Save More This Year

Ray’s Take: January is the time of year when many people make decisions about how they want to improve their lives in the coming year. Part of your plans for improvement should be to figure out if there are any places in your life where you can save more than you did last year (and the year before). 

 

One definition of insanity is to keep doing the same thing but expecting the results to be different. Coming up with some simple strategies now can help you end the year with a lot more put aside than you had at the beginning of the year.

 

It can’t be said often enough that planning and conscious spending are two tools that have the biggest impact on growing your retirement fund and savings account.

 

Automatic saving is a certain way to increase your savings account. If the money isn’t in your checking account, you’re much less likely to spend it. Put your credit cards in the freezer. Then put ALL discretionary spending in a “no sacred cow” pile and work backward. Alternate picks until there’s no available spending money left in the budget. You have just set your priorities. Are you expecting to receive an income tax refund? Make good use of that money by putting it into your emergency fund. 

 

Review your contributions to your retirement plans. Are you on target for the amount you’ve projected that you’ll need? Can you increase any of your contributions or start a different account for a need that wasn’t apparent last year? Increases now will pay big dividends in the future. Money you don’t see is more difficult to spend.

 

Make it a point to become familiar with the new tax laws that just passed and see if there are things you need to adjust, depending on if you are retiring within the next five years or so. Some of the new laws sunset rather than stay permanent.

 

Sitting down with a financial adviser and a tax expert could lead to changes in your retirement planning that you didn’t know you needed to make. 

 

Dana’s Take: January. A new year. Time for new goals and getting rid of old bad habits. 

 

This month is the biggest one of the year for making resolutions to change. Lose weight. Save more. Go back to school. The options are endless. And should be. Reflection is good for everyone. Sitting down quietly and really thinking can open our eyes to things we want or need that we didn’t notice in the hectic rush of day-to-day living where we are moving from one thing to another almost mindlessly, trying to keep our schedule.

 

When was the last time you made an appointment with yourself to just sit down and reflect on life and your circumstances? 

 

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Powers of Attorney: A Big Part of the Plan

Ray’s Take: There are multiple moving parts to a good estate plan and various powers of attorney are an important element. Power of attorney basically gives someone else the right to act on your behalf; there are two types of powers of attorney.

A medical power of attorney names someone to make medical decisions for you if you’re unable to make them yourself. It can be very broad and general powers or very specific powers they may have.

A financial power of attorney allows someone to manage your financial affairs. You can limit it to certain functions or make it all-encompassing. This is different than your power of attorney for personal care; you need to have them both in your financial planning process.

Spouses just assume they will be able to act for each other if such trouble strikes, but that’s not necessarily true. For example, you would not be able to make any financial decisions relating to investments or retirement accounts held solely in your spouse’s name without a power of attorney.

When it comes to health care decisions, under the Health Insurance Portability and Accountability Act (HIPAA), health care providers can only talk with and release information to authorized representatives.

Once you’ve decided to execute these powers of attorney, sit down with the person to whom you are giving the authority. It can be a difficult conversation, but it’s crucial that this person understands your wishes and agrees to act on your behalf.

In many cases they can and should be different people. Not everyone is good in financial matters. Not everyone can keep a cool head in the face of life-and-death decisions at the hospital. Having this conversation in advance can spare your family from having to make difficult decisions on your behalf – often on short notice and in a state of emotional distress.

The potential cost of not having these documents in your plan could be very high in the event you become incapacitated.

Dana’s Take: At age 18, your child is an adult in the eyes of the law. And that means you no longer automatically have access to their medical or financial information or have the right to make medical decisions on their behalf. Increasingly protective privacy rules, while they are beneficial in the big picture, limit your powers as a parent.

For example, if your child goes to college in another town, or even out of state, and a medical emergency arises, most likely the medical staff will not discuss your child’s condition with you. When your child turns 18, make arrangements to have him/her execute both of these powers of attorney. Hopefully you will never need it, but better to have it in place just in case.

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Estate Planning For Unmarried Couples

Ray’s Take Times change. And more couples put off getting married for numerous reasons. People are marrying at a later age and sometimes not at all. Older Americans who have been widowed or previously divorced are deciding to cohabit instead of marrying.

While there are many good reasons to make these choices, it is important to know what rights you are giving up when you choose not to marry. 

For example, legally married couples are allowed to leave their entire estate to the surviving spouse, free of estate taxes. Everyone else is subject to pay tax on amounts over the exclusion amount. State laws generally award assets to biological relatives unless there is a will or other beneficiary documentation in place. 

Additionally, should there be a medical crisis, without the proper power of attorney in place, biological relatives will make all the decisions. Be sure to title any property appropriately so that your loved one isn’t turned out of the home in the event of your death.

There is a common misperception that if you live together for a certain number of years you are married in a common-law union with all the rights of a couple that was married by license. That is not true.

