Easy Ways to Be an Economic Patriot

May 08, 2017

Are you looking to support the American economy by how you spend your money? If so, you’re not alone. About 80% of Americans would prefer to buy an American-made product, according to a 2015 Consumer Reports survey. In fact, six in ten people surveyed said they’d be willing to pay up to 10% more for a product if they knew it was American-made.

The problem is that in a global economy, it’s pretty challenging to easily discern what is American-made and what isn’t. Your computer or cell phone may bear the name of an American company but is manufactured entirely overseas. Conversely, your car or your ice cream may be produced in the United States by a foreign firm. Many goods are a hybrid of some components made overseas and some made in the U.S. So what’s a consumer who wants to express their economic patriotism to do?

Look for “Made in the USA” label

The lowest effort way to find out if something is made in the U.S. is to check the label or the box. According to the Federal Trade Commission, products with the label, “Made in the USA,” means that “all or virtually all, of the product has been made in America. That is, significant parts, processing and labor that go into the product must be of U.S. origin.”

The very first thing I do before deciding between competing products is look for that label. Remember, just because something has an American flag in the logo doesn’t mean it’s made in the U.S. See these guidelines from Consumer Reports on how to spot the real thing.

Buy goods made in the U.S. by global companies

That candy bar you crave might be manufactured in the United States by American workers for a global company. Many well-known brands have production and manufacturing in the United States, employing American workers and contributing to the local community and national economy. In fact, data from the Brookings Institute showed that as of 2014, 5.6 million Americans were employed by foreign-owned establishments – about 5% of the workforce. The easiest way to find out if a product from a foreign-owned firm is made in whole or in part in the U.S. is to check their website or do a quick Internet search of “where is ____ made?”

Shop small and shop local

Small businesses of less than 500 employees employ nearly half the American workforce (56.8 million employees). Every time you buy a birthday gift at an independently owned toy shop, buy your shoes at a local shoe store, or visit a local printer for party invitations, you’re contributing to your local economy and supporting local jobs. This past weekend, I was shopping for new hockey skates for my son, and I decided to buy them at a local shop instead of ordering them online.

Sure, online shopping is convenient, but my dollar doesn’t have as much power there. As it turned out, the hockey store was having a sale, and I ended up spending less money – and my son got a custom fit. If making an impact with your consumer purchases is important to you, there’s no place like home to do it.

 

Can you think of more ways consumers can be economic patriots? Please email me at [email protected]. You can also follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

 

What Does Self Storage Really Cost You?

May 01, 2017

My husband and nine year old son have a new favorite television show: Storage Wars. They love watching the quirky, somewhat foul-mouthed cast of characters bid at auction for the contents of abandoned storage lockers. My guys focus on the contents of the lockers and discuss whether or not they are worth purchasing but not me. When I watch with them, I can’t help but think of the original owners of all those unused possessions and what prompted them to keep so many belongings in storage.

Most of the lockers featured on the show are full of everyday household items and furniture. The storage facility has taken possession of the unit when the original owner did not pay their monthly bill. Why did the owner rent the storage unit in the first place?

Common reasons for renting a storage unit include relocation, divorce, dislocation, military deployment and death – and increasingly, just having too much stuff. According to a Self Storage Association fact sheet, nearly one in ten (9.5%) American households rent a storage space, with about 1 in 3 renters saying they will rent for two years or longer. Even more surprising, 65% of renters have a garage, 47% have an attic and 33% have a basement at home. What is the true cost of renting that space to store all that extra stuff?

Let’s take a simple example: Taylor, age 35, recently redecorated her home, but isn’t sure she wants to get rid of her old furnishings. Her belongings have sentimental value, but they aren’t worth that much – about $2,000 – and aren’t expected to increase in value. She rents a 5’ x 10” unit for $85 per month and moves her furniture and some old toys and books, artwork and party ware into it. Assuming the rental cost of the unit goes up with inflation (estimated at 3% annually) and Taylor keeps the storage unit for 10 years, she’ll pay over $11,000 over the total period to hold on to her $2,000 worth of stuff for ten years.

What if Taylor had sold her old furniture online or at a garage sale but she only netted $1,000? Instead of paying storage costs, she used the proceeds to set up a Roth IRA and invested in a diversified, low fee mutual fund. Every month, Taylor had $85 transferred from her checking account into the Roth IRA and bought more shares of the mutual fund. Over a ten year period, the mutual fund’s average annual return was 6%. Her Roth IRA would be worth $15,235. If she kept doing what she was doing, by the time Taylor was 65 it the Roth would be worth $86,383.

Think about it. Which sounds better to you – paying over $1,000 a year to store your excess stuff or having an extra $86,000 in tax free money in retirement? Now that’s a storage war.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can also follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

 

Does a Money Market Fund Make Sense for You?

April 24, 2017

Are you looking for a stable value investment with easy access to your cash when you need it but a higher return than leaving your money in a checking or savings account? A money market fund could be a good fit. Here are some things to consider.

What is a Money Market Fund?

While a money market fund is often referred to as a “cash equivalent” because of its low risk profile, a money market fund is not cash. It’s actually a mutual fund which invests in very short term, low risk debt securities such as treasury bills, the debt of various government agencies, and “commercial paper” (short-term corporate IOUs). The investment objective of a money market fund is to earn interest for its shareholders while maintaining a stable net asset value (NAV) of $1 per share. The value of these short-term investments rarely fluctuates, which is why they’re considered almost as good as cash. But since they’re not cash, money market mutual funds yield a slightly higher return than savings accounts or money market accounts.

When to Use a Money Market Fund

The benefits of money market mutual funds — safety, liquidity and a higher yield on “cash-equivalent” savings — make them attractive to many savers with differing goals. Here are some common uses for money market funds:

  • For an emergency fund – A money market fund can be a low risk place to keep 3-6 months of expenses. Make sure you choose one that doesn’t have a penalty for redeeming shares.
  • For cash management – Many financial institutions offer money market accounts with cash management privileges, where unused cash balances are swept into a linked money market fund and shares are redeemed to pay a check, debit card or ATM withdrawal.
  • To save for short term goals like a home down payment – Money you know you will need relatively soon shouldn’t be subject to the volatility of the stock or bond markets.
  • As a parking place between investments – If you sell an investment, you can park the proceeds from the sale in a money market fund while you research other investment options.
  • To balance the asset allocation of your portfolio – Many investment strategists recommend that a portion of any investor’s portfolio remain in “cash,” available to take advantage of opportunities that come up in the stock and bond markets.

When Not to Use a Money Market Fund

A money market fund is considered a short term, cash-type investment. That’s great for your emergency fund but may not be the best place for retirement savings that you don’t plan to access for decades. If you’re not sure what the mix of stocks, bonds and cash (such as money market funds) should be in your portfolio, download this Risk Tolerance and Asset Allocation Worksheet.

Types of Money Market Funds

There are differences among money market funds that make for variations in taxation, safety and yield. Savers with different goals will choose different funds. Money market funds, depending on their objective, can offer a taxable return or a full or partially tax-free yield, depending on what type of debt securities they hold in the fund..

What to Know Before Investing

Money market funds are not federally insured. However, most people consider the amount of extra risk in money market funds to be so minimal as to be easily offset by the slightly higher interest they earn. Fees on money market funds can vary, so do some research before you invest, including reading the fund’s prospectus.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

 

Should You Invest in an Equity-Indexed Annuity?

April 17, 2017

Should you consider investing in an annuity linked to stock market returns but with less risk than the stock market? I recently had a coaching session with an employee who had invested a lump sum distribution from a retirement account into an equity-indexed annuity. Did she make the right decision, she wondered, and should she add more to the annuity or diversify into something else?

Remind Me What an Annuity Is, Please!

