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The Equifax Data Breach Is Massive — Here’s How to Protect Yourself

From Motleyfool.com

Equifax announced a data breach that could affect 143 million consumers. Here’s what you need to know.

On Thursday, Sept. 7, Equifax announced a data breach that could potentially impact 143 million U.S. consumers. Among the information that was accessed were names, Social Security numbers, birth dates, addresses, and more. Here are the details of what happened and what you can do to protect yourself.

What happened?

Equifax reported that unauthorized access of certain files occurred from mid-May through July 2017, which could potentially affect millions of consumers. The criminal activity was detected on July 29, and the company says that it acted right away to stop it.

A glove hand holding credit card over a computer keyboard.

CRIMINALS ACCESSED SENSITIVE INFORMATION OF UP TO 143 MILLION PEOPLE. IMAGE SOURCE: GETTY IMAGES.

Criminals obtained information such as names, Social Security numbers, birth dates, addresses, and driver’s license numbers. Credit card numbers for more than 200,000 consumers and credit report dispute letters for about 182,000 consumers were also accessed.

However, the company says that no unauthorized access on Equifax’s core credit reporting databases (consumer or commercial) has been detected.

Equifax also plans to send direct mail notices to consumers whose credit card numbers or dispute documents (which contained personal identifying information) were accessed.

How to protect yourself

To help protect consumers who may have been affected, Equifax is offering free credit file monitoring and identity theft protection for one year to all U.S. consumers at www.equifaxsecurity2017.com. It may be a smart idea to take advantage if you don’t already use a credit monitoring service.

According to Matt Schulz, CreditCards.com’s senior industry analyst, “When breaches like these happen, consumers need to be diligent — and not just in the short term. Just because nothing looks amiss on your bank statements or your credit report now, that doesn’t mean you haven’t been compromised. Bad guys can be very patient, so it’s important to keep an eye out long after this story fades from the headlines.”

In other words, the best defense is to monitor your credit report frequently to check for any suspicious activity, such as accounts you didn’t open, address changes, or anything else that you don’t recognize.

You may want to consider a fraud alert

If you believe that your identity has been compromised, or if you just want to be on the safe side, you can place an initial fraud alert on your credit report. Doing so is free, and all you need to do is to contact one of the three credit bureaus (Equifax, Experian, or TransUnion), and they will inform the other two.

In a nutshell, a fraud alert makes it tougher for would-be thieves to open fraudulent accounts in your name. Lenders see the fraud alert when checking your credit, and then must take additional steps to verify that it is actually you opening the account.

An initial fraud alert lasts for 90 days, and can be renewed or cancelled as needed. Equifax offers an “automatic fraud alert” feature, which automatically renews the fraud alert every 90 days.

A credit freeze is a more effective step

Freezing your credit makes it virtually impossible to open an account in your name, as it will deny lenders access to your credit report. This means that they won’t be able to complete a credit check and therefore won’t be able to open an account. Unlike a fraud alert, a credit freeze won’t expire until you choose to remove it.

You must place a credit freeze with each bureau individually, and doing so can come with a fee, depending on what state you live in (usually less than $10 per bureau). However, if you’re already a victim of identity theft, a credit freeze is 100% free.

If your identity is stolen

Aside from placing a fraud alert or freezing your credit, if you see a fraudulent account show up on your credit file, there are a few important things to do, according to the Federal Trade Commission.

  • First, it’s important to create an identity theft report, which you can do at identitytheft.gov, or by calling the FTC at (877)438-4338. This can serve as proof that your identity was stolen and gives you certain rights when trying to do damage control, such as the ability to close fraudulent accounts and have them removed from your credit report.
  • Next, call the fraud department of the company where the account was opened and explain that someone stole your identity. Ask them to close the accounts right away to prevent further fraudulent charges.
  • Once you have an identity theft report, you can go to your local police station and file a report. Be sure to get a copy of it.
  • If you find fraudulent charges on your current credit accounts, call the fraud department and explain which charges aren’t yours and ask that they be removed.
  • Write to each of the credit reporting agencies, explaining which information came from identity theft, and ask them to block that information. Include a copy of your identity theft report.
  • If your identity has been stolen (and you have an identity theft report), you can place an extended fraud alert that lasts for seven years. You’ll need to contact each of the three credit bureaus.

Note that this is not an exhaustive list, and depending on your situation, there may be other steps you can take. You can find the FTC’s suggested situation- and account type-specific steps to take on the agency’s website.

The bottom line

To be perfectly clear, the Equifax data breach shouldn’t be a cause for panic, as many people who have their information stolen never experience any issues.

That said, it’s important to keep an eye on the situation and take additional steps as appropriate. If you don’t already have a credit monitoring service, it may be a good idea to take advantage of the free year of Equifax’s services being offered, just in case any suspicious activity takes place.

