Time to Add Discipline to Your Good Money Habits

That 30th birthday can be a somewhat traumatic event, but with people living longer, they say 50 is the new 30. If that’s the case, then you’re just a kid!

That doesn’t mean, however, that you should be childlike about your finances. If your 20s are the years when you lay the foundation for good financial habits, then your 30s are when you build on that foundation.

By now you’re likely employed in your field, possibly married or in a committed relationship, and thinking about building a family. It’s important to factor in these life events when you are planning. A financial advisor can work with you to create a solid plan and provide objective guidance no matter how investment savvy you are.

Your priority should be saving and avoiding non-mortgage debt. Without debt, saving seems easy. And there’s a lot to save for: the wedding, starting a family, buying a house, sending your kids to college and retirement. Not to mention all the surprises in between. This is where the long-term plan you and your financial advisor create comes in. It’s important to stick to it.

Another key element is to review your financial plans periodically to make sure they still meet your goals. If you are part of a couple, consider making “financial dates” with your spouse or partner to proactively talk about money. It’s a good way to make sure both parties in a relationship are aware of the other’s goals for the future.

To Help You Get Started on your Journey, Here’s a Checklist for 30-Somethings:

• Save for retirement. Are you taking advantage of the retirement plan offered by your employer? It allows you to invest a portion of every paycheck before taxes – or after taxes in the case of a Roth 401(k). While you’re at it, analyze other employer benefits. Are you taking advantage of all the benefits your employer offers? Look at everything, from flexible spending accounts to group discounts.
• Pay off personal debt. Have you paid off your high-interest debt? Paying off a credit card that charges 25% interest means substantial savings.
• Write a simple will and also a living will. How will your property be handled if you die? A simple will can keep your loved ones from having to decide. What do you want to happen if you become seriously ill? A living will records your wishes and removes that burden from your family.
• Name a guardian for your children if you have any. Who will be responsible for your children if you and your spouse/partner die? Protect them by legally naming a guardian.
• Review your insurance. If you’ve recently married or started a family, are life and disability insurance adequate given your new status? Also, the younger you are, the less long-term care and disability policies cost. It’s also a good idea to review your auto and home policies to ensure your family and property are fully covered. You may also be eligible for package discounts.
• Start a college fund for your children if you have any. As soon as you are out of debt, begin an education fund. The costs for education are soaring, so the earlier you can begin saving the better.
• Think about your future housing needs. Is your family going to outgrow your house? Will your parents eventually move in with you? A separate savings fund for housing can accommodate these possibilities.

The Realities of Remarriage

For a variety of reasons, second (or third) marriages are becoming the norm. And even as they bring emotional richness to your life, blended families – with ex-spouses, step kids and half siblings – add complexity to financial and retirement planning. To help your marriage withstand some of the common pitfalls that trip up a relationship, it’s important to make time to talk about your new financial realities. Here are four questions to keep in mind.

What are Your Priorities?
Any marriage requires establishing joint financial priorities and setting the wheels in motion to try to achieve them. Start by taking inventory of your collective assets and liabilities, property, insurance coverage, banking, retirement and brokerage accounts – pretty much anything that has to do with money.

You’ll also need to discuss how much debt you each have, your credit histories, and what exactly you owe to other parties. What if alimony isn’t enough for an ex who constantly demands more? Or you use debt to buy lavish gifts for your children out of guilt after the divorce? Your spouse should know about those payments so you can work together on a plan to take care of your family without jeopardizing your financial future together.

It’s also a good idea to think about how much each of you should contribute if there are disparities in income and to what accounts (his, hers and ours, perhaps?), as well as how you’ll pay for your children’s needs and bills you incur as a family.

Who Gets What, When?
Getting married is one of those life events that should automatically trigger a review of your estate planning documents. It’s an opportunity for each of you to review your will, trust documents and beneficiaries on everything from your financial and retirement accounts to insurance and annuities. You’ll also need to determine how your property will be titled.

What About the Kids?
With second marriages often come blended families or the creation of a new one. Ideally, everyone will get along, and you and your ex will easily come to a fair agreement as to which family will pay for certain expenses. But it doesn’t always work that way. The court will mandate certain responsibilities, but invariably nonobligatory expenses will crop up. Decide now whether one of the biological parents will be responsible for this support, whether it’ll be a joint expense between the parents or whether you and your new spouse will pay and where the money will come from. 

