Why a Lower Paying Job May Still Be Worth More

April 05, 2017

When looking at job opportunities, it can be easy to be wooed by increases in salary. I learned the hard way that it’s not the only thing that matters when I took a new job many years ago for a couple thousand more per year, only to find that my actual take-home pay was lower because my new employer didn’t offer the premium benefits I’d enjoyed at my first job. But how do you know which benefits are better than others?

While you can’t put a price on things like “dress for your day” or bring your dog to work policies, you can figure out how much a lot of benefits are actually worth to you, personally, in actual dollar amounts. I’ll use my own benefits as an example since Financial Finesse is a well-recognized employer of choice. Obviously you’ll have to use your own numbers according to the benefits available to you and who would be covered in your family, but here’s a good framework to start with:

Health insurance – Definitely find out what your premium would be to factor that in, but don’t only look at that, especially if the employer covers your costs like they do at Financial Finesse. Is there a high-deductible option that comes with a health savings account and does the employer make a deposit into that account on your behalf? That’s also part of your compensation. If I were comparing offers, I’d also want to know the maximum I’d be on the hook for with each health plan since coverage levels matter as well. It’s all well and good if your employer covers your premium, but that could seem irrelevant if any costs incurred would require you to spend $5,000 of your own money to hit your deductible before any coverage kicks in.

HSA deposit to my account for individual coverage: $1,500 (This also happens to be my deductible. If I had to pay a premium, I would subtract that amount from this to arrive at the net increase to my compensation.)

Retirement plan – Any match your employer gives you should be considered additional compensation, so definitely take that into account. Some employers even make discretionary deposits regardless of your own level of contribution, which should absolutely be accounted for when considering total pay. Financial Finesse basically matches me 4% as long as I contribute 5%, which is a no-brainer. Contributing less than 5% is the same as saying, “No thanks. I don’t want that extra bit of pay.”

Annual employer match: 4% of my eligible pay = over $3,000

Financial wellness benefit – Offering a workplace financial wellness benefit is becoming an increasingly common (and smart, if you ask me) way for employers to demonstrate their commitment to employee wellness. In fact, it can be a great resource in helping you to make the most of all your other benefits! How you quantify this benefit will depend on what’s offered. At Financial Finesse, all employees have access to calling our Financial Helpline, which is the equivalent of having a CERTIFIED FINANCIAL PLANNER^TM professional on retainer. When I was an independent financial coach working with the general public, I charged clients $300 per quarter for a similar service. That meant they had unlimited access to call, email or meet with me as long as they paid that fee, similar to the Financial Helpline that many of our clients offer to their employees. If the offer you’re looking at includes an unlimited benefit like Financial Finesse, that’s the best way I know how to quantify it.

Annual savings by not having to hire a financial coach: $300 x 4 quarters = $1,200 (Note that this has nothing to do with what employers actually pay for their employees to have access to financial wellness but instead is what you’d have to pay if you sought an equivalent service on your own.)
Not included in this number: The financial benefit of using a financial wellness program to pay off debt, create a budget, increase savings for the future or invest appropriately along with reduced financial stress. Value: priceless

Professional development support – This depends heavily on your career field and any credentials you have to maintain but can be a real differentiator. I have three professional credentials that aren’t cheap to maintain on an annual basis. Financial Finesse supports all of them, but my last employer only supported part of them, which is a big difference to my wallet. Beyond that, each employee at Financial Finesse also has a $250 per year personal professional development budget to be spent on things related to enhancing their job function such as books, classes, conferences, and even role-specific consultants. For mine, I add up all my credential licensing fees, professional association dues, cost of continuing education and the professional development fund.

Annual savings by having my professional expenses reimbursed: about $1,750

Life insurance – Most employers offer employees automatic coverage of at least a year’s salary should the employee pass away while they are employed. The differentiator is when they cover more than that. Quantifying that truly depends on your personal situation. For some people, one times their annual salary is enough so additional coverage might not factor in as applicable compensation to consider. If you would need more coverage than the employer offers, you can figure out the savings based on what you pay for any additional policies you have outside of work.

Annual savings by having a portion of my needed life insurance covered: $50

To add it all up, I’m actually receiving at least $7,500 in benefits beyond my salary and insurance coverage – not too shabby!

There are plenty of other benefits to consider as well, depending on your personal situation and what you need. For example, your employer may offer discounted pet insurance, but that’s only applicable in your calculation if you’d switch your pet insurance over and get a discount. Another example would be pre-paid legal assistance, a benefit that’s really handy for people who need to draft estate planning documents or own rental property and need a little real estate legal advice but not as useful if you’re all set it those areas. This also doesn’t include the more typical benefits that the majority of employers provide like disability insurance, an EAP and obviously unemployment insurance. Since you’re likely to have those benefits at any place you work, they won’t really help in making a decision even though they are useful and important benefits to have and appreciate.

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

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.

Why and How to Have Weekly Money Talks

March 28, 2017

When I first got married, money talks in my home looked something like this: I brought out my spreadsheet and the four other programs I was working on to have a financial summit with my husband. He mentally tuned out the second he saw the first version of the budget and was in another place (I suspect it was at a college football game) by the time the meeting was over. Over the years, I learned to simplify my budgets and my husband brought both his mind and body to the meeting. My colleague Steve offers great insight into how to make couple money meetings work that I wish I knew from the beginning:

I have a confession to make. For over a decade in my professional career, I was the pot calling the kettle black. Almost 20 years ago, I followed the advice of a fellow CFP® professional and started advising clients to schedule a weekly 30 minute money meeting to focus on their finances, but I wasn’t doing these myself. Then about 7 years ago, I started having those meetings with my spouse and guess what? They work.

