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Debunking a Few Popular Retirement Myths

Certain misconceptions ignore the realities of retirement.

Generalizations about money & retirement linger. Some have been around for decades, and some new clichés have recently joined their ranks. Let’s examine a few.

“When I’m retired, I won’t really have to invest anymore.” Many people see retirement as an end instead of a beginning – a finish line for a career. In reality, retirement can be the start of a new and promising phase of life that could last a few decades. If you stop investing entirely, you can risk losing purchasing power; even moderate inflation can devalue the dollars you’ve saved.1

“My taxes will be lower when I retire.” You may earn less, and that could put you in a lower tax bracket. On the other hand, you may end up waving goodbye to some of the deductions and exemptions you enjoyed while working, and state and local taxes will almost certainly rise with time. So while your earned income may decrease, you may end up losing a comparatively larger percentage of it to taxes after you retire.1

“I started saving too late, I have no hope of retiring – I’ll have to work until I’m 85.” If your nest egg is less than six figures, working longer may be the best thing you can do. You will have X fewer years of retirement to plan for, so you can keep earning a salary, and your savings can compound longer. Don’t lose hope: remember that you can make larger, catch-up contributions to IRAs after 50. If you are 50 or older this year, you can put as much as $23,000 into a 401(k) plan. Some participants in 403(b) or 457(b) plans are also allowed that privilege. You can downsize and reduce debts and expenses to effectively give you more retirement money. You can also stay invested (see above).1,2

“I should help my kids with college costs before I retire.” That’s a nice thought, but you don’t have to follow through on it. Remember, there is no retiree “financial aid.” Your student can work, save or borrow to pay for the cost of college, with decades ahead to pay back any loans. You can’t go to the bank and get a “retirement loan.” Moreover, if you outlive your money your kids may end up taking you in and you will be a financial burden to them. So putting your financial needs above theirs is fair and smart as you approach retirement.

“I’ll live on less when I’m retired.” We all have the cliché in our minds of a retired couple in their seventies or eighties living modestly, hardly eating out and asking about senior discounts. In the later phase of retirement, couples often choose to live on less, sometimes out of necessity. The initial phase of retirement may be a different story. For many, the first few years of retirement mean traveling, new adventures, and “living it up” a little – all of which may mean new retirees may actually “live on more” out of the retirement gate.

“No one really retires anymore.” Well, it is true than many baby boomers will probably keep working to some degree. Some people love to work and want to work as long as they can. What if you can’t, though? What if your employer shocks you and suddenly lets you go? What if your health won’t let you work 40 hours or even 10 hours a week? You could retire more abruptly than you believe you will. This is why even workaholics need a solid retirement plan.

There is no “generic” retirement experience, and therefore, there is no one-size-fits-all retirement plan. Each individual, couple or family needs a strategy tailored to their particular money situation and life and financial objectives.

Warmest Regards,

 april-signature

Citations.

1 – tiaa-cref.org/public/advice-guidance/education/financial-ed/empowering_women/retirement-myths [8/29/14]

2 – 401k.fidelity.com/public/content/401k/Home/HowmuchcanIcontrib [8/29/14]

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Bad Spending Habits That Can Be Corrected

A little frugality may lead to a lot of financial progress.

Americans have a great deal of disposable income relative to many other nations, yet our free spending can take us further and further away from the potential for financial freedom. Some people fall into crippling spending habits and injure their finances as a consequence.

Bad habit: failing to save. Saving – saving even $50 or $100 a month – isn’t that hard under most financial conditions. Even so, some households don’t put much of a priority on building a cash reserve of some kind, a portion of which could be used for equity investment.

When you don’t make saving a goal, you don’t have any money to withdraw in a pinch – so if you need to get ahold of some money, where do you find it? Basically, you have three options. One, turn to friends or Mom or Dad. Two, divert money that would go toward a core need (food, rent, the heating bill) toward the sudden crisis. Three, charge your credit card. (There are other options, but they are best not explored.)

Good habit: save just a little, then a lot. You can start a savings campaign by saving “invisibly” – that is, just spending $10 or $15 or $20 less on a regular expense each month. Maybe two or three, even. That’s less than a dollar a day per expense. When your earnings climb further above your financial baseline, you can increase the amount you save/invest.