An annuity is a contract between you and an insurance company in which the insurance company agrees to make periodic payments to you, starting immediately or at some future time, in return for payment from you, either in a lump sum now or over flexible installments over time. With a “fixed annuity,” the insurance company agrees to a fixed return and a fixed payment. With a “variable annuity,” the rate of return and the payment vary depending on the investment choices within the contract.

So What is an Equity-Indexed Annuity?

An equity indexed annuity is the lovechild of a fixed and a variable annuity. With an equity-indexed annuity (EIA), the insurance company will pay an interest rate linked to a stock market index if the market index is up, with a guaranteed minimum rate if the market is down. In the case of the employee I spoke with, she would earn an annual rate of return linked to the performance of the S&P 500 during the accumulation phase of the annuity, capped at 6%. If the S&P 500 index went down, her return would be 0% for that year.

Who is a Good Candidate for an Equity-Indexed Annuity?

The primary financial planning purpose of an annuity is to turn a sum of money into a stream of income you cannot outlive. An equity-indexed annuity makes the most sense for an investor who is a) looking to create a future fixed income in retirement and b) who is not comfortable with direct stock market risk but would like to participate partially in potential stock market returns. In the case of this employee, she was willing to accept a cap on returns of 6% in return for no loss of her investment if the market declined.

She was also within 10 years of retirement and much more concerned about maintaining the value of her savings than she was in generating out-sized returns. It’s important to have both fixed and flexible sources of income in retirement so ideally an investor would refrain from putting all their retirement savings into an annuity. I encouraged this employee to keep some of her retirement funds in her 401(k) and IRA so she would have a source of income to meet flexible expenses in retirement such as a big vacation, dental work or an unexpected home repair.

Who is Not a Good Candidate for an Equity-Indexed Annuity?

A more aggressive investor would not be comfortable capping returns at 6% – especially in a year when the S&P 500 index went up 20%. Plus annuities generally have high fees which can eat into investment performance. EIAs typically have high surrender charges during the first 8-10 years of the contract so once purchased, you’ve got a strong incentive to stay put.

The moderately aggressive to aggressive investor could consider accumulating savings in a diversified portfolio of low fee index funds. That investor could potentially build a larger nest egg and then purchase an immediate annuity at retirement with some of those savings if interested in turning them into a stream of income. Because of the higher fees, younger investors are also generally not good candidates for equity indexed annuities. Finally, an investor who doesn’t ever plan to turn their savings into retirement income is not a good candidate for an annuity.

Was it a Fit for Her?

Was an equity-indexed annuity a good fit for this employee? After weighing the pros and cons, her conclusion was “yes.” She was willing to trade upside potential in order to eliminate the risk of losing money.

She was planning to annuitize within ten years – turning her annuity into a stream of payments in retirement. Moreover, she had chosen a reputable insurance company with an A+ rating from A.M.Best. Although she was excited about the annuity return/risk profile, she decided it would be best to continue to keep some of her retirement money in her employer plan so she’d have some flexible sources of income to meet unexpected retirement expenses.

Do Your Homework

Annuities are very complex investments. Before signing on the dotted line, make sure you’ve read and understand all the provisions in the contract. If you are considering an equity-indexed annuity, start with this fact sheet from FINRA. Check out the financial strength of the issuing insurance company and make sure it has a high rating for its financial position. If possible, get an unbiased second opinion from a financial planner in your workplace financial wellness program or a fee-only CFP® professional.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

 

Meet Our Newest Planner: James Jacobucci

April 10, 2017

The newest member of our CERTIFIED FINANCIAL PLANNER™ team, Jim Jacobucci, CFP®, MBA, has always liked to save money. It’s one of the reasons he switched careers to financial planning from manufacturing. I asked Jim some questions about his money story, money and family life, and what it means to come to Financial Finesse:

What’s your personal mission? Who do you most want to help?  I most want to help people who generally do not have access to sound financial guidance. Those who have problems making ends meet each month or who have taken on high levels of credit card debt need help just as much, if not more, than anyone else. My mission is to provide sound guidance on how to navigate through everyday financial issues that are important to everyday people.

What’s your money story – what your parents taught you about money, etc.? Did you hold any negative beliefs about money that you had to overcome? For as far back as I can remember, I liked to save money. I’m not really sure why. When I was, say, 8 years old, I did not have a goal in mind to buy something specific, but I just liked to save what little money came my way.

I do not recall my parents teaching me specifically about money, but we were a middle class, single income family. When my dad was working, things were fine, but if he was laid off, things got pretty tight, pretty quickly. Maybe just experiencing this influenced me to save when I could.

What is the biggest mistake you ever made with your money, and what did you learn from it? The biggest financial mistake I ever made was not having an adequate emergency savings fund while I was going through a career change. I knew that my income would drop during this transition, but I did not properly plan for all scenarios. For a while, money was pretty tight until I gained some more traction in my new profession. What I learned from this is to always hope for the best but plan for the worst when it comes to making decisions that will have a long term financial impact.

What have you learned about money and marriage that you can teach the rest of us? I am very fortunate in that my wife and I are pretty much on the same page regarding our finances and how to prioritize. And therein lies a lesson learned. This may sound a bit too clinical, but I believe when you commit to spending the rest of your life with someone it just makes sense to be sure you have the same general philosophies when it comes to money.

My wife and I never really had in-depth money conversations before getting married, but you get a pretty good grasp on someone’s financial tendencies when you are spending time together. While dating someone, if I saw she was spending frivolously on luxury items at the expense of more practical things, that would have been a red flag for me. Not that she would be “wrong” in her spending choices, but having such a different outlook on spending compared to mine would present some challenges if we did get married.

How do you teach your kids about money? I try to explain to my kids why I am making the everyday choices that I am with regards to money. It started out at the grocery store when they were young.

If we were going to buy a gallon of ice cream, I would explain why I was buying the brand that I was. Was it on sale? If one brand is more expensive, is it worth spending that extra dollar on that brand or would it be wiser to spend that dollar somewhere else?

Now that they are a bit older, when it is time to make a purchase for my kids for say, new summer clothes, it is left up to them what to buy (as long as it is tasteful). They are given a budget of how much to spend, but it is up to them on how they spend it. My wife and I certainly provide some coaching along the way and help weigh the pros and cons of buying a designer item vs. a more run-of-the-mill item.

What do you think your generation does differently with money/attitudes about money? Being a Gen Xer, I think my generation sees money that is something that you need to work hard for, to earn. Put in an honest day’s work and get an honest day’s pay.

If you could wave a magic wand and reform financial services, what would you do? I am frustrated that those who need the most help, those who are really struggling to make ends meet, get the least help. One of the great things about delivering workplace financial wellness benefits is that we’re compensated and incentivized equally for offering financial guidance to an employee with a net worth of $10 or one with $10 million. This is the approach of Financial Finesse and why I love working here.

Tell me about your financial coaching philosophy? First and foremost, I respect every employee that I am coaching. They may be in a bad financial spot, but there are always reasons for getting to where they are.

Understanding those reasons, how they affected their finances, and what can be done to improve their financial wellness is what I strive to do. I never pass judgment on a person, regardless of their situation or how they got there. It’s my job to listen and understand and give employees the tools to make improvements.

Why did you want to earn your CFP® designation? What does it mean to you? There were three main reasons that I decided to pursue my CFP®: to broaden my knowledge base in tax and estate planning, to provide myself with a certain level of intellectual stimulation that was lacking in my job at the time and to give me the ability to help a wider range of people. To me, the CFP® designation represents an ongoing commitment to keep current on financial planning topics, which enables me to be in a position to help people make the right financial decisions.

Is there anything that really surprised you about coming to work at Financial Finesse? Why? The thing that surprised me the most about coming to work at Financial Finesse was all of the planners are deeply involved in the company in areas which impact how workplace financial wellness programs are designed and delivered. They are involved in many parts of the business – research, consulting, communications, recruiting and fact-checking. This is a great because the planners all have unique skill sets and experiences that are useful in multiple areas of the company.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

 

Quiz: Do You Get the Most Out of Your Benefits?