The basic idea is this. Many of us can go a month or longer and not spend any time thinking about our investments or whether we are spending our money on what is important to us instead of where we have always spent it. We pay our bills but don’t think about our spending plan.

On a side note, I hate the word “budget.” It sounds like “diet” to me. They both are limiting and negative.

A friend of mine told me “Steve, you’re a financial planner. Don’t think of it as a diet. Think of it as an eating plan.”

That works for me. I don’t think of my spending as a budget. I think of it as a spending plan.

The ideal time to have a conversation about money is not when you’re late for work, trying to get the kids off to school and have a deadline that is consuming all of your mental energy – been there done that. The Weekly 30 Minute Money Meeting can either be with yourself or with your partner. The rules are the same:

1.You cannot change the past. It is a waste of time to argue about or beat yourself up about things that have already happened. Learn from your mistakes (we have all made them) so you don’t repeat them in the future.

2. Be thoughtful and focus on the future. With my eating plan, if I choose to have a 1,500 calorie breakfast (which is delicious), I’d better plan on eating a lot of salad with little dressing for the rest of the day. If I choose to spend my future paychecks now (think credit cards), I’d better plan on not spending any other money.

3. Hold yourself accountable. Notice I didn’t say hold your partner accountable. We are adults and need to hold ourselves accountable. If you make a mistake, own it and try hard not to repeat it.

4. Schedule the meetings when your energy is high. I am an early morning person. I wake up at 5:30 am every day no matter the time zone or if it’s a weekend.

The ideal time for me would be 6:00 to 6:30 on Saturday morning. My wife’s response to this suggestion is not fit for publication. We meet from 11:00 to 11:30.

These are some tricks to make the most out of your meetings:

Put them on your calendar and if you think about something, pull your phone out and add a note to this week’s meeting. That way you don’t forget it.
Use the meetings to develop a spending plan. Your spending plan needs to get you, not the other way around. Look at your bank’s online tools, other online tools like Mint, our Easy Spending Plan, a custom made Excel spreadsheet or paper and pencil. Try different ones until you find the one that gets you.
Find an item in your spending plan that you buy because you have to but don’t enjoy spending money on and see if you can cut that cost. Think of auto insurance and electricity. Any money you can free up from those is money you can save or use for something you want.
Run a retirement estimator calculator and make sure you are on pace to retire. Update this at least once a year.
Run a DebtBlaster calculator and make sure you are paying off your debt as efficiently as possible. Update this every 6 months or when you pay something off.
Review your investments at least once a quarter and make sure you are taking an appropriate amount of risk.

As someone who has done this for a while, the benefits of these meetings include reduced financial stress, you and your partner having a plan and fostering honest, direct and sincere conversations about money. Start now. Don’t wait a decade…like some people.

Should You Follow Senator Elizabeth Warren’s Investment Advice?

March 23, 2017

Last week, I wrote about some of her money management tips as described in an article titled “You, Too, Can Invest Like Elizabeth Warren!” Overall, I found them a bit too simplistic. Now let’s take a look at the investing side:

1. Visualize. Specifically, “take a moment to savor your dream.” It’s hard to argue with this. If visualizing your retirement or other goals helps motivate you to save and invest, go for it. Just remember that the dream probably won’t become reality unless you wake up and take action, which brings us to…

2. Create a retirement fund. Warren suggests contributing 10% of your income to a 401(k) or IRA. This isn’t a bad idea on its face but lacks detail. Why just 10%? The consensus seems to be that the average American household needs to save about 15% of their income for retirement so 10% is probably too low.

Even better, you should run a retirement calculator to get a more personalized number. That’s because the percentage you should be saving depends on your age, your current retirement savings, how aggressively you invest, when you want to retire, how much retirement income you need, and how much you can expect to get from Social Security and other income sources. In other words, you may need to save a lot more or a lot less, depending on your particular goals and situation.

It also matters whether you choose a 401(k) or an IRA. While they can have similar tax benefits, you’ll want to contribute at least enough to your 401(k) to get your employer’s full match. After that, your choice depends on a variety of factors like the investment options in each account and whether you prefer the convenience and simplicity of having everything in your 401(k) or the freedom and flexibility of an IRA. Don’t forget that you can also do both.

3. Invest prudently in the stock market. Warren also recommends investing another 5% (or 10% if you’ve paid off your mortgage) in an indexed mutual fund. Her own non-retirement account portfolio is largely invested in fixed and variable annuities with some money in stock, real estate, and bond funds.

Again, why 5%? The amount you save should depend on how much you’re willing to put away to reach your goals. If your goal is retirement, you’ll probably want to max out your 401(k) and IRA before investing in a taxable account. If your goal is education funding, consider tax-advantaged education accounts like a Coverdell account or 529 plan.

The index fund recommendation makes sense since compared to actively managed funds, they generally have lower costs, outperform over the long run, and generate less in taxes since they don’t trade as much. However, Warren seems to be using deferred annuities instead to shield her personal money from taxes. There are a couple of downsides to this strategy. One is that variable annuities tend to have high fees. Another is that the earnings are withdrawn first and are taxed at ordinary income tax rates.

In addition, her heirs will also have to pay taxes on the earnings they inherit after she passes away. In contrast, long term (over one year) capital gains on stocks and funds are taxed at lower tax rates and won’t be taxed at all when passed on to heirs. Her real estate and bond funds also generate a lot of taxes.

