June 12, 2014 By

Thursday’s need-to-know money news

credit-score-repair1Today’s top story: Meet the credit score you didn’t know you had. Also in the news: What to do when you’re debt free, how to break out of a financial slump, and what single people need to do to protect their money.

You Have a “Secret” Credit Score That Could Be Working Against You
That late payment on your rent ten years ago could come back to haunt you.

Life After Debt: 5 Ways to Make the Most of Healthy Finances
Debt free. Now what?

4 Ways to Overcome Financial Inertia
Stop treading water.

3 Things That Make Single People Financially Vulnerable — And How To Beat Them
Because being single wasn’t depressing enough.

Is Your Credit Card Debt Average? And What’s Average?
One of the few times when being below average is a good thing.

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June 6, 2014 By

Friday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Teaching your kids to avoid money mistakes. Also in the news: Becoming a smarter investor, cleaning up your digital life, and how your summer vacation could earn you credit card perks.

Teaching Kids to Avoid Money Missteps
Put them on the right path early.

One Phrase That Will Make You a Smarter Investor
It’s all about the evidence.

Tips for Cleaning Up Your Digital Life
Protecting yourself from identity theft.

The Best Summer Credit Card Rewards Offers
How to get perks from your vacation spending.

3 Tips to Increase Your Paycheck
It’s time to maximize your allowances.

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May 26, 2014 By

Q&A: Regular 401(k) vs Roth 401(k)

Dear Liz: I just turned 50. My company has an option to contribute pretax money to a regular 401(k) or after-tax money into a Roth 401(k). Should I put the maximum contribution ($17,500) plus the catch-up ($5,500) into the Roth? Or should I split my contributions?

Answer: Given that you’re close to retirement, putting most of your contributions into the traditional 401(k) is probably the way to go.

Most people’s tax brackets drop once they retire. That means you can benefit from a bigger tax break now and qualify for a lower rate on your future withdrawals.

If you had a few decades until retirement, the math might be different. Younger people with good prospects may well be in a lower tax bracket currently than they’ll eventually be in retirement. In their case, it can make sense to gamble on making after-tax contributions to a Roth 401(k), betting that their tax-free withdrawals in retirement will be worth much more.

You may want to put some money into the Roth 401(k) so you’ll have flexibility with your tax bill in retirement. Being able to choose between taxable and nontaxable options gives you what financial planners call tax diversification. But the bulk of your contributions should still go to the traditional 401(k).

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May 12, 2014 By

Q&A: An Update

Dear Liz: I think you were way too hard on the young man who said his 30-year-old girlfriend’s lack of retirement savings was a potential deal breaker. You told him to get off his high horse. He was just being prudent.

Answer: It would be prudent to regard massive debt, alcoholism or drug use as deal breakers for a relationship. Elevating the young woman’s lack of retirement savings to this level is just over the top. But let’s hear what the young man himself had to say:

Dear Liz: I want to say thank you for taking the time to write on my question. I was able to find a few charts online and show her [the power of compounded returns]. She got excited about it and is now putting in to get the company match (5%).

Thank you very much for putting me in my place. I did not mean to come across as if I was better. I have been very lucky to have been able to save and be taught about compounding at an early age.

Answer: One of the potential hazards of being good with money is arrogance. We can become convinced that we know better and that other people should do things our way. It takes some humility to understand that not everyone has had the advantages we’ve had or been able to take in the information as we’ve done. Understanding that makes it easier to find compromises in a relationship that work for both parties.
Good luck with your relationship. She sounds like a keeper.

Filed Under: Investing, Q&A, Retirement, Saving Money Tagged With: , , ,
May 12, 2014 By

Q&A: Social Security Payouts

Dear Liz: My wife and I, 63 and 62, plan to continue working till at least 65. We will begin collecting Social Security benefits in September. Our combined income is $58,000, we own our home outright, and we have no debt, no children, $84,000 in a traditional IRA and $90,000 in a stock portfolio.

I just sold a portion of a mutual fund for a $30,000 gain that is in the bank for the time being. How long do we have to reinvest without paying a capital gains tax? Or would it be best to pay the tax now, leave the money in the bank and be done with it?