Author Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy  See Sept 10, 2017 article at https://www.fool.com/credit-cards/2017/09/10/the-equifax-data-breach-is-massive-heres-how-to-pr.aspx 


How American Families Pay for College

From ThinkAdvisor,com:

Here’s how a typical family financed a college education in 2016-2017 according to the latest annual report, How America Pays for College, from Sallie Mae:

  • Scholarships & grants:                     35%
  • Parent income & savings:                23%
  • Student loans:                                   19%
  • Student income & savings: loans:     11%
  • Parent loans:                                       8%
  • Relatives & friends:                          4%

There was little change in the breakdown from last year – just a 1 percentage point difference up or down in all categories except for parent income and savings, which fell by six percentage points, and student loans, which rose by six percentage points.

Neither saving less nor borrowing more is good news, and they are related.

“When parent income and savings are less available, the funding gap appears to be bridged by borrowing, more student borrowing than parent borrowing,” according to the study,  which is based on telephone interviews with 800 parents of undergraduates, ages 18 to 24, and 800 undergraduate students, ages 18 to 24, conducted by Ipsos Public Affairs.

(Related: 30 Best Paying College Majors: 2017)

Forty-two percent of families surveyed borrowed money to help pay for college this year, according to the report. The typical loan amount was just over $9,600 for students and almost $3,900 for parents, and federals loans were the most popular for both.

Borrowers were more likely than non-borrowers to attend college full-time and in a four-year program, and more likely to venture out of state, attend a private school and choose one based on its academic program.

The study also found a disconnect between parents and children concerning loan repayment.

While 84% of student borrowers expect to be solely responsible for repaying their loans, only 58% of parents concurred with that and 12% of parents expect to repay those loans. In contrast, 41% of parent borrowers expect to be solely responsible for repaying their loans while 21% of students expect the responsibility lies with them

Despite the decline in savings and increase in borrowing, families and students are focused on college affordability, according to the report. Not only are they seeking scholarships – 7 in 10 families did but only 49% reporting using them – but most are completing the Free Application for Student Aid (FAFSA) (86%) needed to qualify for student aid, and 73% report choosing an in-state schools.

In addition, 50% of  students were living at home in the 2016-2017 academic year, 26% were enrolled in an accelerated program to graduate early (and spend less), 76% were working to help pay for college – working year-round or during school breaks—and 26% were enrolled in accelerated programs to graduate earlier (and save money). Many families were also reducing personal spending and working longer hours to help pay for college.

One action many families aren’t undertaking, however, is developing a plan to pay for college. Even though nine in 10 surveyed said they anticipated college attendance since their child was in pre-school, less than half (42%) said they made a plan to pay for it.

The survey covered families across the U.S. and found that those in the Northeast stood out from families in other regions of the country. Families in the Northeast spend about 70% more on college, and finance that with more borrowing and a larger contribution from parents. Enrollment in private school and on a full-time basis higher among those families as is academic programs as a key reason for college choice.

Article from Think Advisor , July 18, 2017  http://www.thinkadvisor.com/2017/07/18/how-american-families-pay-for-college-2017?eNL=596e5a89140ba0f942a97de8&utm_source=TA_DailyWire&utm_medium=EMC-Email_editorial&utm_campaign=07182017&page_all=1

 

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Is Social Security Enough for Retirement?

Use These Strategies to Help Stretch Your Dollars

Despite a tumultuous political climate, Social Security seems safe. But Social Security is rarely enough to cover more than the most basic living needs. And with the average monthly Social Security benefit coming in around $1,250  and growing slowly, this fact isn’t going to change anytime soon.

For some, a government or corporate pension may provide additional, regular income.  The majority of Americans, however, will have to maximize what they themselves have set aside in their retirement plans to sustain their standard of living throughout retirement.

I spoke with a couple about to retire recently. They told me about all the things they anticipated doing in the next few years: travel, taking some classes at the local community college, becoming more tech savvy to keep up with the grandkids. A shadow, however, passed over the wife’s face as she mentioned something she was NOT looking forward to – retirement.

“I’m going to miss that green envelope,” she said.  “Knowing I won’t be seeing it in our mailbox makes me really nervous.”

She was referring to her husband’s monthly pay receipt. For decades, his paycheck had been deposited as regularly as clockwork in their checking account and was the anchor and compass of their financial management. Without it, they felt like they were on their own trying to figure out how much they could withdraw from their retirement reserves – not to mention how to plan for taxes, deciding which accounts to draw from first, and how to invest.

In many cases, after a lifetime of receiving paychecks on a consistent basis, retirees must shift gears and start creating their own income. However, like my retiree couple, they find the prospect pretty challenging and, at times, overwhelming.