A better strategy for Warren would be to prioritize the bonds and real estate investments in her 401(k) and IRA and use the taxable accounts for the remaining stock funds. This is because stocks are more tax-efficient and their higher volatility would allow her to use losses to offset other taxes. By sticking to index funds, she could save even more in taxes and other costs.

4. Oh, and avoid investing in these: gold, prepaid funerals, and collectibles. I’m not sure I’d call prepaid funerals an investment at all, but collectibles can be a fun way for someone to speculate as long as they’re not counting on them for anything. A small amount in gold is used by many investors as a hedge against rising inflation and other types of instability and can help diversify a portfolio since it typically moves differently than stocks and bonds.

As with her money management advice, you could do a lot worse than funding a retirement account, investing in an index fund, and avoiding speculative investments. But Warren’s investment advice is a bit too oversimplified as well. Instead, find out what retirement and investing strategy makes the most sense for your particular needs or work with an unbiased financial planner who can help you. After all, we don’t all have a senator’s pension to bail us out of any mistakes.

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.

How Paying For Health Care Changes in Retirement

February 27, 2017

For most American workers who retire at age 65 or later, managing the costs of medical care becomes a bit more complicated. There may be more paperwork to juggle as reimbursements for costs could come from different sources. Here’s a breakdown of what’s typical:

Medicare

Most American workers and small business owners will be eligible for Medicare, the federal health insurance program for people age 65 and older. Medicare has four parts: Part A is Hospital Insurance, Part B is Medical Insurance, Part C includes Medicare Advantage Plans (HMO/PPO type plans which provide hospital and medical insurance together) and Part D is Prescription Drug coverage. See this article on understanding how Medicare works. Things to keep in mind include:

As you near age 65, you’ll need to decide if you want the original Medicare or a Medicare Advantage Plan and if you want prescription drug coverage.
Generally, the initial sign up for Medicare begins three months before you turn 65 and continues for three months after the month you are 65.
If you don’t sign up for Part B during your initial enrollment period, you may have to pay a late enrollment penalty.

Medigap

A Medical Supplemental Insurance (Medigap) policy helps pay some of the health care costs not covered by original Medicare, such as co-pays, deductibles and co-insurance. Medigap policies are sold by private companies. Keep in mind:

Medigap policies generally don’t cover long-term care, vision or dental care.
You can’t be enrolled in a Medicare Advantage program and a Medigap policy at the same time.
Medigap policies sold after January 1, 2006 cannot include prescription drug coverage. If you want that, you’ll need to sign up for it separately.

Retiree Health Plan

Employers are not required to provide health coverage to retired employees, and most don’t. If you are lucky enough to be one of the 16–25 percent of Americans who receive retiree health benefits from a former employer or union or receive military or other veterans’ benefits, how your coverage works in conjunction with Medicare depends on your company or organization’s plan. Generally, if you are retired and have coverage from both Medicare and a retiree health plan, Medicare pays first for your medical bills and your group health plan is the secondary payer. Keep in mind:

Get a copy of your plan’s benefits description and read it carefully. Make sure you understand how your plan is integrated with Medicare.
Employers can change benefits or premiums for your retiree health program or even cancel coverage.
Your retiree plan may not pay unless you enroll when eligible in both Medicare Part A and Part B.
Find out before retiring if/how your retiree plan covers your spouse and any dependents (if you have them).

Health Savings Accounts

For those employees who have balances at retirement in their health savings accounts (HSA), they are a highly tax-advantaged source of funds to pay health care expenses in retirement that are not reimbursed by Medicare or other insurance. HSA funds are triple tax-free if used for qualifying medical expenses: they are contributed pre-tax, grow tax-free and are withdrawn tax-free. During your savings years, there are good reasons to consider maxing out your HSA before other retirement accounts. Keep in mind:

Tax-free withdrawals from HSAs can help you manage your overall tax rate in retirement and could help you meet thresholds for lower marginal and capital gains tax rates on other income.
If you have built large balances in your HSA and don’t need all the funds to pay for medical expenses, you can withdraw funds after age 65 without penalty. (Withdrawals are included in your taxable income like retirement plan distributions.)
HSAs do not have required minimum distributions.
You may use HSA funds to pay for tax-qualified long term care insurance premiums.

Deducting Medical Expenses

Those taxpayers who face significant unreimbursed medical expenses can deduct some of those expenses. The IRS allows taxpayers to deduct qualified medical expenses which exceed 10 percent of your adjusted gross income for the tax year. For example, if you have a household income of $50,000, you would be able to deduct medical expenses in excess of $5,000. Keep in mind:

You must itemize your deductions on your tax return.
Expenses such as prescription drugs, dental care, vision, mental health care, glasses, hearing aids and preventative health care are included.
Payments for medical insurance, such as long term care insurance (see below), are generally included.

Long Term Care Insurance

LongTermCare.gov defines long-term care insurance as insurance which covers “long-term services and supports, including personal and custodial care in a variety of settings such as your home, a community organization, or other facility.” Medicare does not cover long term care. Keep in mind:

The best time to purchase long term care insurance is in your fifties.
If you don’t have an HSA, the amount of long term care premiums you can deduct from your taxes, subject to the 10 percent floor, increases with age.
You can generally pay for LTC premiums from your HSA account, subject to the same annual age-based limits.
For very low income retirees without assets, Medicaid may pay for some of the costs of long term care depending on the state, but most retirees will have to fund the costs of long term care themselves should they need it.

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.

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.

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.

Is Spending $2 Million per Month a Bad Thing?

