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Thumbs upFor every rule of thumb, there are hundreds of people who would quibble with it.

We saw that just recently with a USA Today columnist who quantified exactly how much you need to save for retirement (his answer, via an analysis by T. Rowe Price: $82.28 a day). Lots of people didn’t like that the number was an estimate, an average, and that their own mileage may vary.

But many more people don’t have the patience, knowledge or energy to sort through all the potential factors for every financial decision. Sometimes, they just want an answer.

Over the next few days, I’m going to share the most helpful rules of thumb I know. They aren’t going to apply to everyone in all situations. But if you’re looking for guidelines (or guardrails), there are a starting point.

Let’s start with retirement:

Retirement comes first. You can’t get back lost company matches or lost tax breaks, and every $1 you fail to save now can cost you $10 to $20 in lost future retirement income. You may have other important goals, such as paying down debt or building an emergency fund, but you first need to get started with retirement savings.

Save 10% for basics, 15% for comfort, 20% to escape. If you start saving for retirement by your early 30s, 10% is a decent start and 15% should put you in good shape for a comfortable retirement (these numbers can include company matches). If you’re hoping for early retirement, though, you’ll want to boost that to at least 20%. Add 5-10% to each category for each decade you’ve delayed getting started.

Don’t touch your retirement funds until you’re retired. That pile of money can be tempting, and you can come up with all kinds of reasons why it makes sense to borrow against it or withdraw it. You’re just robbing your future self.

Keep it simple–and cheap. Don’t waste money trying to beat the market. Choosing index mutual funds or exchange-traded funds, which seek to match market benchmarks rather than exceed them, will give you the returns you need at low cost. And cost makes a huge difference. If you put aside $5,000 a year for 40 years, 1 percentage point difference in the fees you pay can result in $225,000 less for retirement.

 

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Zemanta Related Posts ThumbnailIn case you haven’t noticed, efforts to teach financial literacy in schools and elsewhere are a pretty big failure.

As a nation we’re not getting much better at managing our money. Efforts to change that by teaching money skills in schools haven’t done much to improve the situation. Follow-up studies on people who took financial literacy courses in school typically show the education has little effect. So the debate rages on about whether we should still try.

You won’t be surprised, given what I do, that I think it’s essential people educate themselves and their kids about money. So I’m looking forward to tomorrow’s Google Hangout with CFP Neal Frankle, who runs the Wealth Pilgrim site, where we’ll talk about financial literacy, including ways to get it and give it. The event is sponsored by Bankrate and AOL DailyFinance.

If you’d like to join us, our chat will stream live starting at 2 p.m. Eastern, 11 a.m. Pacific. Hope to see you there!

Update: If you missed the event, the link to our conversation can be found here, on the DailyFinance site.

 

 

 

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Social security switch

Apr 13, 2014 | | Comments (0)

Dear Liz: When I turned 66, I applied for and then suspended my Social Security benefits so that my husband could take spousal benefits based on my work record. Shortly after he turned 69, he decided to start taking his full benefit from his own work record, so we canceled the spousal benefits.

After he applied to take his full benefit, I applied for spousal benefits from his account. Since I am only 67, the plan was for me to collect spousal benefits until I reached 70 and then collect off my account. Since I am the primary breadwinner, that allows the maximum lifetime funding should something happen to either of us. I sat with an employee at the local Social Security office. Together we processed all the appropriate documentation and she submitted it.

I just received a notice of denial that says, “We cannot approve your request because we received it after the 12-month limit.” I took the letter to the Social Security office for an explanation, and the woman had never heard of the rule it cited. The rule, it turns out, was designed to prevent people from repaying all the benefits they’ve received over the years so that they can restart their benefit at age 70. The rule says that they can pay back only benefits received in the prior 12 months to restart their benefits. But that is not what I did.

Answer: No, it’s not, but what you tried to do still won’t work.

Here’s the simplest way to explain it: There’s only one spousal benefit for each couple. Once you filed for your own benefit, allowing your husband to claim spousal benefits, you aren’t allowed to switch even though you hadn’t started receiving checks yet.

If it’s any consolation, you chose the right spouse to receive spousal benefits, since you’re the higher earner. It would have been best if your husband had waited to switch at age 70, when his benefit reached its maximum, but his checks are still substantially larger than they would have been if he had started earlier.

Another point that should be made because it’s often misunderstood, is that your husband was allowed to switch from spousal benefits to his own benefit because he started Social Security at or after his own full retirement age. If he’d started benefits before his full retirement age, which is currently 66, he would have been stuck with a discounted spousal benefit and couldn’t have switched to his own benefit later.

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Beware of loans to family

Apr 13, 2014 | | Comments (0)

Dear Liz: I went with my brother to his credit union to refinance his house and found out his wife has about eight medical bills that went to collections and he owes a phone company more than $2,000. Their debt totals about $6,300. I could lend them the money or they could do a debt consolidation or talk to a credit counselor. What’s your opinion on these options?

Answer: None of these options is likely to work the way you hope.

Your brother should be wary of any “debt consolidation” offers he gets, as many will be scams and others will charge outrageous interest. The collections accounts have trashed the couple’s credit, which means mainstream lenders will probably avoid them until their situation improves.

The debt management plans offered by legitimate credit counseling agencies, meanwhile, are designed to help people pay off credit card bills, not past-due medical or phone bills. A credit counselor may give the couple some helpful budgeting advice to enable them to pay their debts, but it typically wouldn’t arrange payment plans.

Lending your brother the money would enable the couple to pay off the overdue bills. That won’t help their credit scores, however, unless your brother is able to persuade the collectors to remove the accounts from their credit reports. That’s often difficult to do, said debt collection expert Gerri Detweiler of Credit.com.

Your brother could start by asking the medical providers to take back any accounts that have been assigned to collectors and making payment arrangements directly with those providers. Medical collections are often on consignment and can be called back if the provider wishes.

The phone account, by contrast, was probably sold to a collection agency and can’t be reassigned to the original company. Even if your brother can’t get the account deleted from credit reports, he’ll probably need to pay or settle it if he hopes to refinance his mortgage because lenders usually don’t like to see open collection accounts.

Before you lend him the money, you should understand that loans to people with debt problems often don’t get repaid. If you can’t afford to lose this money, don’t lend it.

Categories : Credit Counseling, Q&A
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