To take back control of their financial future

Retirees must learn to separate fact from fiction when it comes to generating the income needed for their sunset years. By focusing on actionable goals, retirees can maximize their retirement assets. First, let’s get the fallacies out of the way.

  1. One magic withdrawal rate will ensure you will never run out of money.It’s true that there has been considerable research done on “safe withdrawal rates” — defined as the highest yearly payout from an investment portfolio that will keep the portfolio intact over a given period. While so much depends on the parameters used to identify this rate, there is generally a consensus that a 4 percent annual withdrawal rate is a reasonable payout over the life expectancy of most retirees.But retirees need to understand that this rate should be flexible. There may be years that a higher rate is warranted or necessary – during times when the investment portfolio is doing well, for example, or when there are large expenses, perhaps for medical costs.This is where an annual conversation with a financial advisor works better than a hard-and-fast rule. Each year, the advisor can help reevaluate the need for greater or lesser withdrawals from the portfolio, while also considering the longevity of the portfolio in a way that fits the unique circumstances of a retiree’s life.
  2. Safe, income-producing investments can be relied on to create income in retirement.It’s too simplistic to call investments that pay interest or dividends “safe,” and say that growth stocks are not.Retirees often confuse regularity with safety. For example, while bonds provide predictable income, this does not mean that this income is perfectly safe. Bond issuers  default sometimes, and companies that pay dividends occasionally cut their payouts to shareholders. Furthermore, inflation will also reduce the purchasing power of those regular payments from bonds and dividends.And in today’s low interest rate economy, it can be difficult to find yields on fixed income investments sufficient to maintain a retiree’s lifestyle. This scenario drives many retirees to search for higher yields, which often carry unacceptable risk.For most retirees, a healthy allocation of investments that will grow over time, rather than those that promise regular income, is warranted. Today’s growth is needed for higher payouts in the future.
  3. Spending capital from the retirement portfolio is a bad idea.Traditional IRAs, 401(k)s, 403(b)s, and self-employed plans are structured, under the tax laws, to be paid out over our lifetimes. In fact, retirees are penalized if they fail to take principal from these accounts at a certain age. Many retirees find the prospect of spending down these accounts very upsetting, when, in fact, doing so under the guidance of a qualified financial professional can result in a far more comfortable, secure retirement.And now for the facts: here’s what really matters to a retiree drawing out income from his or her retirement savings.
  4. Taxes matter.Of course they do – and where they really matter is in determining acceptable withdrawal rates.Suppose, for example, a retiree decides he needs about 4 percent from his retirement portfolio to cover his annual living expenses. As discussed above, a 4 percent payout is a reasonable (but not certain) rate to ensure portfolio longevity.But when this payout is made from a tax-deferred retirement account, the retiree will need to withdraw an additional 1 percent from the portfolio to cover the tax liability on these withdrawals. As a result, the sustainability of the portfolio over his lifetime may drop considerably.When saving for retirement, many individuals fail to appreciate the importance of using both taxable and tax-deferred accounts. Having the flexibility to choose between the two types of accounts when it’s time to make a withdrawal, and thereby controlling the amount of taxes owed in any given year, can be critical to sustaining the retirement portfolio.
  5. Timing matters.

    The month and year a retiree chooses to start taking income from his or her retirement accounts can make a huge difference. As individuals who retired in 2007 or 2008 are all too aware, a bad investment market combined with portfolio withdrawals may diminish the sustainability of those withdrawals by several years. In cases of bear markets, those able to delay retirement and continue earning income rather than consuming assets are in a much better position to avoid running out of money during their lifetimes.
  6. Spending matters more than investments.

Getting it “Right”

Many retirees believe that if they could just get the portfolio allocation and security selection “right,” they will have enough for their retirement. It may surprise them, however, to realize that in the studies done on sustainable withdrawal rates, the allocation of the portfolio providing the withdrawals was not very important to the results.

Instead, the most effective way to ensure that retirees’ resources will last in retirement is for them to focus primarily on expense management.

Taxes, timing, and spending are fairly simple principles. What’s not so simple is coordinating the three. Finding a financial professional can make a big difference here:  He or she is trained to take all these factors into account in designing an individual retirement income strategy that makes sense for you.

From Is Social Security Enough for Retirement? ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.


