Category Archives: Getting Started

What can you do to begin the process of retiring on your terms.

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Have 30% of Boomers Given Up On Retiring? 5 Reasons to Have Hope.

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I read an article in USA Today that appeared on March 18th. The headline screamed, “A third have less than $1,000 put away”. My immediate thought was that these are boomers who have given up on the idea of retiring any time soon if at all. My second thought was that these people just don’t understand the whole retirement income picture.

I can’t help with the first group but the second group is right up my alley. The force that will drive boomers to retirement success is education – learning some basic information about how to plan for a successful retirement. Forget owning the vineyard. I’m talking about not outliving your money!

The USA Today article goes on to explain that 60% of workers have less than $25,000 saved for retirement. Only 44% of those surveyed say they have tried to calculate how much money they will need to save by the time they retire. The survey concluded that those who have done the “calculations” tend to have higher level of savings. If you have been following my blog you know what calculations they are talking about. If you don’t, go here to learn more.

The biggest reason cited for not saving enough was cost of living and day-to-day expenses. Another telling statistic from the survey is that many people surveyed do not have a retirement plan such as a 401k or IRA that they can contribute to.

There are a couple of conclusions one could draw from the survey results:

  1. Many people have just given up on the idea that they can stop working someday and “retire”.
  2. People think that Social Security and/or an inheritance will appear and solve their retirement savings problem.

Both of these conclusions are dangerous so let’s focus on what people can do today, right now, to start bridging the gap between those who are confident they can retire and those who feel there is no hope of ever being able to stop working.

So what can you do if you find yourself with little or no money saved for retirement and you are 40+ years of age? Here is my list of things you can and must do right now:

  1. Sit down with a Financial Advisor and figure out exactly where you are. How much have you saved, what is your income and current expenses? Don’t try this alone.
  2. Put a budget together. A good financial planner will be able to help you find a few dollars to invest toward your retirement regardless of how strapped you think you are. Get more info on budgeting here.
  3. Find out what your “retirement gap” is. That is the difference between what you need to retire at a point in the future and where you are headed now. I call it your “Red Line” – that point where you will run out of money in retirement unless you make some changes now.
  4. Discuss the “Red Line” solutions with your advisor. For a more in-depth review of these “Red Line Solutions” review my blog post here.
  5. Decide on your plan of action to bridge the Retirement Gap. It’s never easy but the good news is that there is hope.

To review the USA Today article and survey results from the Employee Benefit Research Institute and Greenwald and Associates click here. My regular readers have heard me say this many times before but it’s a drum I will keep beating, “The best time to plant a tree was 20 years ago. The next best time is today.” And so it is with your retirement income planning. You can’t go back and start over. So let’s get started right now!

Time Out! What is your biggest concern about retirement? You can leave a comment here.

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5 Steps to Establishing an Emergency Fund

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I am often asked the question, “How much money should I set aside as an emergency fund?” There is no cut and dried answer but using CFP® guidelines you should keep between three and six months’ worth of fixed and variable expenses in a liquid account such as a money market account.

OK so the next question is usually, “OK is it three or six?” Before we get to that answer we need to get our arms around the whole concept of this “emergency fund” idea. It has been a recommendation by financial planners for many years and the concept stepped into the spotlight in the aftermath of the great meltdown of 2008. Many people were laid off from their jobs and found themselves unemployed for a longer time than they anticipated, often outstripping their savings. In other words, people felt like it could never happen to them or they just didn’t think they could set aside extra money for such an unexpected need.

Well, the truth is it can happen to any one of us so we have to get prepared. The second concern will be addressed in this discussion. Don’t underestimate your ability to save because in reality, you can start today to build a fund.

Experience being the great teacher that it is put a focus on setting aside money while you are employed for the proverbial “rainy day”. The recommendation is three months of fixed and variable expenses if:

  • You are single with a second source of income
  • You are married and both of you work with a similar income or
  • You are married and only one spouse works but you have a second source of income (income property for example)

What is a second source of income?

  • Alimony (if it is significant i.e. not just a few hundred dollars)
  • You are the beneficiary of a large trust fund
  • You consider yourself “financially well off” i.e. you have substantial investment income and/or other income coming in each month

If the above scenarios don’t apply then use six months as your emergency fund gauge.