Without additional planning, if one person in an unmarried couple dies, the survivor is not entitled to any benefits, notice in a probate proceeding or continuing support that is afforded to legally married spouses. 

Know the costs and benefits of your choices and do appropriate planning around them. Laws vary from state to state, so it’s important to be aware of how they work in the state where you live. If you haven’t created an estate plan, your state has a default plan for you. A good financial planner can help you create a plan that works for you.

Dana’s Take The average age for marriage is now at an all-time high: 27 for women and 29 for men, according to the 2012 American Community Survey. 

According to Pew Research Center, of all Americans ages 18-29, only 20 percent are currently married, compared with 59 percent in 1960. Delaying marriage leaves time for developing careers, exploring alternatives and developing as an individual before tying the knot.

Ray and I married after age 35, so I get it. But if you’re committed enough to share a home, wouldn’t you want to protect your partner in the event of your death or illness? In the case of your unexpected disability, wouldn’t your spouse feel more committed to care for you than a roommate would? 

For numerous legal, financial and emotional reasons, legalize that union. A lavish wedding is not required, just a trip to city hall.

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Avoid 401(k) Loans

Ray’s Take Many employers offer 401(k) plans that grant participants the option to take out a loan. And when times are tough – or maybe you really, really want to renovate your kitchen – it’s tempting to withdraw money from your 401(k) for a loan.

The loan gets paid back over time by payroll deductions. After all, you’re borrowing money from yourself – what could go wrong? It looks easy and painless on the surface. But digging deeper, there are some very good reasons not to do it.

If you leave your job, the full balance left on the loan becomes due immediately. And the same rule may apply if you are downsized from your job. Defaulting on a 401(k) loan makes the outstanding loan balance into a withdrawal subject to full income tax and, if the borrower is not 59 1/2, the 10 percent penalty too.

The debt typically has to be repaid within five years, or tax and penalty apply to the balance. These sound like some pretty good reasons not to take a loan from your 401(k), but there’s an even bigger one.

The biggest drawback to these loans is opportunity cost that comes with the missed potential growth of your investments. In addition to the lower balance in the account making less money, people typically reduce or stop contributions to their 401(k) while repaying a loan, which means they’re missing out not only on their normal contribution but also on their employer match.

People are living longer than ever, with fewer safety nets. That makes taking loans from your 401(k) even less of a good idea than ever. When you borrow from your 401(k), you are borrowing from your future self and even when you pay back the principal and interest, you probably still won’t break even in terms of lost investment growth by the time you retire.

Dana’s Take Seeing money in your 401(k) account is like smelling freshly baked brownies – it’s hard to keep your hands off. Those of us who are more impulsive may have a hard time leaving that big pile of money alone.

Having a financial planner on retainer to manage your investments can be like having your mother in the kitchen when those delicious brownies emerge from the oven. While a financial planner cannot stop you from raiding your savings, he or she can go over the benefits of leaving that money to grow and compound for decades.

As Ray’s father, Denby Brandon Jr., used to say, “It’s very inconvenient to be old and broke.”

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Bridging the Gap

Ray’s Take: After years of working, planning and saving, many retirees are well-prepared financially to stop going to work in order to earn a living. But many are less prepared for how to fill the space previously filled by work.

Most of us envision retirement as that golden age at a predetermined point in the future where we’ll be free to do all the things we want to do but don’t have time for now. Do you have actual activities that you’re already trying to fit into your routine? Or are they more idealized, hazy, abstract things that you intend to figure out once you reach retirement?

A great question to ask yourself before you retire is: What do I feel like I missed out on? Or What resonates with me now that I want to know more about? Let that be a guide to some things you might want to begin exploring before taking the retirement plunge.

It’s hard to break the routine of a career, but now is the time to get your feet wet in other areas. Retirement may provide more time to do the things we’ve thought about for years, but it still doesn’t provide magic pixie dust – or energy – that will give us the motivation to engage in those activities. Retirement tends to magnify existing behaviors and habits. Putting a foundation in place now to build on later can be one of the best retirement plans you make.

As I have said before, retirement is nothing short of creating an entirely new identity. The transition from full-time worker bee to fully retired can be far more challenging than asset accumulation. If you’re already squeezing in some interests, then you’re ahead of the game. Building a bridge by starting on interesting and fulfilling projects or exploring interests now, before you retire, can make the transition a lot smoother.

Retirement is about more than money. It’s also about creating a new, engaged and fulfilling life.

Dana’s Take: The retirement decision is as much, or maybe more, psychological as it is financial. Some people enjoy what they do so much that it could be unwise to retire without a solid replacement activity or passion established before leaving the workforce. Others are waiting avidly for the day when they can walk out the door of work for the last time and celebrate. Knowing which personality type you are will help you plan the best way to build your retirement lifestyle.

Are you already involved in hobbies or volunteering and passionate about it? If not, it may be unreasonable to expect that you’ll suddenly develop that passion the day after you retire. The most successful retirees plan their post-working lives.

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