Bad habit: buying things on a whim. The correlation between impulsive spending and credit card use isn’t too hard to spot. Spending money you don’t have on material items that will soon depreciate doesn’t put you ahead financially.

Good habit: set a budget when you shop. As you arrive at the market, the mall or the local power center, arrive with a limit on what you will spend on that shopping trip and stick to it. Take an hour (or a day) to mull over any big buying decisions – are you buying something you really need? Lastly, use cash whenever you can.

Bad habit: living on margin. Living above your means, charging this and that credit card – this is a path toward runaway debt. You may look rich, but you’ll carry a big financial burden that risks being “out of sight, out of mind” in between credit card statements.

Good habit: strive for lasting affluence, not temporary bling. Possessions symbolize wealth to too many Americans. Real wealth is measured in accumulated assets. They aren’t usually visible, but you can count on them in the future, in contrast to ever-depreciating luxury goods.

Bad habit: buying unnecessary services. Cable subscriptions, extended warranties, service contracts for highly reliable items, health club memberships that translate into little more than an alternate place to shower – they all add up, they all siphon some of our dollars away each month. In many cases, we pay for options rather than necessities.

Good habit: evaluate who benefits most from those services. Are they benefiting the provider more than the consumer? Are they entrees to a “main course” – a steady, long-range financial exploitation?

Go against the norm – it might leave you a little wealthier. In April, Gallup found that 62% of Americans liked saving money more than spending it. Just 34% liked spending more than saving. This appreciation of frugality is relatively new. As recently as 2006, 50% of Americans told Gallup that they enjoyed saving more than spending with 45% preferring spending.1

If we love saving money, a key statistic doesn’t reflect it. According to the Commerce Department, the typical U.S. household was saving 4.8% of its disposable personal income in May. The personal savings rate for 2013 was 4.5%, the least in any year since 2007. Compare that to 6.7% across the 1990s, 9.3% across the 1980s and 11.8% during the 1970s.1,2

Perhaps many of us want to save but can’t due to financial pressures. Perhaps the economic rebound is encouraging personal consumption over saving. Whatever the reason, Americans on the whole don’t seem to be saving very much. That’s the status quo; going against it might help you build wealth a little more easily.

Warmest Regards,

april-signature

 Citations.

1 – gallup.com/poll/168587/americans-continue-enjoy-saving-spending.aspx [4/21/14]

2 – bea.gov/newsreleases/national/pi/pinewsrelease.htm [6/26/14]

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Retirement Planning With Health Care Expenses in Mind

It is only wise to consider what Medicare won’t cover in the future.

As you save for retirement, you also recognize the possibility of having to pay major health care costs in the future. Is there some way to plan for these expenses years in advance?

Just how great might those expenses be? There’s no rote answer, of course, but recent surveys from AARP and Fidelity Investments reveal that too many baby boomers might be taking this subject too lightly.

For the last eight years, Fidelity has projected average retirement health care expenses for a couple (assuming that retirement begins at age 65 and that one spouse or partner lives about seven years longer than the other). In 2013, Fidelity estimated that a couple retiring at age 65 would require about $220,000 to absorb those future costs.1

When it asked Americans aged 55-64 how much money they thought they would spend on health care in retirement, 48% of the respondents figured they would need about $50,000 apiece, or about $100,000 per couple. That pales next to Fidelity’s projection and it also falls short of the estimates made back in 2010 by the Employee Benefit Research Institute. EBRI figured that a couple with median prescription drug expenses would pay $151,000 of their own retirement health care costs.1

AARP posed this question to Americans aged 50-64 in the fall of 2013. The results: 16% of those polled thought their out-of-pocket retirement health care expenses would run less than $50,000 and 42% figured needing less than $100,000. Another 15% admitted they had no idea how much they might eventually spend for health care. Unsurprisingly, just 52% of those surveyed felt confident that they could financially handle such expenses.1

Prescription drugs may be your #1 cost. In fact, EBRI currently says that a 65-year-old couple with median drug costs would need $227,000 to have a 75% probability of paying off 100% of their medical bills in retirement. That figure is in line with Fidelity’s big-picture estimate.2

What might happen if you don’t save enough for these expenses? As Medicare premiums come out of Social Security benefits, your monthly Social Security payments could grow smaller. The greater your reliance on Social Security, the bigger the ensuing financial strain.2

A positive note: EBRI and Fidelity both reduced their estimates of total average retirement health care expenses from 2012 to 2013. (Who knows, maybe they will do so again this year.)1

The main message: save more, save now. Do you have about $200,000 (after tax) saved up for the future? If you don’t, you have another compelling reason to save more money for retirement.