Answer: Unless you sell another investment for a $30,000 loss to offset the gain, you’re going to have to pay taxes on your profit.

“There is no way to do a tax-free reinvestment,” said tax professional Eva Rosenberg, an enrolled agent who runs the TaxMama.com site. “And the time to ask questions like that is before you sell the mutual funds.”

You still have time to avoid a much bigger mistake: signing up for Social Security now.

Your Social Security checks would be reduced $1 for every $2 you earn over a certain level, which this year is $15,480. That “earnings test” applies until you reach your full retirement age (which is 66, not 65, for both you and your wife). What’s more, you would lock in lower benefits for life and give up a chance to boost your Social Security payout in a way that’s available only to married couples who wait until full retirement age to start benefits. (More on that in a moment.)

Your savings are too small to generate much income, particularly if you want to minimize the chances of running out of money. You should be looking to maximize your Social Security benefits to help make up for that deficit. Your benefits grow substantially each year you put off applying for them, and most people will live past the break-even point where delaying benefits until full retirement age results in more money than taking them early.

Many people erroneously think they should grab Social Security as early as they can, but the Social Security system isn’t going away, and you are likely to regret settling for a smaller check. Remember that your wife probably will outlive you and will have to get by on one check, so you should make sure your benefits are as big as they can be.

One way to do that is for the lower-earning spouse to claim spousal benefits at his or her full retirement age. Once the lower earner’s benefit maxes out at age 70, he or she can switch if that benefit is larger.

But spousal benefits can’t start until the higher earner files for his or her own benefit. If the higher earner waits until full retirement age to apply, he or she has the option to “file and suspend” — a maneuver that lets the spouse claim spousal benefits while leaving the higher earner’s benefit untouched so it can continue to grow.

This “claim now, claim more later” strategy is available only to people who wait until their full retirement age to start.

Your tax question and your plan to start Social Security early indicate you could really use some sessions with a fee-only financial planner. Such a consultation is a good idea for everyone as they’re approaching retirement, but in your case, it’s essential.

Filed Under: Couples & Money, Investing, Q&A, Retirement Tagged With: , , ,
April 27, 2014 By

Q&A: What to do with an old IRA?

Dear Liz: I left a job several years ago to become a full-time freelancer. I have a SEP IRA and a SIMPLE IRA from that job that have basically just been sitting there. What are my options in moving this money to a better retirement investment?

Answer: SEPs and SIMPLEs are just the tax-advantaged buckets into which you (and your then-employer) put money. It’s the investments you choose within those buckets that determine what kind of returns you’ll get. The financial institution that’s holding these accounts can be a factor as well: If it’s charging a lot of fees, your returns will suffer accordingly.

Your best bet is to make sure the accounts are being held at a low-cost provider and that you have sufficient exposure to stocks to offer growth that will offset inflation over time. Most discount brokerages and mutual fund companies offer target-date maturity funds that give you diversification, professional asset allocation and automatic rebalancing at a low cost.

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April 27, 2014 By

Q&A: What to do with a big tax refund?

Dear Liz: I got a big tax refund this year and am trying to figure out what to do with the money. Right now I have school loans with a 4% interest rate that I do not need to make a payment on until 2024 with my current payment plan, but the amount I owe is pretty hefty and I know it’s going to compound more over time. I also have a very low-interest car loan (1.9%) that will be paid off in 31/2 years. I also could put that money in the market in hopes that it will grow. I should add I am 27 years old. Any advice?

Answer: Yes: Please review the terms of your student loans, because it’s likely you’ve misunderstood your obligation.

Federal education loans typically don’t allow you to go 10 years without payment, said financial expert Mark Kantrowitz, publisher of Edvisors Network.

“With federal education loans, the economic hardship deferment has a three-year limit and most forbearances have a three-year limit, with one or two having a five-year limit,” Kantrowitz said.

“One could potentially consolidate the loans after getting a deferment and forbearances to reset the clock and thereby get a new set of deferments and forbearances on a new loan. But most of the forbearances aren’t mandatory, so one can’t count on stacking deferments and forbearances to get a 10-year suspension of the repayment obligation.”