What About Retirement?
And as you consider your financial realities, don’t forget to take your future wants and needs into account. When it comes to retirement planning, there are a number of factors to consider. And some depend on the divorce decree from the earlier marriage. Did the ex-spouse claim half of the retirement assets in the divorce? If so, that means you may have less to retire on as a couple, and you’ll need to plan for that.

Step By Step:

• Consider a trust to protect the inheritance of children from prior marriages
• Discuss a pre- or postnuptial agreement
• Update wills and other beneficiary accounts
• Re-evaluate life insurance needs
• Coordinate healthcare and retirement benefits

Social Security benefits also come into play, particularly if you’re considering marriage later in life. Social Security rules allow exes and widows/widowers to collect benefits on their previous spouses’ records under certain circumstances. But remarriage generally means those spousal benefits will go away unless the later marriage also ends (see ssa.gov for more information).

Content created by Raymond James for use by their advisors.

Advice for GenXers and Millennials

What advice can we offer regarding the financial lives of the post-boomer generation – those who are in their 20’s and 30’s?

Start saving as soon as possible – every bit counts. Albert Einstein called the power of compounding the eighth wonder of the world.  Consider the following example used by Keith Ambachtsheer, the renowned pension expert, as discussed in his book The Future of Pension Fund Management.

 

• Someone makes $60,000 a year, saves for 40 years of their working life, and lives in retirement for 20 years.
• They will need $40,000 (two-thirds of their salary) per year in retirement, a fairly standard assumption in the pension industry.
• $20,000 a year will be covered by social security.
• Savings will need to cover the remaining $20,000 per year for 20 years.

Here is where the power of compounding comes in.  Let’s consider two cases – one where the return on the investment is zero, and another where the return is 4% per year.

Assuming a zero rate of return, our wage earner will need to accumulate $400,000 to fund 20 payments of $20,000 in retirement.  This works out to be about 17% of their pay, which is pretty difficult, in our view.

In contrast, with just a 4% rate of return during both the 40 saving years and the 20 retirement years, our wage earner only needs to save 5% of pay during their saving years – a huge difference.

Like any example, this one raises many questions: Will social security still be available to GenXers and Millennials?  What about people who live longer than 20 years in retirement?  Can anyone afford to save for 40 years of their total working life?

 

What is abundantly clear is the importance of saving, in our view, at least 5% (preferably more) and investing in assets that will return at least 4%.  The good news is that 4% is, generally, a very conservative assumption, in our view.  We recommend a goal of saving 10% of income, and starting as soon as possible.

 

In an environment of some inflation, one should hope that pay will keep pace with inflation, but in our view, assuming a return of 4% above inflation is not only historically reasonable, it is conservative over a 40-year saving horizon.

 

Plan on living longer and working longer:  The post WWII social security model is broken.  When pension models became popular and government pensions were widely introduced, most countries had many more workers than retirees, and the average lifespan for those reaching retirement was much lower.  According to the official social security website (www.ssa.gov), in 1930 life expectancy at birth was 58 for men and 62 for women.  Only half of men who reached the age of 21 could expect to live to 65, the retirement age.  For those who made it to 65 in 1940, when social security payments began, another 12.7 years for men and 14.7 years for women could be expected.

 

Today those numbers are almost 19 and 21 years beyond 65, according to the social security site, and the number is likely to grow.  As illustrated, it takes 40 years of saving (not just 40 years of working) to seek to fund a 20-year retirement if social security is there, and of course, these are just averages.  In the future, it may be possible to give people a more accurate and personal life expectancy number.

 

In the early years, do not be alarmed by market declines.  Investing is an emotional experience, which is where advice can help.  Bull and bear markets (significant rises and significant declines in price) will likely happen during your savings years.  Think about it – you would probably much rather see declines in the early years, while you have less money and are adding every year or every pay period. Assuming what you are investing in goes up over time, you want to have prices at their lowest when you are buying and at their highest as you approach retirement.  Emotionally, we like to see our money grow, even in the early years, but logically we should recognize that when we are “putting pennies in the jar,” lower prices are a good thing as long as we believe markets will go up over time.  If we don’t believe that, then we shouldn’t be investing.