April 03, 2017

Today is Employee Benefits Day. How will you celebrate? Don’t worry. Celebrating Employee Benefits Day does not require you to make a special trip to the party store or spend a single dollar.

In fact, the best way to celebrate it is to recognize and appreciate the value of your employee benefits and to maximize them for your personal financial situation. Don’t know where to start? Take this quick quiz to test your benefits knowledge.

1) You have decided it’s time to prepare a will. Where might you most likely find links to basic estate planning tools?

a. The public library

b. Your employee assistance program (EAP)

c. Your retirement plan provider

d. The HR department

2) Next year you plan to get laser eye surgery to correct your vision. Where is the best place to save extra money pre-tax to pay for it?

a. A health savings account (HSA)

b. An employee stock purchase plan (ESPP)

c. A flexible spending account  (FSA)

d. A deferred compensation plan

3) Where you can save and invest for retirement so that the income after age 59 ½ will be tax-free?

a. Non-qualified stock options (NSOs)

b. Nowhere – there’s no such thing as tax-free retirement income

c. A cafeteria plan

d. A Roth 401(k)

4) During this year’s open enrollment, you choose a high deductible health plan (HDHP) because of the lower premiums. You have the option to save money pre-tax in an HSA to cover the deductible and a portion of out-of-pocket expenses. You should:

a. Skip the HSA. The point of choosing your health insurance was to save money.

b. Contribute no more than $1,000.

c. Contribute the maximum ($3,400 for an individual and $6,750 for a family in 2017). If you don’t need to use the money, you can roll it forward to future years.

d. Contribute no more than $1,500.

5) Taylor takes the train to work every day, Max drives and parks in the public garage and Jenna rides her bike. Who can use a pre-tax commuter benefits account offered by their employer?

a. Only Taylor. The point of pre-tax commuter benefits is to encourage employees to take public transportation.

b. Taylor and Max can contribute up to $255 per month in 2017, but not Jenna. There are no employer-sponsored bicycle benefits.

c. Everyone but contributions are from the employer only.

d. Taylor and Max can contribute up to $255 per month in 2017. Jenna can’t contribute pre-tax, but she can participate in her employer’s bicycle reimbursement program, for up to $20 per month in eligible expenses.

6) According to our recent financial wellness research, the single most important tool an employer can offer to boost employee retirement preparedness is:

a. A “bank at work” program

b. A retirement calculator

c. Incentive stock options (ISOs)

d. A target date fund

7) Which benefit replaces your income if you have an injury or illness which is not work-related?

a. Disability insurance

b. Long term care insurance

c. Workers compensation

d. Unemployment insurance

8) According to the 2016 Milliman Medical Index, what is the typical total cost for family coverage in an average employer-sponsored group health plan?

a. $25,826 for a preferred provider organization (PPO) plan

b. $6,742 for a health maintenance organization

c. $43,350 for a high deductible health plan (HDHP)

d. $15,003 for preferred provider organization (PPO)

9) Your employer will reimburse you up to $3,000 for an undergraduate course, a graduate course or a professional certification. How will the reimbursement be taxed?

a. Reimbursement for a professional certification will be taxed  but not reimbursement for college/university courses

b. Reimbursement for college/university courses will be taxed  but not reimbursement for professional certification

c. Tuition reimbursements are generally included in the employee’s taxable income

d. Tuition reimbursements of less than $5,250 are generally not included in the employee’s taxable income

10) What type of pre-tax benefit can you use to pay for after-school care expenses for your children?

a. Health savings account

b. None – after school care is not eligible for reimbursement

c. Education savings account

d. Dependent care flexible spending account

See the answers in italics below. How did you do? If you scored a 9 or higher, congratulations! Chances are that you see your employee benefits as an integral part of your overall compensation.

If you scored an 8 or lower, you may be leaving money on the table by not taking full advantage of everything your employer offers. If you have access to financial coaching via your workplace financial wellness program, consider setting up a time to talk to a planner about how you can fully maximize the value of your employee benefits. In addition, check out the blog posts for the rest of this week, which will focus on various aspects of your benefits.

Answers:  1 – b, 2 – c, 3 – d, 4 – c, 5 – d , 6 – b, 7 – a, 8 – a, 9 – d, 10 – d

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

Should You Take a Hardship Withdrawal?

March 27, 2017

If you are considering a hardship withdrawal, by definition you have a challenging, time-sensitive financial problem. You are probably feeling very worried and anxious about your situation. When money is tight, it is tempting to look to your retirement plan for resources to solve the problem.

Under certain limited circumstances, you may be able to access funds in your 401(k) or 403(b). However, just because you could withdraw funds doesn’t mean that you should do it. A hardship withdrawal should only be used as a last resort, in a truly urgent situation. Why?

It is expensive both now and later. You will pay income taxes on the amount you withdraw, as well as an additional 10% penalty if you are under age 59½. If the withdrawal is large, it could bump you up into a higher marginal income tax rate. Plus, you’re taking away funds which should grow to provide income in retirement for your future self. Here are some questions to help you to find the best choice for your situation:

1. Does this have to be paid right away?

Sometimes a need is urgent, very important and immediate. Some examples include preventing eviction or foreclosure, paying for medical treatment, or repairing your home after a natural disaster so you can live in it. In those cases, a hardship withdrawal for the amount of the need may be the only way you could stay in your home or get the care you or a family member needs. If the bill does not have to be paid all at once, such as a past-due medical expense or a home purchase you could defer, it may be better not to take a hardship withdrawal.

2. Do I have any other sources of funds?

Have you considered all your options? While your cash situation isn’t ideal, make sure you have thought about all things you could sell or places you could borrow from to raise funds:

  • Do you have any non-retirement investments you could liquidate such as stocks, bonds, or CDs even if it means you would take a loss?  Taking a loss on an investment is usually much less costly over the long run than withdrawing funds from your retirement plan.
  • Do you have a Roth IRA? If so, you can withdraw the contributions – but not the earnings – without taxes or penalty.
  • Can you borrow against your home equity or take a personal loan?
  • Do you have non-essential personal property you could sell to raise some cash? Some examples might include a second car, motorcycle, art, collectibles or jewelry.

3. Could you take a retirement plan loan?

Before deciding on a hardship withdrawal, explore taking a loan from your 401(k) or 4013(b). Many, but not all, employer-sponsored plans permit loans that allow you to borrow up to fifty percent of your vested balance up to a cap, whichever is less, for a one to five year period. Some plans also permit longer term loans for the purchase of a home.

The interest rate is usually low and paid into your own account, payments are deducted from your paycheck and it’s not reported to the credit bureaus. See here for situations when a retirement plan loan may make sense. A retirement plan loan has downsides, but they’re not as impactful as a hardship withdrawal.

4. Would the IRS consider your situation an allowed “hardship?”

A hardship is something that causes suffering or privation. The IRS allows hardship withdrawals from qualified retirement plans when the employee has immediate and heavy financial need, limited to certain:

  • Medical expenses incurred by you, your spouse or dependents
  • Payments to avoid eviction from or foreclosure of your primary residence
  • Post-secondary education expenses for you, your spouse, children or other dependents
  • Funeral expenses for you, your spouse, children or other dependents
  • Expenses to repair damage to your primary residence
  • Costs to purchase a primary residence

Note that credit-related needs such as satisfying payday loans, title loans or credit card debts are not covered under the definition, nor are tax bills or business expenses. See IRS guidelines here.