February 10, 2017

Well, if you’re Johnny Depp, the answer appears to be a resounding…YES! In a case where Johnny Depp and his former agents are making claims against each other (I have no idea which side’s arguments have merit), there are unconfirmed reports that his spending habits are rather lavish, averaging about $2,000,000 per month. He reportedly paid $3,000,000 for a party that ended with firing the ashes of Hunter S. Thompson from a cannon. Sadly, I missed that party. His prior firm is now suing him for an unpaid loan and he’s suing them for mismanagement of his finances.

This will be an interesting case to watch, and if he needs to generate cash, we may see a lot of Johnny Depp in roles that he wouldn’t have previously taken..or he could sell some islands. For those of us who have never spent close to $2,000,000 in a month, the numbers here seem completely absurd. It’s easy for us to roll our eyes at yet another celebrity who spent money on a lifestyle that isn’t sustainable in the long term.

How many times have we seen this? (Answer: A LOT) How can they not know that this is how the story unfolds? (Answer: It’s THEIR first time handling this much money.)

The interesting thing, at least interesting to me, is that I see this same thing happening on a daily basis, just with much smaller numbers, all over America. Here’s a story of someone I’ve had the pleasure to get to know over the last few years. He works for a big company that is one of our clients and is now, at age 50, ready to make progress in his financial life. He has a great job, a great family, great friends…and about $30,000 in credit card debt that is killing him! He is now struggling to make just the minimum payments on all of his cards.

During a conversation recently, we laughed at how we each made less than $20,000 per year in our first jobs out of college and at that time, we felt like we had more than enough money to live a great lifestyle! Fast forward a couple decades and now he’s earning just over $100,000 and feels like he has less discretionary income than when he was 22 and new to the workforce. As his income went up, so did his lifestyle and spending level.

It’s not quite the reported Johnny Depp level of spending, but it’s not tough to see how that happens. We somehow spend as much as we make, no matter how large the income gets. When that income stops, which we see in sports and entertainment, or slows down – that’s when we see headlines about famous people being broke.

It just happens more slowly and without the press when you aren’t famous. While Mr. Depp owes millions, a normal everyday guy owes $30,000 in credit card debt and it’s incredibly burdensome. Some of it was for vacations, some for car or home repairs, and some was books for college for his son, but it all has added up and become close to unmanageable.

We developed a plan to get him out of debt, which involved cutting back on some spending while increasing income for a 6-9 month window. He and his wife have ideas on how to generate some income thru “gig work” and will use every dollar to pay down credit card debt. Between Uber, Lyft, some handyman work and some graphic design, they will laser focus and work themselves hard for a fixed period of time. The reason I tell their story isn’t for the solution, but more for the parallel that I see between them and Johnny Depp. The numbers may be smaller, but the problem stems from the same behavioral pattern.

What can we learn? As your income goes up, pretend that it doesn’t! Rather than increasing your level of spending, how about increasing your savings rate FIRST!

Get to the IRS limit on your 401(k). Max out your health savings account. Contribute to an IRA. Build a serious emergency fund (a year’s worth of expenses). Once you are there, then allow yourself to increase your lifestyle to meet your income.

Should You Be In an Asset Allocation Fund?

February 09, 2017

One of the most common questions we get on the Financial Helpline is how to choose investments in your employer’s retirement plan. Investing can be complex and intimidating so it doesn’t surprise me that people are looking for help with their decision. What does surprise me is how few of them understand and use an option that was created to help simplify their decision.

Depending on your plan, you may have a target date or a target risk fund available to you. Both are “asset allocation funds” that are designed to be fully-diversified “one stop shops.” All you need to do is pick one fund that most closely matches your target retirement date or your risk level. (Target date funds can also be “set it and forget it” because the funds automatically become more conservative as you get closer to the target retirement date.)

If you think of investing as getting you from point A to point B, asset allocation funds are like the commercial jets of investing. They’re much cheaper than a private jet (a financial advisor) and much simpler than piloting your own plane (picking your own investments). That’s why when I first heard about these funds early in my financial career, I assumed they would take over much of the mutual fund industry and even replace the need for a lot of financial advisors. While they have seen a meteoric rise, especially as the default option in retirement plans, they still aren’t utilized as much as I thought they would be. I think there are 3 main myths responsible for this:

1. Putting everything in one asset allocation fund is having all my eggs in one basket. What you don’t see is that an asset allocation fund is actually a basket of baskets. Each fund is composed of several other funds. In fact, one asset allocation fund is usually more diversified then the typical mix of funds that I see people in.

So why not have other funds in addition to it? Isn’t that making your portfolio even more diversified? The problem here is that these funds were professionally designed to hold a certain proportion of investments so adding others will throw the balance off. It’s like adding extra ingredients to a chef-prepared meal. Only do it if you really know what you’re doing (in which case, you probably don’t need an asset allocation fund anyway).

2. I can probably do better on my own. Remember that these funds were put together by professional money managers who’ve been trained in investment management and do this for a living. What’s the chance that you’ll create a better portfolio? One study of 401(k) participants showed that investors who chose their own funds did worse on average than those who just went with a target date fund.

Part of that is due to lack of knowledge. However, a lot is also likely due to the temptation to buy investments that are performing well and then sell them when they eventually underperform, which is a recipe for buying high and selling low. If nothing else, asset allocation funds provide discipline… assuming you don’t trade these funds too of course.