 

 

 

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Opinions expressed are those of the James Hyre and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The examples provided are hypothetical in nature and are presented for illustrative purposes only. They are not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

Kid Friendly Finances

We all like to think our children or grandchildren are practically geniuses, but some things just don’t come intuitively. Wise money habits, for example. Everyone needs to learn the value of a dollar, how to make money work toward our goals and how to protect our financial legacy, even little kids. In fact, the sooner you start the better. When your little ones aren’t so little anymore, you’ll have the comfort of knowing they understand and appreciate the power of financial planning and the role money plays in their lives…

Click here to read more about how to help your children and grandchildren make wise money decisions:  Kid Friendly Finances

Five Fundamentals Every Investor Should Know

When it comes to money matters, everyone should have a basic idea of how their money is working toward their future goals. And that means knowing and understanding the fundamental concepts behind financial planning and investing. Here are five easy, yet important ideas that make up a well-designed financial plan. Keep these in mind as you and your financial advisor work together to build a solid financial foundation.

Concept #1: Time horizon
As a general rule, the longer time you have to invest, the greater the risk exposure you may wish to undertake. Someone who is just starting out in a career can typically assume greater investment risk as a trade-off for potentially higher returns given the longer time frame available to offset potential losses. On the other hand, for someone nearing the end of a career and approaching retirement, less risky investments are often preferred. This person may have more savings accumulated and be more interested in preserving assets than growing them, due to less time to recover from possible losses.

Concept #2: The risk planning spectrum
Generally, the rule of thumb is that the greater the risk assumed, the greater the potential return on that investment. One of the best ways to potentially lower a portfolio’s risk and still potentially earn attractive returns is by diversifying investments across a spectrum of asset classes with various levels of risk.

Concept #3: Diversification
Diversifying your assets across sectors, strategies and types of investments helps mitigate the risks you face. Every type of investment responds differently to changes in the markets. So if you own a variety of assets, a decline in one can potentially be balanced by lower volatility or increased value in another. Bear in mind, however, that diversification does not ensure a profit or protect against a loss.

Concept #4: Asset allocation
Asset allocation is a long-term strategy designed to help investors achieve their financial goals without assuming undue risk. It’s based on the premise that various types of investments, namely different asset classes like stocks and bonds, have different characteristics that often prompt them to respond differently to economic and financial developments. Asset allocation goes further by breaking down each category into classes, such as small-cap stocks or intermediate-term bonds. Recognize, however, that asset allocation does not ensure a profit or protect against a loss. It is important to discuss your total financial picture – including securities in other accounts, real property, collectibles and other assets – with your financial advisor when developing a financial plan. This is to ensure that your total asset allocation is appropriate to meet your objectives and tolerance for risk. Investing involves risk and you may incur a profit or loss regardless of strategy selected. 

Concept #5: Tax planning
After you and your advisor settle on an asset allocation, it is important to consider whether to place assets in a taxable or tax-deferred account. After all, what you actually keep after taxes is what matters.

A taxable account, such as a stock portfolio, is where you place after-tax. A tax-deferred account, such as a 401(k) or IRA, enables you to contribute money on which you have not paid income taxes. Tax-deferred accounts enable your money to grow without the burden of annual income taxes on contributions or capital gains. Be aware, however, that you will have to pay ordinary income taxes on the money once it is withdrawn from the account. Tax-deferred accounts make sense for retirement savings because you are more likely to be retired – and in a lower income tax bracket – when you withdraw the money.

Bonus: Monitoring and rebalancing

It’s not enough to establish a financial plan based on asset allocation, risk tolerance, time horizons and diversification. You must then execute and monitor your investments, making periodic adjustments or rebalancing assets as needed to retain the desired allocation percentages designed to meet your financial goals. Market conditions can grow some assets substantially, while reducing others. It’s important to review your investment portfolio with your advisor on a regular basis to ensure it is aligned with your financial objectives. Keep in mind that rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

Understanding and implementing these fundamental concepts can be crucial to achieving your financial and life goals. Educating yourself on what you own and why is not only essential during Financial Literacy month, but throughout the year and for many more to come.

The information in this document is provided solely for general education and information purposes and, therefore, should not be considered a complete description of listed options. No statement within this document should be construed as a recommendation to buy or sell a security or to provide investment advice. Please consult a tax advisor regarding any tax matters.