What You Need To Know About Social Security

It’s most important to know:

  • Your full retirement age: Your age has a big impact on your Social Security benefits. While you can typically claim Social Security at age 62, it can pay off to wait until you reach your full retirement age. For those born between 1943 and 1954, the full retirement age is 66 – meaning the age at which a person may become entitled to full benefits. The full retirement age will gradually rise toward 67 for those born after 1954. If you decide to claim your benefits early, it can result in risks and permanent reductions to your income.
  • Understand spousal benefits: Both current and ex-spouses (if you were married for more than ten years and did not remarry prior to age 60), as well as widow and widowers are eligible to receive spousal benefits once they reach retirement age. Your spouse will need to file for their benefits first in order for you to be eligible; spousal benefits can be up to 50 percent of your spouse’s Social Security benefits. If you are a widow or widower and of retirement age, you may also be eligible to receive 100 percent of your spouse’s benefits.
  • You don’t need to stop working to collect Social Security benefits: If you reach your full retirement age but aren’t quite ready to take the plunge into retirement, you can continue to work and receive your benefits. If you are younger than the full retirement age (currently 66), your monthly benefits will be temporarily reduced. Once you reach full retirement, your benefits will increase to make up for lost time.
  • Delaying your claim can pay off: If you can afford to delay claiming your Social Security benefits, it can result in an increase in the amount you receive later on. Your benefits can stand to grow 7-8 percent a year if you delay until age 70. Cost of living adjustments (COLA) will also be included in that increase. Similarly, if you are a widow or widower, delaying your spousal claim can also increase your income. 
  • Benefits aren’t always tax exempt: Throughout your career you will have paid into the Social Security Trust Fund, but when you begin receiving benefits you will likely need to continue paying taxes on your benefits. Benefits lost their tax-free status in 1984, and, depending on your income, you may be required to pay tax on up to 85 percent of your benefits.

Navigating the Social Security landscape can be complicated

Ensure you fully understand your options and make the most of your benefits by consulting a financial planning professional.

From What you need to know about Social Security Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.

 


Claiming Social Security Benefits: Think Before You Point and Click

It was October 15, 2007 and the cameras were rolling.  At a media event hosted by the Social Security Administration, Kathleen Casey-Kirschling applied online for her retirement benefits.  Born January 1, 1946 at 12:01 a.m., she was officially America’s first Baby Boomer to file for Social Security.

Casey-Kirschling merrily pointed and clicked her way through the online application, saying:  “It’s so easy! You can do this from home.”

And so launched the “silver tsunami” of retiring Baby Boomers filing for benefits at a clip of more than 10,000 per day for the next two decades.

Ask any financial planning professional, what we may have thought about this momentous occasion, and you would have probably heard a loud groan.  The unintended message sent to the Baby Boomer generation by this short media clip was not a very good one.

Why was it bad?

First of all, Ms. Casey-Kirschling was 62 years old. Yes, this is the age Americans with a sufficient work history become eligible for retirement benefits from Social Security. But was Kathleen aware of how much she was forfeiting in benefits by not waiting until she reached her full retirement age (FRA) of 66? The answer is approximately 30 percent.  And if she had waited an additional four years till age 70, her benefit would be 62 percent higher than what she got at age 62.

Next, as her hyphenated last name suggests, Kathleen was married.  That fact alone opens up all sorts of possibilities for coordinating her claim with her spouse, to give her more in benefits than what she would receive based solely on her own work record.  Figuring out which spousal claiming strategy makes the most financial sense is anything but something you can easily do in a few minutes from home.  It takes some real analysis, yet it can lead to upwards of tens of thousands of additional dollars over retirement.

In all fairness, Ms. Casey-Kirschling may have been completely aware of what resulted in a penalty for taking benefits before full retirement age, and perhaps had done her homework on how she could coordinate her benefits with her husband’s. The reality, however, is that most Americans do not know that there are smart and not-so-smart ways to take Social Security. Too many believe that it’s best to take the money at the first opportunity and run.

How I wish we could have added 20 more seconds to that 2007 Social Security media clip with a consumer-friendly message of my own.

Here’s what else needed to be said

  • Think twice before claiming at age 62.  Make sure you have done some financial planning to account for your health, family longevity and other resources before automatically signing up the minute you are eligible.
  • If you are married, be aware that for married couples there are multiple strategies to increase combined benefits. These may include suspending benefits or filing a restricted claim to spousal benefits.  The “best” strategy depends on the difference between the spouses’ ages and the amount each spouse would collect on his or her own record, as well as the couple’s basic financial and health circumstances.
  • If you are single and divorced but were once married for over 10 years, you still have the opportunity to make a claim based on your former spouse’s record.
  • If you are widowed, widowed and remarried after age 60, disabled, and/or have a disabled spouse, there are even more possible strategies for claiming benefits.

Bottom line

Before you point and click to get your Social Security retirement benefits, spend some time getting good advice about your options. Be aware that the Social Security Administration, while extremely helpful, efficient and high-tech, cannot give you advice about when and how to claim.

Better still is to work with a Financial Planning professional who can look at your whole financial picture, and has the expertise and specialized software to help you make a good decision.  This could make all the difference between just getting by in retirement and truly enjoying life in your later years.