Medicare, after all, will not pay for everything. In 2010, EBRI analyzed how much it did pay for, and it found that Medicare covered about 62% of retiree health care expenses. While private insurance picked up another 13% and military benefits or similar programs another 13%, that still left retirees on the hook for 12% out of pocket.1

Consider what Medicare doesn’t cover, and budget accordingly. Medicare pays for much, but it doesn’t cover things like glasses and contacts, dentures and hearing aids – and it certainly doesn’t pay for extended long term care.2

Medicare’s yearly Part B deductible is $147 for 2014. Once you exceed it, you will have to pick up 20% of the Medicare-approved amount for most medical services. That’s a good argument for a Medigap or Medicare Advantage plan, even considering the potentially high premiums. The standard monthly Part B premium is at $104.90 this year, which comes out of your Social Security. If you are retired and earn income of more than $85,000, your monthly Part B premium will be larger (the threshold for a couple is $170,000). Part D premiums (drug coverage) can also vary greatly; the greater your income, the larger they get. Reviewing your Part D coverage vis-à-vis your premiums is only wise each year.2,3

Underlying message: stay healthy. It may save you a good deal of money. EBRI projects that someone retiring from an $80,000 job in poor health may need to live on as much as 96% of that end salary annually, or roughly $76,800. If that retiree is in excellent health instead, EBRI estimates that he or she may need only 77% of that end salary – about $61,600 – to cover 100% of annual retirement expenses.1

Warmest Regards,

 april-signature

Citations.

1 – washingtonpost.com/news/to-your-health/wp/2014/03/31/guess-how-much-you-need-to-save-for-health-care-in-retirement-wrong-its-much-more/ [3/31/14]

2 – money.usnews.com/money/retirement/articles/2013/06/17/how-to-budget-for-health-costs-in-retirement [6/17/13]

3 – medicare.gov/your-medicare-costs/costs-at-a-glance/costs-at-glance.html [4/30/14]

 

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Why Do We Save So Little?

 What’s good for the economy isn’t necessarily good for our future

Our parents & grandparents saved much more than we do. Most people who have read up on the economy for any length of time have heard of the personal saving rate (PSAVERT), which the Commerce Department calculates as the ratio of personal saving to disposable personal income. The January personal spending report released by the Commerce Department in early March showed the PSAVERT at 4.3%.1

As recently as January 2013, households were saving just 2.3% of their disposable incomes – so this can be labeled a short-term improvement. It still pales in comparison to the way Americans used to save.2

The “greatest generation” had a culture of saving. Its thrift was reinforced further by hard times and a call for personal sacrifices as the economy endured the Great Depression and stateside rationing during WWII. The Commerce Department began measuring household saving in 1959, and as unbelievable as it may seem today, households saved 10% or more of their disposable incomes through nearly all of the Sixties. In May 1975, the personal savings rate reached a historic peak of 14.60%.1,2

From 1959 to the present, the PSAVERT average has been 6.84 percent – but the 21st century shows evidence of a significant decline. The savings rate fell into the 1-3% range, dropping to a record low of 0.8% in April 2005.

To some analysts, a declining personal savings rate signals a stronger economy. It implies more spending, and consumer spending has the biggest impact on GDP. You can’t have it all, however; more spending means less saving, and Americans are plagued by insufficient retirement reserves.

Are credit cards the problem? We borrow greatly, but there are other factors in play. You may have heard about America’s “shrinking middle class.” That is no exaggeration.

The most recent Census Bureau data shows the median U.S. household income for 2012 at $51,017. By comparison, median U.S. household income in 1989 – when adjusted for inflation – would work out to $51,681 today. From 1989-2012, annualized consumer inflation was mostly in the 2-4% range. All this illustrates a slow but notable erosion of purchasing power.3,4

During the same time frame, the cost of college went up dramatically, health care costs increased, and real estate values fluctuated. People saved less and borrowed more, and not simply on impulse; they wound up borrowing more to maintain a middle-class standard of living.