Here are 5 things you can do to establish your emergency fund:

  1. Enroll in my free Budgeting That Makes $ense Course to learn more about how your emergency fund fits into the all-important budgeting process.
  2. Once you have a good handle on your expenses then determine if you need to multiply by 3 or 6 based on the information I discussed above or you can use this handy calculator.
  3. Open a separate account for your fund. Don’t mingle these funds with your day-to-day checking account, etc. I recommend using SaveDaily for this account because you can link it to your checking or savings account. You can have as little as $1.00 deducted and invested in your emergency account.
  4. Use systematic investing to build up your emergency account. It works like your 401(k). Again, SaveDaily allows you to set up 2 different times during the month to have money automatically withdrawn from your checking or savings account and invested in your money market account.
  5. Be disciplined and vigilant. Think of your emergency fund as untouchable except for those true emergencies like losing a job and/or unexpected healthcare expenses.

No one expects to encounter an emergency. That’s why you have to plan for the worst case scenario and expect the best. Being prepared will put you on the offensive rather than reeling financially and putting yourself and your family in a financial hole that could take years to get out of. It can be painless and if done right can grow fairly quickly.

What challenges have you had or do you foresee when it comes to setting up an emergency fund?  Click here to add your comments

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#1 Fear is Running Out of Money in Retirement – Having Fun is More Important

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When does the fear of going broke outweigh the pain of saving for retirement? The answer remains a mystery if you read the latest report from Bank of America Merrill Edge. They surveyed people with incomes from $50,000 to $200,000 and the feelings expressed were similar regardless of income.

Some of the more surprising results showed that while the number one fear for more than half of the respondents was “running out of money in retirement” over a third of those who feared running out of money said that still they are not willing to cut back on entertainment to save more (eating out and vacations included). 63% said that having money to live “in the here and now” is a priority.

If you feel guilty that if you won the lottery you might blow it on a trip to Vegas or a new car or some other toy don’t worry because 34% said they would not use their lottery winnings for retirement. Some good news is that 89% of those surveyed stated they have a household budget but…66% say they are consistently unable to live within that budget.

So getting back to my initial question, when does the fear of going broke outweigh the pain of saving for retirement? Stay tuned because there is no clear cut answer. The jury is still out. It still appears that many people have given up on the idea of retirement and will either work until they drop dead or move in with the kids if they run out of money.

There is always some good news from the confusion of these surveys. It can be different for you. If…you start right now. It takes a plan and is what most of these survey respondents do not have. Like you they may not be aware of the Red Line Solutions that may help you enjoy retirement on your terms. What are they? If you follow my blog here is a reminder. If you are new then have hope and take action:

1. Work longer, retire at a later date. Don’t forget, each year that you continue to work increases not only your Social Security benefit, if you have a pension it could increase that benefit as well. It will also allow your retirement investments to continue to grow (401(k), IRA accounts, and taxable investments).

2. Work a second job or part-time after retirement. The first step is to figure out what your income shortfall will be and then you can start considering the type of part-time work you will need to supplement your other sources of income in retirement.

3. Reduce monthly expenses. Yes, this can be a painful process but in many cases it will be necessary. This is why the budgeting step is so crucial. You don’t know what needs to be reduced if you don’t know what you are spending. Check out my Budget Tracker tool to get started. Most retirees don’t need to live on their pre-retirement standard of living. It will probably be somewhere between 70-80% of what you are spending now. Once you have your budget you can figure out what can be reduced or eliminated.

4. Increase the contributions to retirement accounts. Use the power of compounding and time to work in you favor. Even a small increase of $50 to $100 a month can have a dramatic effect on your retirement savings depending on how long you have until retirement.

5. Sell an asset. Again, probably a tough decision. Maybe not, if that vacation home is going unused now that the kids have grown and are not as interested in using it as they were once upon a time. Or maybe you want to downsize and get a smaller, less expensive home or move to a part of the country that is less expensive than where you live now.

Take action and have a plan. Don’t let survey results justify bad financial decisions or discourage you. Your situation is unique and you can retire on your terms. Please let me know how I can help you.

Time Out! What money concerns keep you awake at night? You can leave a comment here.

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Five Rollover Blunders That Could Cost You a Fortune

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One of the most important decisions boomers will make when it comes to their retirement is how to handle that 401(k), pension or other qualified retirement plan when they leave their job for good. Not that you necessarily have to roll that 401(k) immediately. In fact about 40% of boomers don’t take action within the first year of leaving their employer. Eventually you will have to rollover those funds.

One of the main advantages of rolling over your retirement account to an IRA is that it gives you many more investment options than those dozen or so mutual funds that you had in the company 401(k). Along with that opportunity come a set of red flags that you need to be aware of so you don’t end of paying unnecessary taxes and penalties. Here are five of the most common blunders pre-retirees make.