 

From Claiming Social Security Benefits: Think before you point and Click Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.


Have You Reviewed Your Beneficiary Designations Lately?

Properly drawn estate planning documents can protect finances, both during life and after death.  Establishing an estate plan can also save your family from paying Federal and New Jersey estate taxes.  Regardless of age or financial status, everyone should have a Will, Living Will, and General Durable Power of Attorney.

 

Surprise! Beneficiaries Can Trump your Will

Often clients are surprised to learn that beneficiary designations can supersede the provisions of their Will.   Many individuals spend a substantial amount of time and money to establish their estate plans.  Those same individuals may spend only a few minutes designating the beneficiaries of their IRAs and life insurance policies.   Sometimes the beneficiaries listed on a particular account are not consistent with the provisions spelled out in a Will.   The result can be that your IRAs and life insurance policies pass in an undesirable manner.

 

Careful attention should be given as to whom you have listed as beneficiary on your IRAs. The IRS rules for determining when income tax has to be paid on an account holder’s death vary depending upon who is listed as the designated beneficiary.

There is not a standard beneficiary designation that applies to everyone.  Instead, the proper beneficiary depends on the account holder’s goals and objectives.

 

More options if you designate your spouse as a beneficiary

If a spouse is a beneficiary then this provides the most flexibility.  A spouse can “roll over” IRA proceeds into their own account or leave the IRA in the deceased account holder’s name as a beneficiary designated account.   If a “roll over” is elected then distributions do not have to be made from the IRA until the spouse reaches their required distribution date (generally, April 1 of the calendar year after reaching the age of 70 ½ ).  Income tax does not have to be paid until distributions are made.

 

If a deceased account holder has children from a prior marriage, they may not want their IRA passing directly to their spouse because they fear that the surviving spouse will exclude the children from the first marriage from receiving a portion of the account.  Furthermore, if a trust was established by the deceased account holder they may prefer the funds be placed in the trust.  If a trust is the beneficiary for retirement proceeds then different rules apply for determining minimum distributions.   As long as the trust meets certain IRS requirements distributions can be taken over the lifetime of the oldest beneficiary of the trust.   This will enable IRA proceeds to be placed into the trust with out triggering immediate income tax on the entire account value.

 

If a child or grandchild is a beneficiary of an IRA then distributions can me made over the life expectancy of the child or grandchild.  Usually this will provide the longest period of time to “stretch out” distributions from an IRA.

 

Consistency is Key

In summary, careful consideration should be given to whom you have designated on your accounts.  Furthermore, contingent beneficiaries should be designated in case your initial beneficiary is not living.  Both your primary and secondary beneficiaries should be reviewed periodically to verify that they are consistent with your Will.

 

Information provided by Guest Authors Douglas Fendrick and Jaime Shuster Morgan of Fendrick & Morgan, LLC, Voorhees, NJ
Learn more at www.fendrickmorganlaw.com


Retirement for Baby Boomers when there isn’t one

Every generation believes itself unique. Unfortunately for Baby Boomers, this may be especially true about their ability to retire.

Some sociologists argue that the Baby Boomer generation has taken historical uniqueness to the extreme, rewriting the rules on just about everything: sex, marriage, work ethic, consumption, faith, and even death. Now that Baby Boomers are in or entering their 60s, it’s ironic then that many lament they cannot retire as their parents did.

In a recent survey by AARP, 44 percent of Boomers said they believed their standard of living will be worse than that of the previous generation.

Despite this result, the first Baby Boomers are often declining to delay their retirement past the age that Social Security defines as their full retirement age, according to a 2013 MetLife study. Even though these Boomers enjoy approximately five more years of life expectancy than their parents did at age 65, 52 percent of these Boomers have retired at an average age of 59.5.

On the plus side for Boomers is the fact that one of the biggest threats to retiree security — inflation — is mercifully low. Older Americans will recall a time when annual inflation averaged between 6 percent and 10 percent a year, and how cumulative inflation from 1970 to 1989 ran a whopping 162 percent.

So what’s left to retirement for Baby Boomers to figure out?  What rules should they break, and which should they keep?

