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Thursday, January 25, 2018

Catch-Up Retirement Planning-Part 2


Even people in their 50s with little or nothing invested have opportunities to make up for lost time. So, if you’re beating yourself up about what you haven’t done to prepare for retirement, it’s time to stop and, instead, take action to create a bright future.  There are many ways for late savers to make up for lost time. 

As noted in my previous post, catch-up retirement planning strategies basically fall into one of two basic categories:

  • Take action before retirement to increase retirement savings

  • Take action after retirement to decrease the amount of savings required
     
    Below are five catch-up retirement planning strategies in the “decrease amount of savings required” category:
     

  • Trade Down to a Smaller Home- When someone downsizes, proceeds from the sale are available to invest for future income and maintenance costs, property taxes, and utilities on a smaller property are generally reduced.

 

  • Move to a Less Expensive Location- So-called “geographic arbitrage” (i.e., moving from a high-cost area to a less expensive area) can substantially reduce living costs and reduce the amount of money required to save for retirement.

 

  • Use a Reverse Mortgages or Sale-Leaseback Arrangement- Both of these catch-up strategies can help late savers convert their home equity into spendable cash without having to move. The former is a loan against equity built up in a home and the latter involves selling a home, typically to a close family member, and leasing it back as a tenant.

 

  • Delay Retirement Age- Continuing to work, even just a few years, provides two benefits: more time to invest for retirement and to allow previously saved assets to grow, and fewer years in retirement during which money is spent.

 

  • Work After Retirement- Semi-retirement, with at least some paid employment after leaving a pre-retirement job, reduces the amount of money needed to be withdrawn from investments to supplement Social Security and/or a pension. Continued employment also provides opportunities for socialization and a sense of purpose.

Thursday, January 18, 2018

Catch-Up Retirement Planning-Part 1


Baby boomers and younger generations face a “perfect storm” of retirement planning challenges: a financial squeeze on Social Security, pension plan underfunding, and inadequate savings-and often high expenses-in 401(k)s and similar defined contribution plans. What to do? For many people, the answer is catch-up retirement planning.
Catch-up retirement planning strategies basically fall into one of two basic categories:
  • Take action before retirement to increase retirement savings
  • Take action after retirement to decrease the amount of savings required
     
    Below are five catch-up retirement planning strategies in the “increase retirement savings” category:
  • Increase Contributions to Retirement Savings Plans- Saving 1% more of a $35,000 salary at age 40 will result in $35,945 of additional savings at age 65 assuming an 8% average annual return and 3% average annual pay increases.


  • Slash Spending and Debt- Reduced spending can free up money to accelerate debt repayment. Use PowerPay (www.powerpay.org) to create a debt repayment calendar. Adding even small amounts to payments on consumer debts will save repayment time and interest and previous debt payment amounts can be added to retirement savings.

  • Moonlight (a.k.a., “Side hustles”) for Additional Income - Freelancing provides an opportunity to earn money for catch-up investing. It can also sharpen job skills and provide a “bridge” to post-retirement employment opportunities.

  • Seek a Higher Investment Return- The higher the return earned on investments, the less that needs to be invested. The trade-off, of course, is increased risk of loss of principal but time diversification helps to reduce this risk.

  • Maximize Tax Breaks- Compound interest works best when income taxes are eliminated (e.g., tax-free bonds), reduced (e.g., long-term capital gains on the sale of securities), or deferred (e.g., 401(k)s and traditional IRAs).

 



Thursday, January 11, 2018

How to Keep Your New Year’s Resolutions


Did you make a New Year’s resolution two weeks ago to improve your personal finances and already give up?   If so, don’t despair. There is a better way to make resolutions…take the time to prepare properly.

 

Nike slogan aside, words like “just do it” rarely motivate people to change. Why? Change does not begin with action.  Rather, it requires awareness of a better way to live, a firm commitment to make changes, and a plan of action.

 

What to do?

 

Step #1: List Your Obstacles- For example, what are your barriers to saving?  Is it high debt, lack of automatic savings opportunities, overspending, or uncertainty about where to put your money?  Ways to overcome these obstacles might be attending a company employee benefit seminar or requesting written information about savings plan options.

Step #2- Set a (New) Start Date- Pick a date carefully to begin changing behavior to reach a goal. This will prevent both premature action and prolonged procrastination. If you are truly ready for action, choose a date within the next month.

Step #3- Go Public with Your Commitment to Change- Tell others about your plans. This increases accountability because others are “looking over your shoulder.”  Fear of public failure can be a powerful motivator to stay on track. 

Step #4- Monitor Your Progress- Develop habits or systems (e.g., automatic 401(k) deposits) to “work your plan,” celebrate progress points (e.g., $500 of savings) and make adjustments, as needed, if progress is slower than expected.

It is not too late to set well-planned resolutions to improve your life in 2018 and take action to implement them. For additional personal finance information from Rutgers Cooperative Extension, visit our Personal Finance Web site.

When there is a will to change personal behavior, people find a way to do so: “where attention goes, energy flows, and results show.”  Stated another way, what we think about, we bring about.  There is still plenty of time to improve your personal finances in 2018. Develop a few realistic resolutions (goals) and a plan of action to achieve them.

Friday, January 5, 2018

How to Set New Year’s Resolutions and Achieve Them


Happy New Year!  At this time, people often make resolutions to lose weight, save money, spend more time with family, quit smoking, get more exercise, and do better in general.  A few weeks later, their good intentions fall apart. Why not make 2018 different by trying the following six-step approach to tackling your financial goals?

Write Down What You Want to Accomplish and When- For example, if your goal is to save $3,000 during the first six months of the year, write down “I will save $3,000 by June 30, 2018.”  This goal is measurable.

Develop an Action Plan- Ask yourself: What steps do I need to take to reach this goal? For example, if you plan to save $500 a month for the next six months, you might reduce certain household expenses.

Identify Obstacles- Write them down.  Beside each obstacle, list 2-3 ways to overcome the obstacle.  If your goal is to save money, obstacles could be lack of an automated savings plan and/or family members who encourage you to spend instead of save.

Identify Resources- Are there books you could read that might help?  Could you join a group of people who are working toward the same goal?  Are there opportunities for automatic savings at your place of employment?

Give Yourself Small Rewards- As you reach milestones toward reaching your goal, think of ways to give yourself encouragement (e.g., something you like, a special treat, and/or spending time with people you enjoy).

Evaluate and Adjust- If you don’t reach one of your milestones, re-group, but don’t give up.  See what is working and what is not and adjust your plans. Evaluate how you spend your time, energy, and money. 

To set financial goals for 2018, with a date and a dollar cost, use this Rutgers Cooperative Extension worksheet.

Red Flags of Investment Fraud

This week, I taught my Rutgers students about investment frauds like Pyramid and Ponzi schemes.  Each year, thousands of consumers lose ...