  1. Missing the 60-Day Rollover Deadline – You have a window of 60 days to move your retirement plan to an IRA tax-free. The clock starts ticking as soon as your money leaves your 401(k) account. Don’t let time slip by while you are on vacation or when the check gets lost in the mail. Keep track of the time or have your financial advisor assist you. The easiest way to avoid this potential problem is to request a direct transfer of your assets to the IRA account that you will set up ahead of time.
  2. Naming the Wrong Beneficiary – Sometimes if your finances are complex your attorney or other advisor recommends a specific vesting that the financial institution holding your IRA cannot accommodate. Another problem occurs when spouses get divorced and fail to update their beneficiary designation. The halls of attorneys’ offices are littered with ex-spouses who inherited money unintentionally because their ex forgot to change the beneficiary. Sign a beneficiary designation form when you set up your account and get up to date with your life events i.e. death, divorce, marriage and update your beneficiaries as they occur.
  3. Not Paying Off Loans Before Rolling Over – Any loans outstanding when you roll over your retirement account will be considered a distribution – taxable and subject to penalties. Before rolling your funds your plan administrator will deduct the amount of the loan. The IRS considers the difference a distribution. Pay off your loans before you rollover the funds.
  4. Cashing Out Your Retirement Account – Yes, it can be tempting to spend some of that hard earned retirement money. The problem is you can be subjected to taxes, penalties and loss of the growth that you enjoyed while your money was invested. Any cash you take out to pay off loans or to buy something will be considered a distribution and therefore taxable. If you don’t replace it within that 60-day window discussed in #1 above it will be taxable.
  5. Failing to Consider a Roth IRA Rollover – We love the benefits of tax deferral. We can keep Uncle Sam’s mitts off of our money only for so long. We know that eventually we will have to pay taxes on our retirement money. If you rollover your funds to a Roth IRA you will pay taxes in the year you roll the funds but…future earnings will be tax free. Wouldn’t it be great to get the taxes out of the way up front and not have to worry about paying taxes on those Required Minimum Distributions down the road? Does it make sense for you? Talk to your Financial Advisor and ask for a Roth analysis.

Of course there are more blunders that you need to avoid. These are 5 of the most important that come to mind. You have worked hard to accumulate your retirement nest egg. Don’t blow it by making one of these mistakes. There is no “Oops Button”; some of these blunders can be fixed. It can be costly and time consuming. I recommend that you don’t go it alone. Work with an expert who can keep an eye on things while you are getting ready for your retirement journey. Good luck and congratulations!

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Time Out!
What is your biggest concern about rolling over your retirement account? You can leave a comment here.

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Should I Pay Off Debt Using Money From My IRA?

"Avoid These Costly Retirement Planning Mistakes" Series #1

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So, you have been struggling to save for retirement.  You qualify to have an IRA account and you have been faithfully putting money into it each year. Great job! Life happens, as they say, and you find yourself with a credit card debt that just won’t go away. You figure that you have enough in your IRA to get rid of the debt. Then, you reason, you will have more to put in your IRA since you won’t have to make a credit card payment. Think long and hard before you make that withdrawal.

First, if you withdraw your funds from your IRA before you are 59 ½ you will get hit with a 10% tax penalty (there are a few exceptions). Don’t forget, you still must pay regular taxes on the money as well. If that regular tax puts you in a higher tax bracket that just compounds the problem.

You have a Roth IRA, you say? Yes, the Feds allow you to withdraw those funds without penalty or taxes. Just make sure you are nit withdrawing earnings on those Roth contributions or you will pay a penalty and taxes.

Another often overlooked downside to withdrawing money from an IRA early is that the funds cannot be replaced. That’s right, there is no catch-up provision. Remember you are restricted to a specific amount that you can contribute each year. So even if you withdraw a small amount, you will forego the benefit of compounded interest for those years until retirement. While it may seem like a small amount, it can have a significant impact on your retirement years.

So, what to do instead of withdrawing from your IRA? There are several choices depending on how dire your situation is. First, you are wise to be motivated to eliminate debt as you approach your retirement. The most difficult yet practical way is to pay down as much as you can each month. By this I mean more than your minimum payment. The first step is to know what you spend each month. My Budget Tracker can help you get started. Once you know how much you are spending then you can find where you can cut back on those expenses.

Once you have figured out where you can cut back i.e. dining out, entertainment, buying coffee out, eating lunch out instead of packing a lunch, etc., then you can use those funds to add to your existing credit card payment. You will be surprised at how quickly you can find $50 or $100 extra each month to pay down your debt quicker.

It’s always best to try to manage your debt “organically” i.e. from your current income and expenses, before you consider taking on debt such as with a home equity loan or borrowing against your 401(k).

Good luck! Please let me know in the comments or email me at mark@myrp.me if you have any questions or want to share your own experiences.