  • The “4 percent” withdrawal rule:  Developed two decades ago, this rule sets the inflation-adjusted amount that retirees can take annually from their savings in order to avoid running out of money before their deaths. The rule was based on historic asset return data, and focused on the negative returns of the Great Depression and the stagflation of the 1970s as presenting the greatest threats to individuals living on investment income. Four percent was determined to be the maximum rate that would allow a retiree to live through periods like these without exhausting his resources. But while 4 percent was created to work for Boomers’ parents or grandparents, it‘s unclear as to whether it will work going forward. Near-zero real returns to bonds as well as increased global volatility have many financial planners believing the “safe” withdrawal rate will need to be lower for Boomers. At the very least, Boomers will need to be flexible in their retirements, able to dial down their rate of withdrawal in extremely negative return environments, delaying consumption until more positive returns are achieved. BREAK IT
  • No debt in retirement:  Boomers are already carrying much more debt – think mortgages and credit cards – into their golden years than did their forbears. But today’s retirees would do better to honor their elders’ example.  Being debt-free in retirement provides necessary cash-flow flexibility. KEEP IT
  • A care-free retirement depends on smart investing:  While not exactly a “rule,” the many brokerage ads depicting happy couples strolling the beach have a lot of retirement-bound Boomers believing that if they just pick the right investments, they will do fine. The reality is a bit more complex:  Prudent investing is wise, but not a complete solution until combined with expense control, down-sizing, health care and disability management, and even part-time work. A diversified “portfolio” of solutions, not a single hot stock or fund, will be the winning formula for many retirees. BREAK IT
  • A carefree retirement, period: Isn’t this the deal that all generations, not just the aging hippies, subscribe to? Unfortunately, Boomers’ increasing life expectancies – theirs and their parents – have meant that their retirements may include much elderly caretaking. Meanwhile, their children – hard-hit by the economy – are also asking mom and dad for help.  Boomers will need to establish realistic priorities, and to set financial limits for their retirements that they might not have anticipated. They’ll need a multi-generational approach to financial planning that addresses both their needs as well as the needs of their extended families.

Defiant Boomers have always done things their way, and navigating retirement will be no exception.  They are, in fact, the first generation that has to look primarily to their own resources and management – rather than to government or corporations – to invest for retirement and create an income stream from these investments.

Fortunately, financial planning and the certification of competent, ethical professionals have come of age with the Boomers, to help them make the most of this uncharted territory.  Boomers will no doubt continue to “do their own thing” in retirement, but with a CFP, they can do it prudently and successfully.

 

From Retirement for Baby Boomers when there isn’t one Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.


Smile Your Way Through Retirement

Just retired or soon to be?

Here’s a warm-up exercise to get you ready for this important phase of your life.

Stand in front of a mirror, and spend a minute or two thinking about what you will spend in retirement.  Now study your face and body language.

Your demeanor is probably telling one of two stories.  Some of you may be wearing a complete blank, eyebrows raised, palms up, as if to say, “I haven’t got a clue what I’ll spend in retirement.” If you’re in this group, check in at the end of this blog where I recommend getting some professional advice to help you get a grip on your prospects in retirement.

Most of you, however, are looking worried or concerned – frown wrinkles between the eyes or clenched fists, ready to slug your way through the cloud of uncertainty that descends whenever you contemplate retirement.  The fear of spending too much and/or living too long is written clearly on your face.

But is anyone smiling?

Probably not, but maybe you should.  According to a recent article in the Journal of Financial Planning1 which looked at spending patterns of retiree households, there is some good news to smooth out those worry lines. The data show that retirement spending tends to decline by approximately 1 percent annually, in real terms.  But here’s something just as encouraging: over a twenty-five year period from ages 60 to 85, the actual annual changes in spending trace a “retirement smile.”  In other words, retirees tend to begin their retirement years at a higher-than-average level (one corner of the “smile”) and end their retirement period with another higher expenditure level (the other corner).   Between the two is the curve of decreasing, then increasing spending, with the lowest levels coming between the ages of 70 and 75.

What’s the positive message here for retirees?  For one, the study shows it’s normal to spend more liberally in early retirement – the time when healthy retirees travel, remain active and enjoy life.  For another, the study indicates that the worry about having to spend a lot more – generally on medical expenses and personal care – late in retirement is indeed a reality, but does not result in overall overspending.  Those middle years of lower spending still keep the average going down over the entire retirement span.

Of course, averages are one thing; your individual circumstances are quite another.  Does this study of “normal” retirement spending still have any good news applicable to you?

The answer is yes.

It demonstrates that each of us has more control over our spending in retirement than we may think.  It also reinforces the following empowering principles:

  • There’s nothing “fixed” about retirement.  We often think that the last phase of our lives is constrained by having to live on a fixed income. Same for our spending, which is perhaps the source of the popular 80 percent rule as a good estimate of what your expenditures will be relative to your current income.  The reality is far more flexible, and more interesting, for retirees.  There will be years of more and years of less, years of having fun and years of taking care.
  • While planning for retirement is imperative to ensure you have the resources to support your spending, planning in retirement is critical, too.  The ebb and flow of spending, which in turn dictates the amount of taxable income you’ll need from your retirement accounts, creates opportunities for creative tax planning.  For example, keeping your adjusted gross income down in a low spending year may qualify you for certain tax credits and deductions.
  • During years of spending more, spend smart. At the beginning of retirement when you’re still healthy, energetic, and have an overflowing bucket list of things to do and places to see, it’s tempting to live large and enjoy life. That’s okay, provided you plan carefully for that largesse and make smart spending choices. Use the free time afforded by your retirement to budget and price compare before you spend. For example, eliminate all those premiums you paid for convenience while working and time was short. Travel during the off seasons; fly through a connecting city, rather than direct; dine out at that new restaurant at lunchtime rather than dinner; get tickets for the matinee film or play.
  • Just because you’re retired, doesn’t mean you should stop saving. During the lower expense years – that period between ages 70 and 75 – prepare for the higher expenses at the end of retirement. If you can, set aside any “leftover” income at the end of the month in a reserve account to hedge against future medical and personal care expenses not covered by insurance.
  • Real spending is what really matters. The study cited above tracked changes in real spending, which means that inflation was factored out of the analysis.  If nominal spending rather than real spending had been tracked, the “smile” pattern of retirement would have looked instead like a crooked grin, with spending increasing each year.  For many retirees, it’s that rising level of expenditure for the same basket of goods and services that’s most worrisome. If, however, retirees focus instead on maintaining the purchasing power of their sources of income, the rising level of nominal spending can be of less concern.  This means keeping a healthy allocation to equity investments, real estate and commodities in the portfolio, rather locking everything into guaranteed sources of income.  Playing it too safe, investment-wise, can mean retiring sorry.

If, however, you’re still finding it tough to feel happy about retirement, try the warm-up exercise with this difference: step up to the mirror with a financial planning professional at your side.  CFP Board studies have shown that those who do their financial planning, ideally with a trusted, competent professional, feel much more confident and in control of their futures.  And that’s certainly something to smile about!

1David Blanchett, CFP®, CFA, “Exploring the Retirement Consumption Puzzle,” Journal of Financial Planning, May 2014.

From Smile your way through retirement Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.


Crunch Time- Strategies for Aggressive Saving

If people want to be able to save more, there are basically three choices:  spend less money, earn more money, or some combination of the two. There’s also another option – granted, a more aggressive option – of aggressive spending cuts to achieve aggressive savings goals.

But why? Simple. Americans need to save more if they want to achieve not just wealth, but enough money to live off of and not work forever.

According to the March 2016 Retirement Confidence Survey, 54% report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit (DB) plans, is less than $25,000.  This includes 26% who say they have less than $1,000 in savings. That’s not good news.

So, how to kick start saving aggressively – cut spending. Here are some tips:

  1. Conduct a spending audit with your personal/miscellaneous expenses.  I think most people have a good idea of how much they spend on food, shelter, transportation, and clothing but have no idea just how much they are spending on everything else.  A great place to find low hanging fruit is by conducting a spending audit on the places you like to go and the things you like to do.  From expensive hobbies, traveling, entertainment and gifts, these types of places where we spend money can add up very quickly.  Am I saying that you shouldn’t spend money on fun?  No, but I am saying that you need to identify just how much you are spending and then decide on where you can cut back.  For example, if you like to golf every weekend, consider going out every other weekend.  If you take two big trips a year, consider cutting it down to one.
  2. Cut your housing expenses by 15%.  It is the largest expense for most people.  It is also one of the broadest spending categories.  Mortgage payments or rent, homeowner’s or renter’s insurance, utilities, phone, internet and cable TV are some of the expenses you likely have.  You may be able to save hundreds of dollars each month by shopping for a cheaper mortgage rate.  If renting, consider moving to a smaller, less expensive place.  Think about cancelling your cable TV, getting rid of your land line if you have a cell phone, and trading your cell phone plan for a prepaid plan if you only make occasional calls.  By just reducing 15 percent of household expenses, the average household could save approximately $3,700 a year.
  3. It’s OK to say NO to your children and grandchildren.  I have always joked with the younger wealth builders I have worked with in the past that have children, that as soon as their kids are out of the house, they will have this magic money tree in their backyard that will seem to have grown out of nowhere.  It is a joke of course, but truthfully, if you are supporting children, grandchildren, or in some cases both, it may be time to cut the umbilical cord.  I understand that I may have offended some by that statement, but if you are serious about wanting to save aggressively, you must be able to spend less.  Spending money, cell phones, car insurance, gas money and car payments are a few things you may be supplementing for a child or grandchild that you might consider cutting out or at least reducing.  Wanting our children and grandchildren to have everything we didn’t have growing up may make us feel better, but it could be hazardous to our wealth.

I have always said that spend, spend, spend may lead to the poorhouse and save, save, save may lead to resentment.  But if it is crunch-time and you are serious about saving aggressively, in order to save, save, save, you have no choice but to spend less, less, less!