3. Asset allocation funds are always more expensive. You would think that this professional management would come at a steep price. After all, paying for investment management typically costs .5-1% of your portfolio. However, asset allocation funds are generally only slightly more expensive than other funds and if they’re composed of index funds, they can actually cost much less than most actively managed funds. Check the fund’s expense ratio before making assumptions as to their cost.

That all being said, there are reasons not to use an asset allocation fund. You may not have one available in your plan or the one you have may be too expensive. Sophisticated investors or those with an advisor may want to create a more personalized portfolio that better matches their risk level or complements outside investments to maximize tax-efficiency. But if those situations don’t apply to you, consider an asset allocation fund. Flying commercial may not be a perfect experience, but it’s better than the alternatives for most people.

Should You Be Making Catch-Up Contributions?

February 01, 2017

Turning age 50 is definitely a milestone – one that some people celebrate and some mourn while others remain ambivalent. No matter how you may feel about it, there’s at least one minor thing to celebrate from a financial planning perspective: 50 is the age when the annual contribution limits to retirement savings accounts is increased for savers via what’s called “catch-up contributions.” Here’s how they work.

Each type of retirement savings account has an annual limit that savers can contribute to each year. Catch-up contributions are intended to allow people who perhaps got a late start to “catch up” by giving them the ability to save above and beyond those annual limits:

So someone with a workplace retirement plan and a Roth IRA over the age of 50 could conceivably tuck $30,500 away after age 50 versus the lower $23,500 that younger workers are limited to. Even if you’re right on track with your retirement goal, the catch-up contributions can help to lower your taxable income and accelerate that financial independence day.

A strategy for 401(k) and 403(b) savers

For workers who are contributing to 401(k) or 403(b) accounts via payroll deductions at work, the catch-up contribution is typically a separate election that must be made in dollar amounts versus the regular contributions where you must elect a percentage of income. For workers whose pay varies due to hourly wages or commissions, it can be challenging to budget for these contributions or ensure that a certain amount is going in each pay period. The good news is that you don’t have to be maxing out your regular contributions in order to elect catch-up contributions.

So if you’re looking to bump your contributions up by a certain dollar amount and don’t feel like doing the math to figure out what percentage that is, you can just enter it as a catch-up amount. A small consolation for hitting that half-century mark? I think so.

Of course, I would always recommend trying to get the maximum amount into your retirement account each year, but that’s not always realistic for lower income workers or people with competing priorities like family needs or high interest debt. If you’re over 50 and thinking about making catch-up contributions, run a retirement estimate to see how they can help you get to your retirement goal sooner. Then start catching up today!

Receive the Tip of the Day in your inbox every week day! Just enter your email address on the Financial Finesse blog main page and select which categories you’d like to receive.

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.

How to Avoid Borrowing From Your Retirement Plan

January 26, 2017

Have you ever borrowed from your employer’s retirement plan? When you need cash in a hurry, it can be tempting. After all, you don’t have to worry about a credit check and the interest just goes back into your own account.

However, there are a couple of reasons why this may not be the best idea. First, you lose any gains your money would have earned. Keep in mind that the stock market averages a 7-10% return per year, including many years with double digit returns so you could be losing out on real money.

Second, if you leave your job before paying off your loan, the outstanding balance could be considered a withdrawal and subject to taxes plus a possible 10% penalty if you’re under age 59 ½. These losses could end up jeopardizing your retirement. Here are some ways to avoid having to raid your retirement nest egg in the future:

Don’t think of your retirement account as a giant ATM. Even if your plan allows it for any reason, retirement plan loans should only be for dire emergencies and no, wanting the latest tech gadget or a vacation doesn’t qualify. Instead, calculate how much you need to save each month and have that amount automatically transferred to a separate savings account until you have enough to purchase what you want. Don’t have enough to save? Ask yourself what expenses you’re willing to cut back on to make your goal happen.

Have an emergency fund. Even if you do have an emergency, a retirement plan loan shouldn’t be your first resort. If your investments are down in value, you may not even have enough to borrow. Instead, build up enough savings to cover 3-6 months’ worth of necessary expenses and keep that money someplace safe like a savings account or money market fund. If you can’t stand the idea of all that cash just sitting there earning less than 1%, here are some ideas to put it to work harder for you.

Consider other options. For example, the average home equity interest rate is about 5%. Don’t forget that it’s tax-deductible too. If you’re in the 25% tax bracket, that loan may only cost you 3.75% after taxes, which is less than your investments will probably earn. Just be aware that your home is on the line if you can’t make the payments so this is probably not be a good idea if you’re facing severe financial hardship.

One final point is that people sometimes use a retirement plan loan to pay down credit card debt. Given how high credit card interest rates can be, this might be a smart move if it’s part of a larger plan to become free of high-interest debt. However, if you end up filing for bankruptcy, you’ll still have the retirement plan loan. In that case, you would have been better off using the bankruptcy to wipe out the credit card debt and leave your retirement account alone. (It’s generally a protected asset in bankruptcy.)

Retirement plan loans have a place, but be aware of the downsides. If you’re not sure what to do, consider consulting with a qualified financial planner. As with any financial decision, you want to make an informed one.

What To Do After a Spouse Passes Away

January 12, 2017

One of the most difficult experiences to live through is the death of your spouse. In addition to dealing with grief, there are a host of financial and legal matters to attend to. To help relieve the stress during an already difficult time, here is a checklist of items to take care of:

Get an inventory of assets, debts, insurance policies and bills. This is particularly important (and challenging) if your spouse primarily handled financial affairs. You can use this Financial Organizer to record the information.