5. Are you taking out funds to purchase a home or pay tuition?

Finally, just because the IRS considers a home purchase or tuition payment a hardship does not mean it’s always wise to take a withdrawal for those reasons. A hardship withdrawal is meant for a true emergency. If the only way you can purchase a home is by taking a hardship withdrawal from your retirement plan for the down payment, you may not be financially ready yet to be a homeowner. As for tuition, consider exploring other options listed in #2 and #3 first, such as borrowing against your home equity or taking a retirement plan loan.

Once you’ve worked through these questions, if it seems like a hardship withdrawal is the best choice for you, know that you’ll have to go through an application process to move forward. You may be required to demonstrate heavy and immediate financial need, that you’ve considered a retirement plan loan but the payments would be burdensome, and that your financial need can’t be satisfied through other channels. Expect the process to take a few weeks.

If you do take a hardship distribution, you won’t be able to pay the money back and you may be precluded from contributing to your plan for six months. Your distribution will be included in your taxable income, plus you’ll pay an additional 10% penalty if you’re younger than 59 ½. If you have access, consider contacting your workplace financial wellness or employee assistance program for financial coaching, to help you put together a plan to manage your cash flow so you can get back on track.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

 

Why a Roth IRA is a Great Graduation Gift

March 20, 2017

Are you bored with giving your teenage child gift cards and electronics for presents? Do you have a graduation gift to offer but don’t just want to give cash? This year, instead of something they’ll spend right away, consider giving the teenager in your life a contribution to a Roth IRA.

A Roth IRA is an after-tax retirement account which can be used for much more than retirement. As long as the account has been open for at least 5 years, earnings and withdrawals are tax-free after age 59 ½.  Anyone who has earned income below certain limits ($118,000 for a single filer) can contribute the lesser of their total income or $5,500 in 2017.

Does your teenager work?

The key is that your teenager has to have earned income. A teenager with a part-time job could contribute their total earnings to a Roth. Gifts don’t count, but you and other friends and family can make gifts to your teenager to cover the allowable Roth contribution.

For example, if your teenager earned $1,500 working at a restaurant, she is eligible to contribute up to $1,500 to her Roth for that year. Remember — you can gift your teenager the money for the contribution, though. In fact, you could even write a check directly to their Roth account.

A W-2 from an employer is proof of income. However, if your teenager’s income comes from sources like babysitting or moving lawns, keep careful records of how much they’ve made. FYI, your teenager does not have to file a tax return in order to make a Roth IRA contribution but does need to keep a record of that contribution. If they have paid income taxes through payroll deduction, they may want to file, though.

Why give a teenager a retirement account?

1. Tax-free growth can help make them rich.

Let’s say you gift your teenager $500 for their Roth IRA as a high school graduation present. Those funds are invested in a diversified, low fee index fund which earns 8% per year. In fifty years, thanks to the value of compounding, that investment would be worth $23,451. (See calculation.)

Do that every year instead of giving a wrapped gift (or until they can take over contributing on their own). After 50 years, your $25,000 worth of gifts would be worth $310,336. (See calculation.) That’s much better than a new telephone, isn’t it?

2. They can withdraw contributions at any time without taxes or penalty.

A Roth IRA account holder can withdraw their original contributions – but not the growth – in their account at any time without taxes or penalty. If needed, they can withdraw those contributions later on to pay for graduate school, fund the down payment on a home, cover expenses while on maternity leave or even handle an emergency. The growth on the investments could stay in the account, continuing to grow tax-free for retirement. For more explanation of the withdrawal benefits, see this post.

3. It’s not counted on the FAFSA.

The Free Financial Application for Student Aid (FAFSA) does not consider a Roth IRA account as an asset the student (or a parent) is expected to spend. However, if your student takes a withdrawal of earnings from their Roth, those earnings are counted as income for the next year’s FAFSA. If you need to access earnings to pay college expenses, the key is to wait until the student’s final year to take the withdrawal. For more tips on how assets and income affect financial aid, see this blog post.

Are you convinced? The next step is to open a Roth IRA at a reputable, low fee financial services firm. (See suggestions here on how to choose one). If your teenager isn’t 18 yet, you’ll need to open the account for them. When your teenager is about to turn 18, make sure to share this guidance with them – and keep helping them contribute to their Roth IRA if you can!

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

 

Widowed? How Social Security Can Help

March 13, 2017

Spouses who lose a partner are faced with a myriad of financial decisions at a time when they feel least equipped to deal with them. What resources are available to you as a surviving spouse? For most Americans, available resources include Social Security.

If you are a worker’s widow or widower, you — and your minor children if you have them — may be eligible for Social Security Survivor benefits. According to the Social Security Administration’s guide to How Social Security Can Help You When a Family Member Dies, the first and most important step is to contact the SSA to make sure your family gets all the benefits for which you are eligible. Benefits are based on what the late worker paid into Social Security and for how long. You cannot file online for survivor benefits. The best way to get a specific benefit information is to contact your local Social Security office or call 1-800-772-1213.

If you are the surviving spouse

You may be eligible to receive monthly Social Security survivor benefits if you are:

  • A widow or widower age 60 or older
  • A disabled widow or widower age 50 or older (and the disability started before or within seven years of the worker’s death)
  • A widow or widower of any age caring for the deceased’s child who is under age 16 or disabled

If your late spouse had not yet filed for Social Security retirement benefits, your survivor payment will be based on what your late spouse would have received at full retirement age (FRA), adjusted for various factors, such as your age when you file. The survivor benefit is based on what your late spouse paid into the Social Security system as well as their age at death. The more they paid into Social Security, the higher your monthly benefit would be. See If You Are The Worker’s Widow Or Widower.

Retirement claiming strategies for survivors

When you retire, you are able to receive surviving spousal benefits or your own benefits (whichever is greater). You may only receive one benefit at a time, but there are strategies for maximizing what you receive. You may be able to claim survivor benefits at age 60, then switch to claiming based on your own work record at your full retirement age or later, up to age 70. If your benefit at full retirement age or later is greater than your survivor benefit, you would maximize your overall Social Security benefits by claiming survivor benefits early and deferring your own benefit until full retirement age.

However, if your spouse was a much higher earner than you, the reverse would make sense: claim Social Security retirement benefits at 62 based on your own earnings record and then claim survivor benefits later on when the benefit equals your late spouse’s FRA. If you are still working, you can claim survivor benefits but your earnings may reduce your total benefit amount. See this article for a more detailed description of claiming strategies.

Benefits for minor or disabled children

Unmarried, minor children of a worker may be eligible to receive Social Security survivors benefits:

  • An unmarried child of the deceased under age 18
  • An unmarried child of the deceased up to age 19 if he or she is a full-time student in an elementary or secondary school
  • A child of any age, who was disabled before age 22 and who remains disabled
  • A stepchild, grandchild or adopted child under certain circumstances

Surviving dependents of the deceased spouse may receive a monthly benefit of 75 percent of the deceased worker’s benefit amount. (See If You’re The Worker’s Minor Or Disabled Child.) There’s a cap on how much a family can receive in total between surviving spouse and children, generally 150 to 180 percent of the deceased spouse’s benefit amount.

If you are a surviving divorced spouse

If you were married to your ex-spouse for at least 10 years but are now divorced and have not remarried, your surviving spousal benefits are not affected by your divorce. If you are caring for your ex-spouse’s minor (under 16) or disabled child, you do not have to meet the “length of marriage” test. See If You’re The Worker’s Surviving Divorced Spouse for more information.

What if you remarry?

If you remarry after age 60 (age 50 if disabled) your remarriage will not affect your eligibility for Social Security survivors benefits. This also applies to surviving ex-spouses.

How to calculate your benefits

Use the benefit calculators on SSA.gov to estimate your Social Security benefits. See also Social Security Survivors Benefits Planner.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

What to Do If You Have a Life Insurance Claim

March 06, 2017

When someone you love passes away, the last thing you want to deal with is paperwork and bureaucracy. At a planner meeting recently, my fellow planner Cyrus Purnell, CFP®, MBA and I were discussing the guidance we would offer on how to navigate the process of settling a life insurance claim. Here’s what we had to say.