Real incomes aside, we are often lured into unnecessary spending. Advertising can convince us that we have unmet needs and desires, and that we must respond to them by buying goods and services. Urges, emotions, ennui, living without a budget – these can all lead us to spend more than we really should, especially given how much money we will need to adequately retire.

Our parents and grandparents really knew how to pay themselves first – and while economic pressures make it harder for many of us to do so today, that doesn’t make it any less of a priority. 

It might be useful to think about future money when you think about making a discretionary purchase. Are those dollars you are spending at a mall or restaurant today better off saved or invested for tomorrow?

Think about your big dreams and goals, the ones you have looked forward to realizing for years. How many dollars are you putting toward them? Is your spending aligned with them, or in conflict with them? Could you spend less here and there and devote more money to those priorities?

Sometimes we have to borrow and spend more than we would like, but often we have a choice – and the choice we make may affect our ability to retire sooner or later.

Warmest Regards,

 april-signature

       

Citations.

1 – research.stlouisfed.org/fred2/series/PSAVERT/ [3/3/14]

2 – tradingeconomics.com/united-states/personal-savings [3/6/14]

3 – billmoyers.com/2013/09/20/by-the-numbers-the-incredibly-shrinking-american-middle-class/ [9/20/13]

4 – tradingeconomics.com/united-states/inflation-cpi [3/7/14]

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Wise Decisions with Retirement in Mind

Certain financial & lifestyle choices may lead you toward a better future.

Some retirees succeed at realizing the life they want, others don’t. Fate aside, it isn’t merely a matter of stock market performance or investment selection that makes the difference. There are certain dos and don’ts – some less apparent than others – that tend to encourage retirement happiness and comfort.

Retire financially literate. Some retirees don’t know how much they don’t know. They end their careers with inadequate financial knowledge, and yet feel that they can plan retirement on their own. They mistake retirement income planning for the whole of retirement planning, and gloss over longevity risk, risks to their estate, and potential health care expenses. The more you know, the more your retirement readiness improves.

Retire knowing that you’ll have to assume some risk. Growth investing is increasingly seen as a necessity for retirees who want to keep ahead of inflation.

According to data and research compiled by the Social Security Administration, the average 65-year-old man will live to be 84 and the average 65-year-old woman will live to be 86. So that’s a 20-year retirement. The SSA also notes that roughly a quarter of today’s 65-year-olds will live past 90, and about 10% of them will live beyond age 95.1

If these seniors rely on fixed-income investments for the balance of their lives, they may end up with reduced retirement income potential, and in turn a reduced standard of living. Look at the Rule of 72: if an investment is yielding 2%, it will take about 36 years to double your money. Yes, interest rates are rising – but inflation should rise with them.2

A generation ago, mature Americans were urged to gradually shift their portfolio assets out of stocks and into fixed-income investments. One old rule of thumb was to subtract your age from 100, with the resulting number being the percentage of your portfolio you should assign to equities.3

Today, retirees and retirement planners are reconsidering this thinking. As the Wall Street Journal reported recently, one study of retirement money and longevity risk concluded that retirement funds may last longer if a retiree gradually increases the stock allocation within a portfolio about 1% per year from an initial range of between 20-50% to between 40-80%. The concept here is that a retiree’s stock allocation should be lowest when their retirement nest egg is largest.3

Retire debt-free, or close to debt-free.  Who wants to retire with 10 years of mortgage payments ahead or a couple of car loans to pay off? Even if your retirement savings are substantial, what will big debts do to your retirement morale and the possibilities on your retirement horizon? On that note, refrain from loaning money to family members and friends who seem quite capable of standing on their own two feet.

If the thought of using some of your retirement money to pay outstanding debts hits you, set that thought aside. You have dedicated that money to your future, not to bill paying. On second or third thought, other sources for the cash may be apparent.

Retire with purpose. There’s a difference between retiring and quitting. Some people can’t wait to quit their job at 62 or 65 – their work is “killing” them, or boring them senseless.  If only they could escape and just relax and do nothing for a few years – wouldn’t that be a nice reward? Relaxation can lead to inertia, however – and inertia can lead to restlessness, even depression. You want to retire to a dream, not away from a problem.

A retirement dream can become even more captivating when it is shared. Spouses who retire with a shared dream or with utmost respect for each other’s dreams are in a good place.