Request a copy of your spouse’s credit reports from each bureau so you can see all the debts owed. (You can get free credit reports every 12 months at annualcreditreport.com.) Don’t forget to contact their former employers for accrued but unpaid salary, bonuses, and vacation/sick pay, pension survivor benefits, and life insurance policies. You should also see if they had any life insurance through their credit cards any any lost policies here. Finally, you’ll want to ask the funeral director for at least one copy of the death certificate for each account, life insurance policy, any real estate property with their name on it.

Close or re-title accounts. Here is a breakdown of how to deal with various types of assets:

Annuities and life insurance policies: After presenting the insurance company with a death certificate, the death benefits (which may be different from the cash values) will be paid out to the designated beneficiaries.
Assets solely in the spouse’s name: These will have to go through the probate process and will pass on to the person designated in the will or if it’s not in a will, according to state law.
Assets jointly owned with rights of survivorship: These assets will pass to the joint owner(s) when you present the bank, investment company, or county records office and mortgage company (in the case of real estate) with a death certificate. If there’s a mortgage on the real estate, you may want to wait until the other affairs are settled since there’s a risk of the mortgage being called.
Assets with a beneficiary (living trust accounts, qualified retirement plans, 529 plans, HSAs, bank accounts with “payable on death” registrations, investment accounts and vehicles with “transfer on death” registrations, and real estate with beneficiary deeds): After presenting the financial institution holding the account, the DMV (in the case of vehicles), or the county records office and mortgage company (in the case of real estate) with a death certificate (and trust documentation or notarized trust certification in the case of a living trust), the asset will pass on to the beneficiary. An IRA can stay in the name of your spouse as an inherited IRA and the beneficiaries would only need to take required minimum distributions according to their life expectancy. Other qualified plans may need to be paid out to the beneficiaries over 5 years but the beneficiaries can avoid this by rolling the accounts into inherited IRAs, which can be stretched over their lifetime. Finally, as the spouse, you have the unique option to roll any inherited retirement accounts into your own IRA to defer the taxes as long as possible.

Make sure the bills are paid on time. Otherwise, you can get hit with late charges and a lower credit rating for late payments on any bills with your name on them. If you do get assessed late fees, ask to see if you can have them waived due to the circumstances. Cancel any services or subscriptions that are no longer needed (you may be able to get refunds) and put the rest in your name. Don’t forget that your spouse will still owe income taxes and while the federal estate tax return is due 9 months after their death, state estate tax return deadlines can be earlier.

Apply for benefits. If you or your children were receiving health insurance through your spouse’s employer, you may be able to qualify to continue it under COBRA. You may also be able to qualify for Social Security survivor benefits if you’re taking care of a minor child or are at least 60 years old and for VA benefits if your spouse served in the military. If you have a child in college, contact their financial aid office to see if you can qualify for additional aid. Finally, you may receive benefits from any unions your spouse was a member of.

Review and update your financial and estate plans. Re-assess your new income and expenses and make any adjustments that may be necessary. You might also want to run a new retirement calculation and consult with an estate planning attorney to see if you need to update any of your estate planning documents like an advance health care directive, will, durable power of attorney, and living trust. If your spouse owned a business, you’ll also want to consult with the business’ attorney on next steps.

Nothing here can ever make the loss of a spouse easy. Hopefully, it can make it a little less difficult though. Sometimes, that’s the best we can hope for.

How’s Your Financial Life?

January 06, 2017

With today being my first post of 2017, it’s a great time to spend an hour or two over this weekend looking back at the year that was and looking forward to the year that is just starting. I have an annual tradition that I started long ago and will continue for as long as I am lucid. Feel free to use my annual process as a starting point, tweak it, and make it your own.

Each year, I put together a quick “How’s my financial life?” spreadsheet. I only need a few reference sources and in less than 30 minutes, I feel like I have a much clearer understanding of where I stand financially. Along the top of the spreadsheet, I list the year and on the vertical (Column A), I list the things I want to measure annually. Here are the things I measure and where I find the information:

Total Assets – I use this Financial Organizer. The goal is for this to increase each year. Tracking the dollar and percentage increases are things I’ve added to my simple spreadsheet over time.

Total Debt – This is also found on the Financial Organizer. The goal is for this to decrease annually and eventually get to $0!

Net Worth – This is simply the total assets minus total debt. An increasing net worth is my primary financial goal each year. This is another thing I track in dollar and percentage terms.

Annual Income – I use my last pay stub of the year. This is a number that should go up each year and if it doesn’t – that could be a warning sign. Or it could mean that you’ve happily retired or downsized your work stress level.

Estimated Mortgage Payoff Date – I pay a bit of extra principal with each payment and at year end, my mortgage company can calculate when the mortgage will be paid in full at my current level of extra principal payments. You can also build this yourself with an “amortization calculator.” (If you Google that term, you’ll find a bunch of them). This is important to me because when my mortgage is paid off, I’ll consider myself financially secure. At that point, my embedded cost of living will be property taxes, insurance, utilities, food and fun.

401(k) Balance and 401(k) Contributions for the Year – For the contributions, I need my last pay stub for the year and for the balance, I can either log on to the website of my 401(k) provider or quickly check Mint for my balance. Each year, I enjoy seeing the balance go up! (I wasn’t so happy with this back in 2008, though.)

Savings Balance – This is one I like to track in order to make sure I have an adequate emergency fund. I enjoy seeing it go up, although it took a big step backward last year because I used a chunk of savings as the down payment on a house. So while I wasn’t ecstatic when I saw that the balance went down, I understand why it did and will work to build it back in short order. I can check this balance in Mint while I get my 401(k) balance, so locating the info is the easiest part of the job.

