of multiple employers
is that you can end up with
jumble of 401(k)s and IRAs, and
this is one area where more is
definitely less.
Yes, dealing with rollovers and
switching accounts can be
time-consuming, but there are several
benefits when you streamline:
you can save on both account and
investment fees; you can
eliminate investments that are
overly similar or redundant;
you’ll enjoy a greater sense of
control (and less paperwork).
How risky your portfolio is
Your asset allocation is
basically the balance of stocks
versus bonds and cash (also
called fixed income) in your
portfolio. It’s important to
know the percentage of each in
your portfolio, because that
balance ratio determines how
much investment risk you’re
taking on.
Stocks can offer more growth and
more risk. Fixed income is meant
to counterbalance that. So
what’s the ideal asset
allocation?
One rule-of-thumb is to invest
your age in bonds. If you’re 35,
that would mean putting 35% of
your portfolio in bonds, 65% in
stocks (or stock and bond mutual
funds, which is what most people
have in their retirement
accounts). Some people quibble
with that ratio, and recommend
investing more aggressively,
especially while you’re younger.
If your money is in a target
date fund—an all-in-one
retirement fund that dials back
on stocks over time to be more
conservative you can choose one
with a higher or lower stock
allocation.
Putting, say, another 10% into
stocks (a 75-25 split) would get
you the potential for more
growth (i.e. higher returns),
but also expose you to more risk
(a.k.a. the risk of losing a bit
more of your money if there’s a
downturn.)
On the other hand, if you have
25 years or more until you
retire, that gives your money
time to recover from a market
drop. Either way, make sure you
revisit your asset allocation
yearly. As the market shifts,
your target mix can get out of
whack. Rebalancing
once a year insures
that you keep your portfolio mix
right where you want it.
The basics about your partner’s
finances
If you’re like most couples, you
probably think you and your mate
are in sync about money that’s
what 72%
of couples believe. But
dig a little deeper and most
couples are at odds
about important money issues,
like when to retire or how much
they’ve saved (43% don’t even
know what their mate earns.)
Here’s a thought: Given that
money discussions can
cause tension, don’t
try to explore everything about
your partner’s money habits,
history, belief system right
now. No soul-baring “money
dates”. Just review your basic
financial plans together.
At minimum, you should know
this about each other:
·
How much you’re each saving for
retirement, and how much you’ve
each saved thus far.
·
Where your accounts, logins and
passwords are located (sharing
info can save headaches later).
·
A general idea of the lifestyle
you might like to have in the
future.
It might take a couple of
sit-downs to cover that ground,
so bring a spirit of
collaboration rather than
criticism. After all,
you’re in this together.
The basics about your parents’
finances
If talking to your mate about
money is challenging, you won’t
be shocked to hear that the same
applies to Mom and Dad. Indeed,
75% of adult children over 30
and their parents agree that frank
discussions about
health care and retirement
expenses are key yet 40% say
they haven’t had detailed
conversations about those
issues.
Avoiding money topics now puts
you at risk of being blindsided
by care giving expenses later.
Nearly half of family caregivers
are spending
over $5,000 per year, out
of their own pockets, to help
pay for prescriptions, in-home
care and more.
Mari Adam, a financial planner
in Boca Raton, Fla., recommends
breaking the ice by talking
about your own plan (having gone
through steps 1 through 7, you
should have plenty to say). Some
other ways to navigate these new
waters:
·
Avoid talking dollars and cents
at first; try to learn more
about your parents overall
thinking and general plan.
·
Your parents may feel relieved
that you’ve broached the topic
but don’t get frustrated if they
seem dismissive. This is a
long-term conversation, not a
single discussion.
·
If there’s too much tension
around this issue, consider
working with a financial planner
or a care
manager. A trained
professional may have skills and
information that will benefit
both you and your folks.
How to save for college
You’ve probably heard that you
must prioritize your own
retirement savings over college
(the standard logic is that you
can get loans for college, not
so much for retirement). But
that doesn’t mean you can afford
to ignore looming college bills,
which are stretching into the
six figures these days.
It might help to recap the
mechanics of college savings:
Not surprisingly, parents with a
college plan tend
to save more than
those with no plan 46% more.
The most common savings vehicle, the
529 plan, allows you to
save and invest money that you
then withdraw tax free for
qualified expenses. Also, 34
states offer a tax
deduction for
the amount you contribute.
Unlike other types of college
savings plans, 529 plans don’t
come with age limits or yearly
contribution caps (although
there’s a lifetime contribution
cap that varies from state to
state). Even better, as long as
you keep the account in your
name, those assets aren’t a big
factor in influencing your
financial aid package.
You don’t have to know
everything like how much tuition
you’ll need or where your child
is likely to go but by the time
you’re 40, you should get
started. Even if you don’t have
kids yet. (Kidding! Sort of.)
The basics of your estate plan
“Estate plan” sounds like a
fancy term, but think of it as a
broad one: Your estate includes
your physical
and your financial well being,
and you need a plan for both.
In time your estate plan may
expand to include trusts and
charitable giving plans your
legacy, if you will but for now
it’s important to cover two
bases: your will and your health
care directive, says Betsy
Simmons Hannibal, a legal editor
at Nolo.
A will determines who will take
care of your children; who will
get your property; and who will
wrap up your estate (i.e. the
executor).
Your health care directive will
name a person who can make health
care decisions for
you if you’re incapacitated, and
state what kinds of health care
you want to receive (or not).
Setting up these documents takes
time and thought, but they’re
not typically expensive.
Remember, these provisions
aren’t for you: They’ll make
life easier for the people you
love when you’re not around.
Your vision for the future
So where is all this planning
and calculating going to take
you? While you’re still a couple
of decades away from those
supposed golden years, it’s hard
to know what’s going to make
them gleam.
Do you want to plan for a second
act, career-wise? Become a
devoted grandparent? Cultivate
heirloom tomatoes on your farm
in Costa Rica?
George Kinder, a pioneer in the
hybrid field of life and
financial planning, is an
advocate of asking yourself (and
your spouse or partner) quality-of-life
questions like
these. Rather than viewing this
sort of self-exploration as an
abstract exercise, think of it
as an investment in your future
a different sort of portfolio.
The answers to the questions of
what you want and what makes you
happy, will, over time, come to
shape many of the financial
choices above. And, like your
actual investment portfolio,
these inner guidelines will help
you reach the future you want as
well.
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