The bottom line? Retirees who know what they want to do – and go out and do it – are contributing to their mental health and possibly their physical health. If they do something that is not only vital to them but important to others, their community can benefit as well.

Retire healthy. Smoking, drinking, overeating, a dearth of physical activity – all these can take a toll on your capacity to live fully and enjoy retirement. It is never “too late” to quit smoking, quit drinking or slim down.

Retire in a community where you feel at home. It could be where you live now; it could be a place hundreds or thousands of miles away where the scenery and people are uplifting. It could be the place where your children live. If you find yourself lonely in retirement, then “find your tribe” – look for ways to connect with people who share your experiences, interests and passions, and who encourage you and welcome you. This social interaction is one of the great intangible retirement benefits.

Warmest Regards,

april-signature

Citations.

1 – ssa.gov/planners/lifeexpectancy.htm [2/6/14]
2 – investopedia.com/terms/r/ruleof72.asp [2/6/14]
3 – tinyurl.com/m8akefj [2/3/14]

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Why Does Family Wealth Fade Away?

A lack of vision is often the answer to that question.

Many are the stories of family wealth lost. In the late 19th century, industrial tycoon Cornelius Vanderbilt amassed the equivalent of $100 billion in today’s dollars – but when 120 of his descendants met at a family gathering in 1973, there were no millionaires among them.1

Barbara Woolworth Hutton – daughter of the founder of E.F. Hutton & Company, heiress to the Woolworth’s five-and-dime empire – inherited $900 million in inflation-adjusted dollars but passed away nearly penniless (her reputed net worth at death was $3,500).1,2

Why do stories like these happen? Why, as the Wall Street Journal notes, does an average of  70% of family wealth erode in the hands of the next generation, and an average of 90% of it in the hands of the generation thereafter? And why, as the Family Business Institute notes, do only 3% of family businesses survive past the third generation?1,3

Lost family wealth can be linked to economic, medical and psychological factors, even changes in an industry or simple fate. Yet inherited wealth may slip away due to a far less dramatic reason. 

What’s more valuable, money or knowledge? Having money is one thing; knowing how to make and keep it is another. Business owners naturally value control, but at times they make the mistake of valuing it too much – being in control becomes more of a priority than sharing practical knowledge, ideas or a financial stake with the next generation. Or, maybe there simply isn’t enough time in a business owner’s 60-hour workweek to convey the know-how or determine an outcome that makes sense for two generations.  A good succession planner can help a family business deal with these concerns.

As a long-term direction is set for the family business, one should also be set for family money. Much has been written about baby boomers being on the receiving end of the greatest generational wealth transfer in history – a total of roughly $7.6 trillion, according to the Wall Street Journal – but so far, young boomers are only saving about $0.50 of each $1 they inherit. If adult children grow up with a lot of money, they may also easily slip into a habit if spending beyond their means, or acting on entrepreneurial whims without the knowledge or boots-on-the-ground business acumen of mom and dad. According to online legal service Rocket Lawyer, 41% of baby boomers (Americans now aged 50-68) have no will. Wills are a necessity, and trusts are useful as well, especially when wealth stands a chance of going to minors.1,4   

Vision matters. When family members agree about the value and purpose of family wealth – what wealth means to them, what it should accomplish, how it should be maintained and grown for the future – that shared vision can be expressed in a coherent legacy plan, which can serve as a kind of compass.

After all, estate planning encompasses much more than strategies for wealth transfer, tax deferral and legal tax avoidance. It is also about conveying knowledge – and values. In the long run, nothing may help family wealth more.

Warmest Regards,

 april-signature

 

Citations.

1 – tinyurl.com/qblyk6v [3/8/13]

2 – investorplace.com/2013/08/woolworths-heiress-outspent-a-near-billion-dollar-fortune-died-penniless/#.Us8-D7SLXs8 [8/2/13]

3 – fa-mag.com/news/why-wealth-disappears-8227.html [9/7/11]

4 – forbes.com/sites/lawrencelight/2013/11/22/how-to-inherit-wealth-without-screwing-up/ [11/22/13]

  

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It Isn’t Too Late to Save for Retirement

If you’re 40 or 50 and haven’t begun, you must make the effort.