Life Insurance Death Benefit – I check this each year to ensure that should this be my last year on the planet, my mortgage can be paid off, my kids’ college can be handled without loans and there could be something left over for them to have a little head start in life, along with a few of my favorite charities getting a few bucks to do the great work that they do. I have to check a file in my desk to make sure that my information is up to date. We had a change in benefits at work and I replaced one policy with another last year so this is a data point that is in flux.

Date of Last Will Update – This is another item that I need to look in my desk drawer files to confirm. Looking at it this year, I’m probably due for an update. The last update of mine was almost 10 years ago, right after my ex-wife and I separated. (It’s amazing how quickly a decade can fly by when you’re having fun!) Hitting the 10 year mark or a significant life change are my triggers for updating this important document, along with my powers of attorney and healthcare directives.

Those are the data points that I can put together in the time that it takes me to watch one college basketball game. (Hey, it’s nice to have a pleasant distraction while working on your financial life.) So pick a game to watch and get busy.

How to Make 2017 the Year of Financial Security

December 28, 2016

According to Fidelity’s annual study on New Year’s resolutions, the number of Americans considering a financial resolution for 2017 increased significantly over last year. If you are one of those who are hoping that 2017 will be the Year of Financial Security, I suggest a quick review of 2016 as a starting point. Ask yourself four questions to get started:

1. How much did you save? Before you start on a mission to save more money next year, take a look at how you did over the past year. Are you better off this year than last? Could you have saved more money? Were your expectations of how much you could save realistic?

Don’t let a small balance in your savings account discourage you from continuing your efforts. Make saving automatic by scheduling a recurring transfer on payday so you never miss the money. If you don’t yet have 6 months of your expenses tucked away in a savings account, that’s a good goal to start with.

2. How is your 401(k) or IRA doing? If you haven’t checked on your retirement account lately, this is a good time to log in and check your asset allocation. If nothing else, you should make sure you’re re-balancing your investments to account for changes in the stock market.

But you should also make changes to your allocation as you approach retirement. Someone who only has 5 years until retirement will have a lot more of their assets invested in fixed income funds versus someone with 30 years to go. It’s also a good time to run a retirement calculator to see if you’re on track to retire when you want to.

3. Did you reduce debt? Raise your hand if your financial resolution includes reducing or eliminating debt. Extenuating circumstances aside, if your total amount of debt increased or stayed the same in 2016, then it’s time to take a look at how you are going to make that number go down for the coming year. The first step in eliminating credit card debt is to stop using credit cards, so start thinking now about how you will shift your spending to cash only while you tackle your debt. Then make a plan and stick with it.

4. Has your financial outlook changed? Perhaps 2016 was a year of change for you. Perhaps you got married, got a raise, switched careers, etc. As you prepare your plans for 2017, cover these questions to set you up for financial success in the coming year:

What are your greatest concerns? What keeps you up at night about your life and money? It might be something totally different from last year. This will affect your financial goals.
Is there specific financial guidance you need? Perhaps you received a promotion and have a lot more money to throw around so you finally need investing help or maybe now you’re caring for a relative. Does that affect your taxes? Consider seeking out a professional to help you with any big changes you’ve encountered. Your workplace financial wellness program is a great place to start.
Have your goals changed? Did you get married, have a baby, move to a new city, or decide to go back to grad school? All of these will affect your long-term goals. Hopefully, you’ve already examined how these changes affect your finances, but if not, now is the time to take a look and make any changes needed.
Do you need to revise your budget? If you did have any major life events in 2016 or if you’re setting a “stretch goal” for yourself for 2017, you probably need to revise your budget. Take a look at those expenditures that have become routine such as stops at Starbucks or taking Uber home from work and decide whether you need to reconsider those activities. For me, I have a renewed focus on my health after a rough 2016. I’m planning to spend more money on fitness activities like specialty classes and less money dining out.

Goal-setting for the New Year can be overwhelming. Make sure you give yourself some time and head space so that you are able to mindfully set goals that are realistic, achievable and motivational! Happy New Year!

Like what you’re reading? Sign up to receive my weekly blog posts directly to your email inbox. Go to the blog main page and enter your email address. You can subscribe to all posts or select your favorite topics and authors.

Why I’m Making Pre-Tax 401(k) Contributions

December 22, 2016

Last week, I wrote about how I’m investing in our company’s new 401(k) plan. That wasn’t the only decision I had to make though. Another choice was between making traditional pre-tax versus Roth contributions. Here are three reasons why I chose the former:

I expect my tax rate to be lower in retirement. The choice is basically between paying taxes now versus later. I’m currently in the 28% federal income tax bracket and the 6.65% NY state income tax bracket for a total marginal tax rate of 34.65%.

When I retire, my tax brackets are likely to be lower and I may end up living in a state with a lower state tax rate or even no state income tax at all. This is partly because I’ll need less income in retirement (especially since I won’t be saving for retirement anymore) and also because some of my retirement income will be coming from a tax-free Roth IRA. If I do end up being fortunate enough to retire in a higher tax bracket, I won’t mind paying the higher tax rate on my 401(k) as much since those additional dollars will be less valuable to me at that point.

I’d rather invest the tax savings outside my 401(k). With the pre-tax contributions, I get that 34.65% that would normally go to Uncle Sam if I made after-tax Roth contributions. I can then invest those tax savings in practically anything I want. Yes, I’ll have to pay taxes on the investment earnings, but I estimate that my higher expected returns in those outside investments will outweigh the taxes.