Another possibility is that you’ve signed up for an income-based repayment plan that has reduced your payment to zero, but your eligibility is determined year by year. “2024 is a very specific date, so it seems unlikely that this is [income-based repayment],” Kantrowitz said.

“The most likely scenario is this borrower is misunderstanding the terms of his loan,” Kantrowitz said. “The next most likely scenario is that this borrower is not referring to a qualified education loan, but to a particular personal loan that he was able to obtain that few other borrowers would be able to obtain.”

Whatever the case may be, one of the best uses for a windfall is to boost your retirement savings. Even if you don’t have a workplace plan, you could set up an IRA or a Roth IRA as long as you have earned income.

Once you’re on track for retirement, your next goal would be to build your emergency fund, since you don’t have any high-rate debt. Once those goals are met, you can start paying down lower-rate debt (such as your student loans).

Filed Under: Investing, Q&A, Student Loans, Taxes Tagged With: , , ,
April 24, 2014 By

Take a year to Get Rich Slowly

Fixing material in the red plastic boxesJ.D. Roth went from being over $35,000 in debt to having over $1 million in the bank. He documented his journey at the excellent Get Rich Slowly site, sharing what he learned about frugality, investing and smart money decisions.

He also wrote a very good book, “Your Money: The Missing Manual.” But The Missing Manual series has a definite format (like the For Dummies and Idiot’s Guides). I’ve been looking forward to reading what J.D. could come up with on his own.

It was worth the wait. J.D. and fellow entrepreneur/blogger Chris Guillebeau just debuted the Get Rich Slowly course. For $39–75 cents a week–you get:

  • An email every Monday that features the best lessons from the blog.
  • A 120-page guide called “Be Your Own CFO”, that in my view is the highlight of the course. (J.D. agrees, calling it “the best work I’ve ever done.)
  • Supplementary downloads, including a revised version of my Roth IRA guide.
  • Interviews with people with a bunch of money thought leaders, including Jean Chatzky, Gretchen Rubin, Tess Vigeland, and yours truly.

I’m not getting paid or compensated in any way for recommending J.D.’s course. I just think it’s a great way to step up your game when it comes to money, and maybe your life.

Check it out at MoneyToolbox.com.

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April 18, 2014 By

Money rules of thumb: Retirement edition

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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April 10, 2014 By

How to start investing

Zemanta Related Posts ThumbnailA reader recently posted this question on my Facebook page:

Liz, I’m 30 years old and looking into starting [to invest in] mutual funds and IRAs and have no idea where to start. I know I really need to invest for the future and am eager to do so, but again, have no knowledge on any of this nor know where to start. Any advice or pointers would be more than appreciated.

I suggested he start with reading two really good books for beginning investors, Kathy Kristof’s “Investing 101” and Eric Tyson’s “Personal Finance for Dummies.” But here’s a summary of what you’ll learn:

Get started investing as soon as possible, even if you don’t quite know what you’re doing. You’ll learn along the way, and you really can’t make up for lost time.

Invest mostly in stocks. Stocks over time offer the best return of any investment class, and provide you the inflation-beating gains you’ll need for a comfortable retirement.

Don’t try to beat the market. Few do consistently. Most people just waste a lot of money. Instead, opt for mutual funds or exchange traded funds that try to match the market, rather than beat it.

Keep fees low, low, low. Wall Street loves to slather them on, but fees kill returns. Here’s an example: An annual IRA contribution of $5,000 can grow to about $1 million over 40 years if you net a 7 percent average annual return. If you net 6 percent, that lowers your total by a $224,000. That’s a heck of a lot to pay for a 1 percentage point difference in fees.

If you have a workplace retirement plan such as a 401(k), that’s where you should start investing. If you don’t, then an IRA you open yourself is the next best thing.

So here’s a prescription for getting started: Open an IRA at Vanguard, which prides itself on its low expenses. Send them a check for $1,000 (the minimum to get started with an IRA). Choose a target date retirement fund that’s close to the year when you expect to retire (in this reader’s case, that would be the Vanguard Target Retirement 2050). Target date funds take care of everything: asset allocation, investment choices, rebalancing over time for a more conservative mix as you approach retirement age. You can get the $20 annual account fee waived if you sign up for online access and opt for electronic delivery of account documents.

There you go–you’re on your way.

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