 Some people start saving for retirement at 20, 25, or 30. Others start later, and while their accumulated assets will have fewer years of compounding to benefit from, that shouldn’t discourage them to the point of doing nothing.   

If you need to play catch-up, here are some retirement savings principles to keep in mind. First of all, keep a positive outlook. Believe in the validity of your effort. Know that you are doing something good for yourself and your future, and keep at it.

Starting later means saving more – much more. That’s reality; that’s math. When you have 15 or 20 years until your envisioned retirement instead of 30 or 40, you’ve got to sock away money for retirement in comparatively greater proportions. The good news is that you won’t be retiring strictly on those contributions; in large part, you will be retiring on the earnings generated by that pool of invested assets.      

How much more do you need to save? A ballpark example: Marisa, a pre-retiree, has zero retirement savings at age 45 and dedicates herself to doing something about it. She decides to save $500 each month for retirement. After 20 years of doing that month after month, and with her retirement account yielding 6% a year, Marisa winds up with about $225,000 at age 65.1

After 65, Marisa would probably realize about $10,000 a year in inflation-adjusted retirement income from that $225,000 in invested retirement savings. Would that and Social Security be enough? Probably not. Admittedly, this is better than nothing. Moreover, her retirement account(s) might average better than a 6% return across 20 years.1

The math doesn’t lie, and the message is clear: Marisa needs to save more than $6,000 a year for retirement. Practically speaking, that means she should also exploit vehicles which allow her to do that. In 2014, you can put up to $5,500 in an IRA, $6,500 if you are 50 or older – but you can sock away up to $17,500 next year in a 401(k), 403(b), Thrift Savings Plan and most 457 plans, which all have a maximum contribution limit of $23,000 for those 50 and older.2

If Marisa is self-employed (and a sole proprietor), she can establish a solo 401(k) or a SEP-IRA. The yearly contribution limits are much higher for these plans. If Marisa’s 2013 net earnings from self-employment (after earnings are reduced by one-half of self-employment tax) work out to $50,000, she can put an employer contribution of up to $10,000 in a SEP-IRA. (She must also make similar percentage contributions for all “covered” employees, excepting her spouse, under the SEP IRA plan.) As a sole proprietor, Marisa may also make a combined employer-employee contribution of up to $33,000 to a solo 401(k) this year, and if she combines a defined benefit plan with a solo 401(k), the limit rises to $47,400. If her 2013 net earnings from self-employment come out to $150,000, she can make an employer contribution of as much as $30,000 to a SEP-IRA, a combined employee salary deferral contribution and employer profit sharing contribution of up to $53,000 to a solo 401(k), and contribute up to $96,300 toward her retirement through via the combination of the solo 401(k) and defined benefit plan.3 

How do you save more? As you are likely nearing your peak earnings years, it may be easier than you initially assume. One helpful step is to reduce some of the lifestyle costs you incur: cable TV, lease payments, and so forth. Reducing debt helps: every reduced credit card balance or paid-off loan frees up more cash. Selling things helps – a car, a boat, a house, collectibles. Whatever money they generate for you can be assigned to your retirement savings effort.

Consistency is more important than yield. When you get a late start on retirement saving, you naturally want solid returns on your investments every year – yet you shouldn’t become fixated on the return alone. A dogged pursuit of double-digit returns may expose you to considerable market risk (and the potential for big losses in a downturn). Diversification is always important, increasingly so when you can’t afford to lose a big portion of what you have saved. So is tax efficiency. You will also want to watch account fees.

If you start saving for retirement at 50, your retirement savings will likely double (at least) by age 65 thanks to consistent inflows of new money, decent yields and compounding.4

What if you amass a big nest egg & still face a shortfall? Maybe you can reduce expenses in retirement by moving to another city or state (or even another country). Maybe you can broaden your skill set and make yourself employable in another way (which also might help you before you reach traditional retirement age if you find yourself in a declining industry).

If you haven’t begun to save for retirement by your mid-40s, you have probably heard a few warnings and wake-up calls. Unless you are independently wealthy or anticipate being so someday, the truth of the matter is…

If you haven’t started saving for retirement, you need to do something to save your retirement.

That may sound harsh or scary, but without a nest egg, your vision of a comfortable future is in jeopardy. You can’t retire on hope and you don’t want to rely on Social Security, relatives or social services agencies for your well-being when you are elderly.