Are you a beneficiary?

In the event of the death of a loved one, it is necessary to determine if you are the beneficiary of any insurance policies. If you are named as a beneficiary, collecting the funds can occur in a timely manner but you have to be proactive in order to get your payout.

Find the life insurance company or insurance agent’s name

The policy can be looked up if you know the name of the company. If you are not sure of the name of the insurance company, you may be able to track it down by locating the agent.

Supply the death certificate

You will need to supply either an original death certificate or a certified copy when you submit your claim.

Complete the claim paperwork

Contact the insurer to get the proper paperwork. If the policy was purchased from an agent, they may be able to help you with the paperwork. Typical claim forms ask for basic details about you and the deceased person and how you would like to be paid.

Choose how to receive your benefit

You can choose to receive your benefit in the form of a lump sum if you have specific goals for the money or if you want total investment control. You can also receive the benefit in installments over time if you prefer a check coming in on a regular basis. There are generally four methods in which the installments can be paid.

  • Fixed period: The insurer makes regular payments on the principal and interest for a designated period of time.
  • Fixed amount: The insurer pays a defined amount at regular intervals until the principal and interest are exhausted.
  • Life income: The payout gets converted into an annuity that provides regular payments for the rest of your life.
  • Interest payments: The insurer pays you regular interest on the balance. The principal may then go to your estate upon your death. Rules on your ability to withdraw the principal may vary so check with your insurance company.

Submit the paperwork

Insurers generally pay life insurance claims within a week or two of receiving the paperwork.

Make Sure There Are No Other Life Insurance Polices Outstanding

There are millions of dollars of unclaimed life insurance benefits. One reason is coverage can go unnoticed. If a spouse or family member passes away, take the time to look for coverage from the following areas:

Individually owned life insurance policies- If you know that your spouse or family member owned an individual policy and you can’t find it, call his or her insurance agent or company to check. It may be wise to review canceled checks to see if you can locate any premium payments to insurance companies.

Group life insurance policies- Group insurance policies may be issued through an employer, bank, credit agency, or other professional or social organizations. Because the group holds the actual policy, the insured person receives a certificate of insurance as proof that he or she is insured. Look for these certificates in your spouse’s or family member’s personal papers, files, and safe-deposit box.

Employer-based group life insurance- In addition to group life insurance from the employer, the deceased may have purchased voluntary coverage. You should check his or her pay stubs and call his or her employer.

Accidental death and dismemberment policy- These policies pay benefits if an insured individual dies accidentally. If your spouse or family member died accidentally, look for such a policy in his or her files or contact his or her employer, bank, credit card issuer, or insurance company.

Mortgage life and credit insurance- Banks and finance companies routinely offer credit life insurance when insurance will pay off the outstanding balance of a loan or account if the insured individual dies. Check with credit card companies, banks, or any other lenders to whom your family member owed money at the time of his or her death.

Social Security benefits– Spouses, former spouses, and minor or disabled children of a deceased person may also be entitled to survivor benefits from the Social Security Administration.

A death in the family can be traumatic, both emotionally and financially. While it won’t solve everything, don’t leave money on the table. Make sure you get what you’re owed.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

What Are Your Health Insurance Options When Retiring Early?

February 20, 2017

Are you considering retiring before age 65 but worried you could lose your access to health insurance due to the new administration’s promise to repeal the Affordable Care Act? There’s a lot up in the air right now, and it’s going to take some time to play out in Congress. Health insurance is expensive, and health care costs are likely to comprise a large chunk of your retirement spending.

Up until now, if you are like most Americans, you have participated in a group health plan with your employer subsidizing the cost. With family coverage, the typical full cost of coverage is over $18,000 per year. If you retire early, you’ll need to find and pay for new health care coverage until you are age 65 and can participate in Medicare. Here are some strategies for making wise decisions in the face of increasing uncertainty about health insurance access and costs.

Don’t Panic

It may feel like the earth is being demolished to make room for an intergalactic freeway, but don’t panic.  The health insurance landscape could look a lot different next year than it does now – or it may not. We don’t know very much for sure except that there is uncertainty.

Under those circumstances, it’s helpful to plan for multiple scenarios: health insurance costs more and/or is harder to obtain, waiting periods for pre-existing conditions could be reinstated, or the major provisions of the ACA are not repealed. Prepare an early retirement budget which reflects your projected health insurance costs under each of these scenarios. Remember – you only need to model the changes through age 65, when Medicare kicks in.

Build up your HSA – and don’t spend it

If you are currently covered by a high deductible health plan (HDHP) with a health savings account (HSA), build up your balance as much as you can. Contribute the maximum to your HSA between now and your retirement date. Those with individual coverage can contribute a maximum of $3,400 and those with family coverage can contribute a maximum of $6,750 for 2017. If you are 55 or older, you may contribute an additional $1,000.

Once you’ve contributed those funds, if possible – don’t spend them. Use other available cash reserves to pay for your routine expenses up to the deductible. After you have built a balance greater than your out-of-pocket maximum for the year, consider investing the remainder.

For those retiring early, keep as much of your HSA balance as possible to pay for eligible medical expenses after you retire, including COBRA premiums (see below) as an early retiree and Medicare Parts B, D and Medicare Advantage after age 65. For IRS guidelines on HSAs see here. For more ideas on maximizing your HSA see here.

Increase your cash reserves

The years leading up to an early retirement are a great time to power up your cash reserves.  Work towards building short term liquid savings such as a savings account, money market fund, short duration CDs or Treasury Bills equal to several years’ worth of projected maximum out-of-pocket health care costs.

Look for part-time work with access to health care benefits

Many early retirees have discovered that the key to managing health care costs in retirement is to work part-time. Ask yourself if it makes sense to look for part-time work through age 65, either with your existing company or another, such as these companies who offer insurance coverage to their part-time employees. You will probably have to cover all or most of the cost of your health insurance. However, participation in a group plan may offer more comprehensive coverage. It also isn’t going to hurt to have some extra money coming in the door during the early retirement years to help pay health care costs.

Consider COBRA

When you retire, you may continue your group coverage under COBRA for 18 months, paying the full premium yourself (or with retiree health plan dollars if you are fortunate enough to have a retiree health plan). As mentioned above, if you have funds in your health savings account (HSA), you can use them to pay for insurance premiums for health care continuation coverage through COBRA. Your coverage continues during the same period, and you won’t have to change providers or get used to a new procedure for submitting claims. Be aware: there will be some sticker shock as you begin to pay the entire cost of your health insurance premium.

If you have a pre-existing condition and are retiring within 18 months of when you’ll be 65, COBRA is likely to be your best option in this age of uncertainty.  As long as you pay your premiums, you’ll remain covered up until you’re eligible for Medicare. Even if you don’t have a pre-existing condition, choosing COBRA still gives you a little breathing room to figure out your next steps for insurance once it’s clear what happens to the ACA.

Price coverage on the private market

If you are in good health, consider pricing your options in the private insurance marketplace. The younger your early retirement begins, the more it could make sense to shop around for the right insurance. The private market offers a wider range of options. Compare plans and prices by using online marketplaces such as ehealthinsurance.com or gohealthinsurance.com or working directly with an insurance broker. Even if you are considering coverage under COBRA or the Affordable Care Act, it’s a good idea to shop around and compare.

Take your chances now with the ACA

The Affordable Care Act is still the current law and the infrastructure which allows consumers to buy insurance is still firmly in place. If you are planning to retire soon, you may consider applying for coverage under the ACA and comparing plans to COBRA and what you found through the private market. Even if you retire outside of the open enrollment period, losing your employer-provided coverage is a qualifying event. Start at Healthcare.gov to see what is available in your state.