I can convert to a Roth later. One thing I love is keeping my options open. When I eventually leave the company, I can convert my 401(k) into a Roth IRA. (I’ll have to pay taxes on anything I convert so hopefully my tax bracket will be lower in at least that year.) However, if I choose the Roth option, there’s no way to go back and recover the benefit of lower taxable income.

Does this mean everyone should make pre-tax contributions? Absolutely not. If you expect your tax rate will be higher in retirement or if you’re maxing out your contributions and want to shield as much of it from taxes as possible, the Roth option would probably make more sense. As always, the best choice depends on your particular situation. Just remember that either choice is better than not contributing at all (or delaying due to analysis paralysis).

How Much Do You Need to Have Saved for Retirement?

December 16, 2016

In many recent conversations, I’ve been asked “how much do I need to save for retirement?” The answer is always “It depends!” Do you want to plan to live until you’re 100 or are you going to project a short life expectancy because of serious health issues? Will you have no mortgage or debt and spend lots of time at the public library reading books or will you have a big mortgage and fly all over the world staying at luxurious hotels?

Your lifestyle choices matter A LOT. Given all the variables and uncertainty regarding how much someone needs saved/invested in order to retire comfortably, it makes sense to have some rules of thumb around that. So here are some varying thoughts on how much you might need to save for retirement:

Fidelity recommends that someone have 10x their annual salary saved by age 67. They also suggests a timeline to use in order to get to that magic number:

By 30: Have the equivalent of your salary saved
By 40: Have three times your salary saved
By 50: Have six times your salary saved
By 60: Have eight times your salary saved
By 67: Have 10 times your salary saved

Aon Hewitt, a benefits consultant, suggests that you have 11x your final salary saved before you retire.

A long established rule of thumb in the financial services community is “The 4% Rule.” What that means is that you can take a 4% withdrawal from your final savings balance annually and increase the amount with inflation each year. If you have $500,000 in your accounts, you’d be able to spend $20,000 in the first year. So for every $1,000 per month you want to spend in retirement, you’d need $300,000 of investments.

Charles Farrell, financial author, recommends saving 12x your final income.

An article in The Street tells Millennials that they will need $2 million in order to retire.

These are just a few of the countless ways that people can calculate their “magic number.” Personally, I don’t believe in magic numbers. How much you need to save for retirement is very dependent upon the lifestyle you want to live.

Conventional wisdom says that you’ll need to replace 70-80% of your current income in retirement to live a lifestyle similar to today’s. I’ve met people who will be perfectly happy at 40-50% because they will have paid off their mortgage and have been aggressive savers who have lived far below their means for decades and won’t spend much money in retirement. I’ve met others who have plans to see the world post-retirement and they’ve saved their whole lives in order to splurge during retirement, so they’ll need >100% of today’s income.

What can you do with all of this potentially conflicting information? Start to think about your retirement picture. Take a look at your current expenses and see what will still be there during retirement and what won’t be. Consider the cost of healthcare and that you’ll need to account for that since you probably won’t have company benefits kicking in a portion of the cost.

Run some retirement calculators to see if you’re tracking well toward a secure retirement or not. Google “retirement calculator” and you’ll get thousands of options. You can also use our retirement estimator as another tool to help you get a gauge on your progress. The next time someone asks me “How much do I need to save for retirement?” I will email them a link to this blog post…

Why I’m Investing 100% of My 401(k) into One Stock Fund

December 15, 2016

Like many companies, Financial Finesse recently changed the fund line-up in our 401(k). As part of the new offering, we now have target retirement date funds that are fully-diversified “one stop shops” that automatically become more conservative as you get closer to the target retirement date. But rather than this more diversified approach, I’m choosing to put 100% of my 401(k) into an S&P 500 index fund. While this strategy is certainly not for everyone, here’s why I decided it makes sense for me:

It complements my investments outside the 401(k). If you have retirement investments outside your employer’s retirement plan, you might want to look at all of your retirement accounts as one big portfolio. In my case, the bulk of my outside retirement investments will be in real estate and microcap and international value stocks. Since I’m a very aggressive investor with my retirement portfolio, I have no interest in bonds or stable value. Therefore, domestic large cap stocks can best diversify my overall portfolio without sacrificing much in expected returns.

Index funds tend to outperform actively managed funds. It’s also the only index fund offered in the new plan. This is an important point because studies have shown that index funds tend to do better than the vast majority of actively managed funds in the long run, primarily because of their low fees and trading costs. While value stocks tend to outperform in the long run and growth stocks would better complement my already value-heavy portfolio, both advantages can be wiped out by the higher costs of active management.

Warren Buffett recommends it. Arguably the greatest investor alive today has recommended index funds to both Lebron James and average Americans. He’s also put his money where his mouth is, instructing his trust to invest 90% of his estate in an S&P 500 index fund for his wife when he passes away and betting a $1 million to charity that a simple S&P 500 index fund would outperform a selected group of top hedge fund over 10 years. (It’s year 9 and he’s way ahead so far.) If it’s good enough for Buffett, it should be good enough for me.

Of course, this certainly doesn’t mean everyone should put 100% of their employer’s retirement plan in an S&P 500 index fund. If you don’t have much outside your plan, your portfolio may not be diversified enough without international and small cap stocks. Unless you’re also a very aggressive investor, you’ll probably want some bonds and cash as well to reduce the portfolio’s risk. This is why most people are probably better off investing in a more diversified portfolio like the target date retirement funds we have now. As always, you’ll want to make sure you’re making an informed decision that’s best for you.