Warmest Regards,

april-signature

 

 

 

Citations.

1 – money.cnn.com/2012/08/15/pf/expert/late-start-retirement.moneymag/ [8/15/13]

2 – irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014 [11/4/13]

3 – forbes.com/sites/ashleaebeling/2013/11/01/retirement-savings-for-the-self-employed/ [11/1/13]

4 – forbes.com/sites/mitchelltuchman/2013/11/21/financial-planning-for-late-starters-in-five-steps/ [11/21/13]

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Dividend Reinvestment & Compound Interest

Their combined power must be recognized & appreciated.

Why reroute dividends back into your investments? Isn’t taking the income the preferred outcome when a dividend is produced?

Retirees and pre-retirees are eager for dividend income in this era of historically low interest rates. Even so, the choice to buy more shares has merit for the long run.

Reinvestment & compounding may have profoundly positive effects. As a hypothetical example, let’s say you own 100 shares of a stock with a $10 share price. For the sake of mathematical convenience, let’s say that this stock maintains that share price while providing you with a 3% annual dividend. That 3% payment breaks down to a 0.75% quarterly dividend ($7.50 per quarter going to you). You choose to reinvest these payouts, buying more shares each quarter. So after one quarter, you own 100.75 shares of that stock (valued at $1,007.50), and a year later, you own 103.034 shares (valued at $1,030.34). Your annual yield effectively improved from 3% to 3.34%.1

That’s after one year. The big picture, even with such a simple example, is easily grasped here. While past performance is no indicator of future results, some recent stock market history illuminates the power of dividend reinvestment and compounding further.

Bears reference the “lost decade” of the 2000s, but dividend trends from that era certainly put stock market investing in a more positive light. Even with the 2000-02 bear market and 2008 downturn, S&P 500 firms increased their dividends by an average of 5.46% in a 10-year stretch that witnessed both those market setbacks. In the same ten-year period, DJIA companies boosted their dividends by an average of 7.07% per year, while NASDAQ firms bumped up theirs by an annual average of 45.38%! If an investor put $100,000 into a hypothetical investment that performed similarly to the DJIA on January 1, 2000, simple price appreciation would have taken its value north to more than $105,000 by January 1, 2012. Yet across the same 12 market years, that hypothetical $100,000 invested with dividends would have grown to approximately $141,000 by the start of 2012.2

Over 80% of S&P 500 firms pay dividends. In September 2013, 83% of stocks in the index were issuing dividend payments – the most in 15 years – with dividends from 99 firms at 3% or better. Some firms paid them out even as they lost money.3,4

Think about DRIPs. About 1,000 publicly traded firms offer dividend reinvestment plans (DRIPs), and you can get into them for the price of a single share. DRIPs let you buy partial shares using your reinvested dividends – often without a fee. (You can also open a DRIP using a broker, but commissions and transfer charges may apply.) This is really another form of dollar cost averaging – slow and steady investment with the potential for a considerable long-term benefit. Multiple DRIPs mean multiple 1099s and some shareholders lose track of DRIPs over time, but they offer you a nice way to broaden your portfolio.5

Do you work for a big company that offers a DRIP? While you expose your portfolio to too much risk by assigning too much of it to one company’s stock, the reinvestment and compounding potential of a no-fee DRIP certainly warrants your attention.

Here is another hypothetical example. Say you go to work for the Rewarding Corporation and you invest an initial $1,000 in its employee DRIP, buying 100 shares at that price. You make $100 monthly contributions to the drip for the next 20 years while the shares appreciate 5% annually over that period and the dividend yield averages 2.3%. (We’ll factor in unchanging capital gains tax rates of 15% as well.) Twenty years later, your investment grows to $52,790.80. If your consistent monthly contribution to the DRIP is $250 rather than $100, you end up with $126,221.11 under the same conditions.6

Keep investing consistently, with compounding & reinvestment in mind. It may make a huge financial difference for you over time – a difference that might even let you retire earlier instead of later.

Warmest Regards,

april-signature 

 

Citations.