Depending on your new family income after early retirement, you may qualify for a subsidy of your insurance premiums. However, that is something which could change quickly, so it’s best not to count on it. In any case, you cannot be turned down for coverage. There are many advantages to the ACA for early retirees if the law remains the same or amended: cost savings, universal access, subsidies for lower income participants, etc. The biggest disadvantage right now for early retirees in buying insurance is not knowing whether the same or similar coverage will be available if the law is repealed.

In conclusion, for those considering early retirement, the uncertainty about what’s going to happen to the Affordable Care Act has added a layer of complexity to pre-retirement preparations. For some employees, they may decide it’s best to delay their planned early retirements until there is more clarity about what happens next. For others, they may choose to forge ahead, hopefully with bigger balances in their HSAs and savings accounts to help manage the risk that comes along with this uncertainty. If you have strong opinions about the ACA and what Congress and the President should do next, you can find information about how to contact them here.

 

Do you have a question you’d like answered in this column? Please email me at [email protected]. You can follow me on our Financial Finesse blog by signing up here, and on Twitter@cynthiameyer_FF.

Questions Your Future Self Wants to Ask You

February 13, 2017

Have you spoken to your future self lately? According to UCLA Professor Hal Hershfield, we often feel disconnected from the people we will become in the future. In essence, our future selves are strangers to us. Envisioning ourselves in the future, says Hershfield, helps us save more money and make better financial decisions.

In Hershfield’s research, participants were shown computer-aged avatars of their current selves. Then they were asked to make a choice of how to spend $1,000: buying a gift for a friend/family member, investing in a retirement fund, planning a fun event, or saving money at the bank. Participants who had seen the vivid digital image of their future selves were twice as likely to put money into the retirement fund.

I am guessing that if you had a conversation with Future You right now, he or she might have some pretty challenging questions for you. Here are some things Future You might ask you. How would you answer?

  • Have I turned out the way you thought I would?
  • How did you manage to save so much for retirement? Tell me how you did it.
  • I’ve got more money now than I need to live comfortably. How should I put it to the best use?
  • That was a great investment! Tell me how you chose it.
  • Who was your financial role model?
  • How did you decide to choose our career?

Future You could also have some recriminations, such as:

  • When are you going to pay me back all the money you borrowed from me?
  • Were those student loans worth it?
  • He/she didn’t turn out to be a great financial life partner. What were you thinking?
  • You spent that much on shoes/cocktails/gambling? Why?!!

Does having a frank conversation with your future self sound like just the thing you need to get you motivated to change your financial behaviors? Hershfield’s digital avatar creator isn’t available for public use. However, you can create an aged photo of yourself with age progression apps such as In 20 Years, Age Me, or Hour Face.

The Future Self in my blog photo? That’s our CEO’s son Jay, age 7, who is envisioning himself at 100. You know he’ll make some great financial decisions. Will you?

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

Should You Use an Escrow Service?

February 06, 2017

If you are taking out a mortgage for the first time, one of the important decisions you’ll face is whether or not to establish an escrow account. My colleague Cyrus Purnell, CFP® and I were discussing this recently. Here’s what we decided are the essential FAQs for homeowners:

What is a mortgage escrow service?

An escrow account, in the case of a mortgage, functions as a middleman between a homeowner, tax entities, insurance companies, and anyone else whom the homeowner designates to pay with the funds saved in it. It is typically a mandatory savings account attached to the larger mortgage payment. Mortgage escrow services are popular with mortgage lenders because they prevent foreclosures due to the lack of payment of property taxes.

Advantages and disadvantages

One of the major advantages of an escrow is convenience. Rather than making individual arrangements to separately save for property taxes and insurance, these expenses are included in one payment. It’s the same principle as automating your monthly bills and 401(k) plan savings. A mortgage escrow service offers you a way to save for large bills monthly. That way the money is already there when you need it.

Another benefit is that you may get a slight reduction in your mortgage rate for maintaining an escrow account. Escrow accounts can function as an unintentional buffer to reality as well. If property taxes or insurance rates go up, you may delay action to shop for less expensive coverage or dispute a property tax appraisal because the escrow covers it. The lender benefits by having an escrow in place for taxes and insurance because it protects against the risk of the collateral for their loan (your home) being auctioned off by the county if those expenses are not paid. It also reduces the uncertainty of the property not being insured against catastrophe.

However, when purchasing a home, the up-front funding for the escrow account can add several thousands to the closing costs. The escrow generally has to maintain a minimum balance, and if taxes and fees come in higher than estimated, your escrow payment may grow to replace that minimum balance. This can cause uncertainty for your housing budget year-to-year. Another disadvantage is that some escrow accounts do not earn the account holder any interest. If you have a substantial amount to pay in property taxes, imagine an account holding thousands of dollars earning no interest.

Whose responsibility is to pay the taxes and insurance?

It’s your lender’s responsibility to pay your taxes and insurance. Generally, that happens without a hitch. However, keep in mind that it’s your responsibility to make sure that it has been done. If the lender didn’t pay, you could experience a lien against your property for unpaid taxes and/or a cancellation of your homeowners’ insurance policy. You should receive an escrow statement at least once per year that shows what has been collected and paid out.

Problems do happen, luckily rarely. When we first bought our home in NJ, our supposedly reputable national mortgage lender collected funds in an escrow account but didn’t pay our property taxes. We got a past due notice from our town, and it took some sleuthing to discover what the lender had done or not done.

Our town assessor’s office was very helpful once they saw our escrow statement and gave us a grace period until we could get it worked out with the lender. Although the lender apologized for their mix-up, it won’t surprise you to learn that we refinanced with another lender soon after that. We haven’t had any problems since.

Can you avoid using an escrow service?

Yes, but not always. Some mortgages require escrow accounts, especially for first-time home buyers or home buyers putting less than 20% down. If you pay your home down below 80% loan-to-value, you may be able to request removal of the escrow account, but there may be a fee for doing so.

Keep in mind that the escrow is not in place to protect the lender only. If you choose not to escrow, you will need to be very confident in your ability to save for the property taxes separately. You may also want to look into having the insurance premiums auto-debited as well.

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

 

How to Have The Money Talk

January 30, 2017

Are you in a serious relationship, thinking about moving in together, engaged or even newly married?  If you are contemplating sharing a household together now or at some point in the future, there’s no better time than the present to discuss your finances.  “Your life partner can be your best financial friend or your worst financial enemy,” according to Financial Finesse CEO and author Liz Davidson.  Marriage is an emotional and spiritual partnership, but it’s also a legal financial relationship.  Money is the leading cause of stress in relationships, but it doesn’t have to be.  The foundation of any successful economic partnership, including living together or marriage, is strong communication with full financial disclosure.

Ground rules

The Money Talk can sometimes bring strong emotions to the surface, so choose a place to have your discussion that will be relaxing and free of distractions to both of you.  Choose a pleasant, neutral location where you have sufficient privacy.  Keep these ground rules in mind:

  • Make sure your discussion is scheduled for a time of day that works for both partners. My husband prefers to talk money and night and I prefer the morning. Over time, we’ve learned over time to bring up financial decisions during breaks in the work day, or on weekend days is best if we’ re going to have the most productive conversations.
  • No alcohol! While a glass of wine could give you courage to disclose your student loan balance, each partner should have their wits about them. It will much easier to listen compassionately without judgment if you are free of cocktails. Feel free to stash a bottle of champagne in the fridge for later to celebrate this milestone in your relationship.
  • Set a beginning and end time for your discussion. If you don’t finish everything, set up a follow up date.
  • Don’t judge. Your partner has a different money story and may have different values and financial priorities than you. Refrain from expressing opinions – think of this conversation as an exercise in  information-gathering.