 

From Crunch Time…Strategies for Aggressive Saving Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.

 


Financial Planning for Small Business Owners

At HFM we know many business owners that are great at what they do, (build houses, sell appliances, provide IT services) but need help managing their finances. We agree with this article that these are the areas where expertise is a necessity. 

Who hasn’t dreamed about starting a business?

Becoming a successful entrepreneur has replaced home ownership as the new definition of the American Dream, thanks to the recent collapse of the real estate market and the made-for-Hollywood stories of folks like Steve Jobs or Mark Zuckerberg, of Apple and Facebook, respectively.

But while Jobs and Zuckerberg have become household names, fame ought to be the least of the attractions in owning a business. More compelling to the tens of thousands of individuals starting a small business every year is the allure of being master of one’s own professional success.

Being the boss can be exhilarating.

But there are also significant risks to going out on your own. Unfortunately, the failure rate of small business is high, with only 20 percent of new businesses surviving for five years. Another depressing statistic: fewer than 40 percent of self-employed persons working alone make more than $25,000 a year.

The old saying, “No one plans to fail, but many fail to plan,” has special applicability to the new business owner. Starting up can be deceptively simple: Facebook was launched with just an innovative idea, a laptop, and a dorm room. But from the very outset, business owners need to be aware that even the most basic business model entails considerable financial planning complexity.

Comprehensive financial planning for an individual or couple generally involves tax planning, risk management, investment planning, retirement planning and gift and estate planning.

For each of these areas, let’s consider how business ownership takes this planning to another level.

  • Tax Planning:  The legal structure chosen for the business – sole proprietorship, partnership, limited liability company (LLC), or a corporation – will determine how the business profits are taxed. As a sole proprietor or single owner of an LLC, your business income is treated the same as your personal income, making tax compliance considerably simpler. Add partners or additional LLC members, and while again the business income flows through to the individual return, it is possible to split the taxable income (and losses) of the business in ways that can benefit multiple owners. S-corporation status can allow business owners to take some distributions of income without paying self-employment taxes, whereas C-corporation status entails separate taxation at the business level, at different rates from what the business owner pays on his personal return. To the extent that individuals and C-corporations have different marginal rates at different brackets of income, it is possible to coordinate the taxation of business and personal income in a way that provides the greatest benefit to both the business and its owner.
  • Risk Management: Most individuals need to plan for the financial risk of early death, disability, illness and infirmity, and liability or loss related to property ownership.  Once an individual owns a business, however, the risks multiply to include: interruption of the business due to a disaster; death or disability of a person key to the success of the business; loss of business property; and lawsuits resulting from negligence or defective products.  This last risk can be addressed in part by the legal structure of the business, but the others require specialized insurance coverage over and beyond what the owner holds for himself and his family.  If the business has employees, worker’s compensation coverage becomes necessary as well.
  • Retirement Planning:  It’s not uncommon for business owners to assume they will never retire.  After all, they’re presumably doing what they love, so why not continue indefinitely? Alternatively, they may see the business as the only retirement plan necessary – as a source of capital that will fund their retirement needs. Thinking along these lines is generally a mistake: If anything, a business owner may need more retirement planning rather than less, to prepare for the time when he no longer can or wishes to work, and/or the business cannot fully provide for his financial needs. The good news is that business ownership affords all sorts of tax-advantaged ways to save for retirement, and the ability to put aside amounts considerably larger than what is permissible to non-business owners.
  • Investment Planning: Most small businesses are self-financed by their owners, which results in the business becoming the owner’s major or only investment. Even when the owner has extra capital to make other investments, he may still prefer to put his money back into his business, where he feels he has the most control over his returns. Prudent planning nevertheless must be focused on diversification. Asset classes and investments must be carefully selected for the owner’s personal portfolio to offset the concentrated risk he is taking with the business.
  • Estate Planning: If a small business grows and becomes a valuable asset, simple wills or family trusts set up for personal affairs may no longer suffice for the transfer of the business. More sophisticated financial planning techniques will be necessary to ensure business continuity after death, reduce any estate taxes assessed for the business, and to provide liquidity to heirs to pay those taxes. A reorganization of the business might be advisable to create different types of ownership for family members, and to make full use of IRS-sanctioned discounts in valuing the business for purposes of gift and estate taxes.  Insurance trusts and charitable trusts can also play an important role in the efficient transfer of a small business.

One point should be clear when it comes to financial planning for the small business owner: the do-it-yourself drive that helped you start your business will not serve you well when it comes to managing the many financial issues created by that business.  This is where professional expertise often becomes necessary.

Exercise your privileges as chief executive officer, and delegate these issues to qualified tax and financial planning professionals. Their advice can make all the difference in improving your chances of business success.

From Financial Planning for Small Business Owners Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.