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with at least some paid employment after leaving a pre-retirement job, reduces the amount of money needed to be withdrawn from investments to supplement Social Security and/or a pension.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.

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).

 

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.

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.

Don’t Stop Donating to Charities

During the past two weeks, I have seen advice like “accelerate planned 2018 charitable contributions into 2017 to take advantage of itemizing rules under current tax law.” Why? It is often property tax, mortgage interest, and/or state income tax, combined, that has allowed people to exceed the standard deduction and itemize and deduct charitable contributions. In 2018, standard deductions are almost doubling and there will be a $10,000 cap on state and local tax (SALT) deductions. Many people who previously could itemize income tax deductions won’t be able to any more.

While advice to time-shift planned 2018 charitable contributions forward might be sound financially, it seems to imply that people will have one “last hurrah” and then stop donating to charities because they can no longer take an itemized tax deduction. This would be a devastating loss for our local communities.

Let’s take a reality check. Only about 30% of tax returns nationally had state and local tax deductions in 2015. In New Jersey, the percentage of tax returns claiming SALT deductions was 41% according to the Tax Policy Center. Thus, a majority of Americans and New Jerseyans have not been able to itemize deductions for charity for a long time, not just starting next year. Some people were unable to claim SALT deductions due to the alternative minimum tax (AMT) and others came out ahead by taking the standard deduction.

Yet, many Americans, who have not been able to itemize tax deductions, have given generously to charities in their local communities, schools that they graduated from, and other worthy causes. Why? Because there are other benefits to making charitable contributions beyond tax savings: helping other people, “paying it forward,” paying back organizations that helped you get ahead, and a personal sense of satisfaction that comes from doing something that is positive, valuable, and worthwhile.

The reality, however, is that not everyone who previously itemized tax deductions will be able to afford to be as generous as they were in the past (i.e., their income tax bill may be rising as a result of the SALT cap or other tax law changes contained within the Tax Cuts and Jobs Act). That’s okay. Give what you can.

Here’s an idea to consider if you are negatively affected by recent tax law changes. I call it the “Make Yourself Whole Charitable Gifting Strategy” for those who previously itemized tax deductions and will no longer be able to itemize. Starting in 2018, give to the extent of your previous out-of-pocket cost for contributions in the past. For example, if you used to donate $2,000 annually and $500 was written off as an itemized deduction in the 25% marginal tax bracket, give $1,500 in the future. If you donated $4,000, give $3,000 and if you donated $10,000, give $7,500.

The result is that there will be little or no impact on your future cash flow. If you are fortunate enough to earn more money in the future, you can go back to making larger contributions again later.

If you need to prune future charitable contributions, be deliberate and intentional and develop an annual charitable contribution budget. For example, you might include:

• National or local organizations that do outstanding humanitarian work
• Organizations that you volunteer for (e.g., a local church or fire department)
• Professional associations that support your career
• Organizations that have helped you or your family (e.g., hospice, 4-H, or a local ambulance squad)

Conversely, if you are among the fortunate ones who will benefit financially from the Tax Cuts and Jobs Act and pay less tax than before, consider increasing your charitable contributions next year to “pass it along.” The Wall Street Journal has a calculator to help users estimate how the new tax law will affect them personally.

Bottom Line: Charitable organizations will need everyone’s support as much in the future under the new tax law as they did in the past. This is especially true if government funding for non-profit agencies, Medicare, Medicaid, and other social support services is reduced as some are predicting. Income tax deductions are just one factor in the decision to make charitable donations. Giving money to effective, high-impact charitable organizations and less fortunate people, when you are able, will always be the right thing to do.