What to discuss? Make sure that you’ve covered all your bases:

Tell each other your money stories

  • How did your parents handle money? What do you think of how they handled their finances? How did that impact you? If you’ve never thought through your money story, the book The Feel Rich Project, by Michael Kay, CFP® has some helpful chapters on how to assess your history.
  • How would you describe your financial personality? Are you a saver or a spender, or something in between? Do you like to plan carefully, or be more spontaneous? Do you collaborate, or prefer to decide independently? Are you more likely to be meet your own expectations or those of others? Consider using this framework for thinking about how you best create financial habits. If you want to dive deeper into the financial personality question, you can both take an online quiz here or here and compare notes.
  • What’s the biggest financial success you’ve had? What are the factors which contributed to it?
  • What’s the biggest financial failure you’ve had? What are the factors which contributed to it?
  • If you’ve been married or living together before, how did you handle money together? What worked, and what didn’t?

Take inventory – how much to you spend, what do you own and what do you owe?

Now that you’ve reviewed the emotional side of money, it’s time to get practical. Compare notes on your income and expenses:

Income

  • How much do you each make? Do you expect that to increase, decrease or stay the same in the short term?
  • Do you have other sources of income, such as rental property, business investments or trust income?

Expenses

  • How much and what are your “must pay” expenses every month – housing, transportation, insurance, child support, tuition, etc.
  • Do you track your expenses? What system do you use?

Assets

  • How much are you saving for retirement as a percentage of your income? How much have you saved so far in retirement accounts, such as 401(k) or 403(b), Roth and traditional IRAs?
  • If you own your home, what’s it worth approximately?
  • Do you have an emergency fund? How much do you have in cash reserves?
  • What other investments do you have?
  • Do you co-own any of your assets with someone else?

Debt

  • What is your mortgage balance, rate and remaining years to pay, if you have one?
  • How many credit cards do you have? Do any of them carry balances that don’t get paid off in full each month? How much?
  • Do you have outstanding student loans? Are they private or federal loans? Are you current on paying them?  Are you in a loan deferral or forbearance period?
  • If you have non-mortgage debt, do you have a plan for paying it off? By when?

Insurance

Financial wellness means that you are prepared for unexpected and expensive events, such as a major illness or car accident.

  • Do you have health insurance? What kind of health care benefits are available to you at work?
  • Do you have short and/or long term disability income insurance?
  • Discuss your auto insurance. Do you have the bare minimum coverage, or are more fully protected?

Show each other your credit reports

Now comes the hard part. Show each other your credit reports. For many couples, this is the most difficult part of the conversation. Remember, regardless of your credit history, transparency here is an act of love. If you are thinking about spending your lives together you’ll have an economic and financial partnership, not just a romantic one. Full disclosure is essential, especially for engaged and married couples, who will generally be held legally responsible for debts their spouse occurs during the marriage.

  • Access your free credit reports from the three major credit bureaus at annualcreditreport.com or share your report from any online credit monitoring service you use, such as Credit Karma or Credit Sesame.
  • Review and discuss any major items, such as bankruptcy, short sales, and a history of significant late payments or charged off accounts. Do you see evidence that your partner has good financial habits, or is working to develop them after a financial mishap?
  • If one partner has significantly better credit than the other, how will this impact how you manage money together?

What are your financial priorities and long term goals?

Once you’ve tackled the rough part of the conversation, you can head to the fun part!  A successful marriage begins with a shared vision. Ask each other:

  • If everything worked out exactly the way you wanted it to financially for us, what would that look like?
  • Where do you see us living now? In five years? In retirement?
  • If we plan to have children, do you think one of us should take a career break to raise them? For how long?
  • When would you like to be financially independent enough to have the option to retire?
  • Can you define “financial independence” for me?
  • What would happen if one of us got sick or laid off? How do you think we should handle it?
  • If one of you has children from a previous relationship, how do you plan to handle the costs of raising them, including sending them to college? See Financial Planning Tips for New Stepparents for ideas.
  • If one of you has significant debt, such as credit card balances or student loans, what is your target time to have them paid off completely?

Not a one-time event

Congratulations on getting through your first “Money Talk!” We hope this will be the first of many ongoing conversations about your joint finances. Marriage can teach you a lot about money.  Now that you’ve established a foundation of transparency, full disclosure and sharing your visions, set up regular “money meetings” to talk through ongoing financial business.  You’ll have a better personal – and financial – relationship for doing that.

Should You Move For a Job?

January 23, 2017

Have you received an interesting offer to live and work somewhere else? Moving to a new city can be very stressful, especially if it involves changing jobs or re-locating with an existing employer. While this stress can be heavy on the person dealing with the job change or transfer, it can also affect others.

Before you accept the move and start plotting your appearance on HGTV’s House Hunters, you and your family will have to work through some tricky decisions. That’s the scenario my fellow planner Brian Kelly, CFP® was discussing with an employee on our Financial Helpline recently. Here’s what he had to say:

1. Don’t base your decision solely on the new salary. Think about how far your income will go in the new city. If you are moving to a place where the cost of living is much higher, you might have to eventually answer this question: “Is the location worth it?” The answer to this question might just be “yes, it is worth it to live in a smaller house near the ocean or have to spend more in a town that has more amenities,” but this is a trade-off that you should be aware of. You will also want to consider new expenses you are not currently budgeting for such as traveling to visit family and babysitters.

2. Calculate your net pay after benefits. Employee benefits are now a large part of a person’s compensation. Taking a new job with a salary increase but weaker benefits can actually decrease your total compensation so factor these in. See this guide for calculating the value of your benefits.

3. Consider your spouse’s career too. Think about this in a longer term perspective. In 5 years, is our “team” going to be better off?

4. How does the move affect your children? Moving children can have effects on their education, their relationships and possibly their well being. Do some research on school systems and after-school care. This might impact your decision on where to buy or rent.

5. How does it affect your parents? Some grandparents’ retirement plans center around time with their children and grandchildren. Others will need elderly care. You might need an extra bedroom in your new home.

6. Should you purchase a home right away or is it wise to rent for a certain time period? Purchasing a home is a major financial decision. The closing costs alone can make a short-term home buying decision a bad one if you have to sell before the house appreciates in value.

7. Lastly, you have to consider the real possibility that it doesn’t work out, for whatever reason, and have a plan B. Companies fail, managers can be impossible to work with, the job doesn’t turn out how you thought it would, parents get sick, or you just miss home.  In that case, have a backup plan.

Checklist of things to do:

  • Create a side-by-side budget with current and new income and expenses. Factor in cost-of-living and benefit changes.
  • Have a family meeting with spouse, children and/or parents to discuss how the potential move will affect them.
  • Visit before you make the final decision. See the new work facility, meet and interview people you will work with and check out schools and areas where you might want to live.
  • Research school districts and after-care if necessary.
  • Compare the costs of renting and buying a home. Consider renting, even if it’s temporary, until you are sure of where you want to live.
  • Articulate a plan B just in case.

Once you’ve worked through the action steps, the wisdom of one path vs. another should be more clear. What does your head tell you? Your heart? The balance of both will help you make the best decision for you and your family.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

 

What I Learned From My First Maternity Leave

January 16, 2017

I had my first biological child when I was 41. At the time, I had a busy career as a financial planner for a global financial services firm and was already a stepparent. I liked my job, my team, my co-workers and the family-friendly corporate culture at my firm.

While I wasn’t quite sure what to expect after the baby was born, I had a vision that things would largely be the same, only busier. I’d be even more efficient and organized and cut back on some volunteering so I could get it all done. For those parents reading this, I’ll excuse you while pick yourself off the floor from laughing at my naiveté! If you are preparing now for parenthood, allow me to share some things I learned from returning to work after my first maternity leave:

Your HR Department is here to help you.