1 – beta.fool.com/cacody/2012/09/02/compound-interest-the-8th-wonder-of-the-world/10945/ [9/2/13]

2 – tinyurl.com/pftknyj [3/26/13]

3 – factset.com/dividend [9/16/13]

4 – 247wallst.com/special-report/2013/10/02/the-highest-yielding-dividends-that-are-safe-to-hold/ [10/2/13]

5 – consumerreports.org/cro/money/personal-investing/drip-your-way-to-growth/overview/index.htm [10/11]

6 – hughchou.org/calc/drip.php [10/17/13]

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Money Matters

For many of us, money seems like a grown-up topic that we can put off until our kids are, well, grown-ups. When they see parents arguing about money, parents tell them it isn’t a big deal. When they ask for something, parents try to get it for them—without mentioning how much it will cost.  It’s easy to send messages that confuse our kids, but it doesn’t have to be this way.

 

Read the stories of five families struggling with the all-too-common kids’ money lessons … and how they can turn their mistakes around.

Click Here to read: 5 Money Mistakes Parents Make … and How to Fix Them

Warmest Regards,

april-signature

 

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Cash Flow Management

An underappreciated fundamental in financial planning.

You’ve probably heard the saying that “cash is king,” and whether you own a business or not, it is a truth that applies. Most discussions of business and personal “financial planning” involve tomorrow’s goals, but those goals may not be realized without attention to cash flow today.

Management of available cash flow is a key in any kind of financial planning. Ignore it, and you may inadvertently sabotage your efforts to grow your company or build personal wealth.

Cash flow statements are important for any small business. They can reveal so much to the owner(s) and/or CFO, because as they track inflows and outflows, they bring non-cash items and expenditures to light. They denote your sources and uses of cash, per month and per year. Income statements and P&L statements may provide inadequate clues about that, even though they help you forecast cash flow trends. 

Cash flow statements can tell you what P&L statements won’t. Are you profitable, but cash-poor? If your company is growing by leaps and bounds, that can happen. Are you personally taking too much cash out of the business and unintentionally letting your growth company morph into a lifestyle company? Are your receivables getting out of hand? Is inventory growth a concern? If you’ve arranged a loan, how much is your principal payment each month and to what degree is that eating up cash in your business? How much money are you spending on capital equipment?

A good CFS tracks your operating, investing and financing activities. Hopefully, the sum of these activities results in a positive number at the bottom of the CFS. If not, the business may need to change to survive.

In what ways can a small business improve cash flow management? There are some fairly simple ways to do it, and your CFS can typically identify the factors that may be sapping your cash flow. You may find that your suppliers or vendors are too costly; maybe you can negotiate (or even barter) with them. Like many companies, you may find your cash flow surges during some quarters or seasons of the year and wanes during others. What steps could you take to improve it outside of the peak season or quarter?

What kind of recurring, predictable sales can your business generate? You might want to work on the art of continuity sales – turning your customers into something like subscribers to your services. Perhaps price points need adjusting. As for lingering receivables, swiftly preparing and delivering invoices tends to speed up cash collection. Another way to get clients to pay faster: offer a slight discount if they pay up, say, within a week (and/or a slight penalty to those that don’t). Think about asking for some cash up front, before you go to work for a client or customer (if you don’t do this already).

While the Small Business Association states that only about 10% of entrepreneurs draw entirely on their credit cards for startup capital, there is still a temptation for an owner of a new venture to go out and get a high-limit business credit card. It might be better to shop for one with cash back possibilities or business rewards in mind. If your business isn’t set up to receive credit card payments, consider it – the potential for added cash flow could render the processing fees utterly trivial.1

How can a household better its cash flow? One quick way to do it is to lessen or reduce your fixed expenses, specifically loan and rent payments. Another step is to impose a ceiling on your variable expenses (ranging from food to entertainment), and you may also save some money in separating some or all those expenses from credit card use. Refinancing – if you can do it – and downsizing can certainly help. There are many, many free cash flow statement tools online where you can track family inflows and outflows. (Your outflows may include bugaboos like long-term service contracts and installment payment plans.) Selling things you don’t want can make you money in the short term; converting a hobby into an income source or business venture could help in the long term. 

Better cash flow boosts your potential to reach your financial goals. A positive cash flow can contribute to investment, compounding, savings – all the good things that tend to happen when you pay yourself first.

Warm Regards,

april-signature

 

Citations.

1 – smallbusinesscomputing.com/tipsforsmallbusiness/5-tips-for-a-smoother-small-business-cash-flow.html [11/19/12]