My HMO gave me forms to fill out for short-term disability and submit to my employer. It turns out I didn’t need them because my firm had 12 weeks of paid maternity leave with full benefits. My office HR rep was a fantastic resource once she knew I was expecting. She fully explained my benefits and how the leave would work.

Before my leave, she arranged for blinds to be installed in my team’s office indoor-facing windows, so I had a private place to nurse or pump when I returned. My manager encouraged my business partner and me to work out whatever arrangement suited us for my return, including a full-time schedule, a part-time schedule and working from home. Keep in mind that at the time I worked for a very large company that has won many awards for being friendly to working mothers, but even in a smaller company, you may be surprised at what you can negotiate.

It might start sooner than you expect.

As I wrote about here, a week or so before my daughter was due, I developed some unexpected complications and had to begin my maternity leave suddenly. It was challenging on many levels. I felt fine, and there were so many things that were left to do. Luckily, this happened late in my pregnancy, but I have friends who have had to go on leave suddenly with many months to go. A paid maternity leave that starts well before the baby is born could have financial implications.

If you still plan to take the same amount off after the baby then there will be a period of time without income. If you have sick time or PTO available, consider using that first before you begin your formal leave. Once you’re expecting, consider building up your emergency fund to cover an additional 3-4 months of living expenses above what you’ve already saved in case you have to take unpaid leave. Use this calculator to determine how much you can save.

You may want to take a longer leave.

After 12 weeks, I went back to work part time, but I found it was too soon. My baby wasn’t sleeping for more than 45 minutes at a stretch, and I was exhausted. My team at work was very understanding, and we tried keeping my daughter in the office with us for a while.

Eventually, I asked to take an unpaid leave for another three months, under the Family Medical Leave Act. That meant that I could take leave for an additional 12 weeks without pay but without risking my job. I was able to continue my health insurance coverage at the same group rate but had to write a check for my share of the premiums as I wasn’t getting a paycheck. See here to learn more about employee protections under the FMLA.

Accept you will feel torn.

Ambivalence is completely normal during the early stages of returning to work after maternity leave. When I was back in the office, part of me felt like I should be home, and when I was at home, part of me felt like I should be at work. Remember that your HR Department is here to help you manage the changes, so reach out when you have questions.

Don’t let maternity leave stress you out. Your company wants you to have a successful maternity leave and a productive return to work. With some preparation and a realistic assessment, you’ll be ready for it!

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

What to Expect When You’re Expecting

January 09, 2017

When I found out I was pregnant with my daughter, I thought a lot about what I needed to do to have a healthy pregnancy and birth. I didn’t consider how much it was going to cost. I had a healthy pregnancy, but during the last few days before labor, I developed high blood pressure, so I had to have extra monitoring for both me and the baby. My daughter was a breech baby, which we knew, and I ended up with an emergency C-section after nearly two days of unsuccessful labor in the hospital birthing room. My daughter was born healthy and I recovered quickly.

Luckily for us, I had excellent coverage from my HMO, so our out-of-pocket costs were minimal. However, for most families with low risk pregnancies, their costs could be in the thousands, especially if they have a high deductible health care plan. If a woman were uninsured and had a situation similar to mine, the cost could be $10,000 to $70,000, depending on where she lived and where she gave birth.

If you are thinking about getting pregnant or are already expecting, you’ll need to take care of your financial business in addition to your health. Even if you are insured, you are likely to have significant out-of-pocket costs for pre-natal care, labor and birth, and care for your new baby.  Step one is to contact your health insurance provider to see what’s covered:

Am I covered and how?

  • Will my insurance cover my pregnancy?
  • What kind of care does my insurance cover? What coverage is fully paid, and what costs should I expect?
  • What is the most I could pay out-of-pocket?
  • Does my health care provider offer a healthy pregnancy program and birthing classes? How can I participate?

What if I need more than the basics?

  • What happens if there are problems during the pregnancy which require special care?
  • Do I need preauthorization for any prenatal care procedures? What is the process for getting authorization?
  • How will I know in advance how much I will pay for a specific medical test or procedure?
  • What is the coverage if there are complications during birth?

What to expect for my hospital stay?

  • Do I need preauthorization for my hospital stay during birth? What is the process for getting authorization?
  • What if the hospital bills for a provider who does not participate in my health insurance without my knowledge (e.g., physician, lab, etc.)?
  • Do I have choices of where/how I can deliver my baby?
  • How many days can I stay in the hospital following the birth? What if I need a cesarean birth?

Is my baby covered?

  • Will my baby be covered right away under my health insurance? Are my baby’s costs covered if he/she has to stay in the hospital longer than me?
  • How can I add my child to my policy when he/she is born? Is there a time window (e.g. 30 or 60 days)?
  • Does my insurance cover any breastfeeding coaching and supplies?

While not everyone can plan in advance for the costs of pregnancy and birth, if you have the opportunity, estimate your out-of-pocket costs up front and build cash reserves to meet them. Even if your pregnancy is a surprise, you still have nine months to get prepared financially. That way, you will be able to focus on the joys of parenting and not the stress of unexpected medical bills when your baby arrives.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

Happy New Year!

January 02, 2017

Happy New Year! We wish you a peaceful and  prosperous 2017.

Happy Holidays

December 26, 2016

We wish you the happiest of holidays — and peace, joy and financial wellness in the New Year.

What to Do When Your Kids Ask for Expensive Toys

December 19, 2016

Do your children ask you – or Santa — for expensive toys? If they’re a kid in America today, chances are that they’ve asked you for an item whose price made you gasp. It could be an American Girl® Doll and accessories, a Thomas and Friends™ train set, a Microsoft® Xbox, or the latest Apple® iPhone.

Say “yes” and you’ll spend hundreds of dollars. It may not be affordable for you to gift something that expensive. Many parents are tempted to put the purchase on a credit card and deal with the payment later. Even if you can afford it, there are reasons to reflect and plan how you will handle the request before agreeing.

Start the conversation about money

A child asking for anything that costs money is an opportunity for financial education. Use your child’s gift request to initiate a conversation about spending, saving and prioritizing. Consider asking your child these questions:

  • How much does it cost?
  • Where will the money come from to pay for it?
  • How do grown-ups earn money?
  • Can you think of ways to save up for this?

For more ideas on how to talk to your kids about money, the Consumer Financial Protection Board (CFPB) has an excellent resource, Money as You Grow. It includes a book club with age-appropriate suggestions to spark money conversations. I also recommend picking up a copy of Ron Leiber’s perspective-changing book, The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous and Smart About Money.

Santa has a budget, too

I’ve always told my kids that Santa represents the giving spirit of Christmas but is imaginary. However, if your kids believe in Santa and have asked for an expensive item on their wish list, talk to them about how Santa has a limited amount of resources to get gifts for all the world’s children. Check out this great interview with personal finance columnist Michelle Singletary for tips on how to explain Santa’s budget.

Have your child research buying options

When my kids ask for a pricey gift or want to purchase a large item with their own savings, they have to do their research first. Ask your child to:

  • Shop around for three price quotes. Show them how to evaluate costs, including shipping.
  • If there are alternatives to their desired version, have them make a grid to compare features and ratings. Ask them to explain how they made their choice of the best buy.

Consider buying a gently used version

If your child is discovering a new line of toy that’s been around for a while, consider buying a gently used version on eBay or your local second hand network. Take Pokémon® cards, for example. For the price of one new “mega” set with 60 cards, you could buy an entire set of thousands from a teenager who has outgrown them.

Sell or give away your kids’ outgrown toys

One family’s cluttered playroom can be another family’s holiday treasure. We’ve been the recipients of many wonderful hand me down toys, including a fabulous kitchen set, dress up costumes, train equipment and Lego® pieces. When your child has outgrown a toy, encourage them to either give it away to a younger child or charity or sell the item and apply the proceeds towards the expensive gift they’ve requested.

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.