Know Your Plan Before You Die…

Most employees do not know what their Social Security benefits will be.  They don’t know what their 401(k) will provide for them at retirement, nor when they will be out of debt.  Few employers provide disability insurance if you get hurt or sick, so what will happen if you become sick or hurt?  And health insurance is a “can of worms.”  If you are self-employed, and/or running a small company, many more questions exist than there are answers.  What will you do when you die or your spouse does?

Everyone should know what benefits they are going to enjoy, and communicate with a spouse about them at least annually.  Things change so fast that if you think you have benefits and don’t, you can go broke in a single week!  It is not hard to gather all your financial information together and review it.  When you have a question, make the effort to call and get answers. 

To see how this works in the real world, I want to share one of my client’s stories:

The husband passed away suddenly at age 64 and his wife had never worked outside the home.  He had $20,000 of group term life insurance and they had $52,000 savings in a 401(k) account.  Their home was worth $230,000, but they still had $189,000 mortgage.  The wife is in good health and expected to live beyond the average life expectancy for women of 87.  The husband’s funeral cost $15,000.  The wife has the option of accessing Social Security benefits of $1,245 a month, or to wait another three years and get $1,570 a month.

What would you do in this situation?  Their monthly living expenses before the husband passed away had been $4,000 per month. Now there’s no money to live like that. Will the wife have to sell the house since the Social Security income she could take now will basically pay the monthly mortgage and that’s it?  If she does sell, where will she live and what will she live on?

This couple had not talked about early death or how one or the other would live once one of them passed away — there was never this kind of detail discussed, ever. They just went along thinking nothing would change.  But it did change and the woman in this situation is in a really bad place financially.  And it will change for you too.  It is only a matter of time before big changes come to your world.  Get prepared.  Review all your benefits and make decisions today as if one of you has passed away.  Play this game over and over until you feel comfortable that you have your financial situation right.

In my experience, most people die with nothing more than a simple will. Their assets have to be probated in court until they are cleared for distribution.  This can take two years.  The expense of having a judge decide how to divide up assets can drain another $30,000 off your assets.  And in many cases, the surviving spouse still needs an income to live on.  What if health problems arise?  

The best way to start preparing for coming changes is to stop spending any more money until you have a Spending Plan in place and have learned how to track that plan so you can see where you are wasting money. Once you do so you will find a surplus that you can begin saving. Fund your future with this real money, that comes from getting your spending and debt under control. Then make sure you create a living trust. Transfer your assets into the trust and make sure nothing goes to the court to decide. Go to www.easylegalplanning.com and see how simple it is to get organized and match assets with a real plan document.  Don’t delay and become part of the majority that leaves your family out in the cold, unable to help themselves.  The memory of you that will be left will not be good.  To learn more go to www.moneymastery.com or contact me: peter@moneymastery.com.

The Real Cost of Funding Your Retirement Entirely with a 401(k)

You work hard to save money on a tax-deferred basis so you will have more money after tax.  Then you go to retire and have to pay tax on 100 percent of the money you take out of the 401(k).  So if you thought paying taxes on your annual income was horrible, wait until retirement if all you’ve planned to retire on is a 401(k) or IRA!  Just because the amount you take out as income during retirement is smaller, doesn’t mean you will be in a lower tax bracket.

This illustration sums up the frustration of a tax-deferred retirement account. As you save money into a 401(k), the annual fees are large and loads for early withdrawals will cost even more money. In addition, the market risks cause losses 4 out of 7 years on average.  How is it possible to have enough money for retirement?    

Now, let’s assume that even with all the leaks that are possible with a tax-deferred account such as the fees, market risks, and penalties, you have been able to accumulate a good sum of money for retirement.  When you start taking income, this large sum is wholly taxed, 100 percent! Since you deferred your taxes, now you have a much larger number to pay taxes on. I ask: why would anyone fund their entire retirement using a 401(k) or IRA? It makes no sense. Of course, if your employer is willing to offer matching contributions, then a 401(k) can be one way to help build a retirement, but to rely solely on this kind of investment is foolish in my opinion.

Take a look at the above illustration one more time and ask yourself, “Does it make sense to defer my income taxes?” By deferring your income taxes, you subject all your money to fees, load, market risks and penalties over 40 years.  This cost can eat up all tax savings.  And when you turn on income, now you pay much more in taxes than ever before.  With few tax deductions, you might struggle to have enough retirement income to live on.  Please consider other options than the 401(k) or an IRA. I have loads of information to share with you on all the grand possibilities for retirement you should consider. Contact me today: peter@moneymastery.com  

Are You Financially Playing More Offense or More Defense?

Take any sport and consider playing strategies and defense always seems to win in the end. Let’s take the NBA Playoffs for example. The highest scoring player of a game is held in high esteem, even paid the most money on the team. Crowds cheer when points are posted on the scoreboard. The high scorer gets to do the team interview at the end of game. But nobody posts defensive plays, no system keeps track of how many STOPS a player makes so the opponent cannot score, so why not? I believe the answer is the player that puts up big points is what sells tickets!

Now reference your 401(k) funds: are you on the offense, trying to score the best rate-of-return? Or, maybe you are playing defense and trying not to lose any money? A simple way to find out is to ask yourself, “Am I going for the best return I can get?” If so, you are on the offense. But history of all sports and all battles in war shows that a good defense wins most of the time, so why aren’t we all playing defense? I believe that defensive savings and investing isn’t as exciting as trying to get a higher rate of return, and doesn’t “sell tickets” so to speak.

So think of your mutual fund manager: Doesn’t he or she emphasize investments that have posted larger rates-of- returns to get you attention? If that is what you want, the best return, you buy into this, meaning you become the “sale.”

Defense definitely wins more games than offense. With a strong defense you shut down a hot offense, that is why you win most often. So when you invest your money, why not switch away from the mentality of always trying  to get the highest returns and play defense? Try playing defense with a small portion of your investment money. Go for the solid, never-lose investments so you don’t lose big and have to gain back better-than-average returns, especially if you have no time left in the “game” to recoup such losses.

Can you imagine how much more money you would have if you just had the money back that has been lost? I’m guessing it’s a huge number! Please consider going on defense with your investments and keep track of what happens. You may find that defense wins most often, just like in any sport. For more help on this subject email me:  peter@moneymastery.com.

How to Avoid Putting “Needs” Money at Risk as You Approach Retirement

As you prepare for retirement, you will undoubtedly want to accumulate the maximum amount of money and you will be tempted to use high-risk investments to do so.  Your reasoning is you have many years before you will need this retirement income, so even if the market were to drop substantially you have time for the market to return to higher and higher gains.  But this simply isn’t so.

The problem with this thinking is that things will be different as you approach the final ten years before retirement and just because another 10 to 15 years of work seems like a long time to you, it isn’t a long time in terms of the market. If it takes a downturn, 10 years will not be enough time to recoup losses.

To combat the temptation to take unnecessary risks as you get older, I caution you to change from an “accumulation” way of thinking to a “conservation of assets” way of thinking a good 10 years before you plan to retire.  It can be hard to change to a conservative way of thinking when you have been in the accumulation stage for so long — in my experience people work and save and put money at risk to get the highest possible return, all the while checking the market weekly for 40 years as they form a habit of watching. But this habit keeps people from changing as they grow older.

For example, if you see the leaves on trees drop and snow on the ground, you prepare for winter.  But old habits of investing in high-growth assets don’t show you strong enough signs like “snow on the ground” so you keep on doing the same thing you have done for years. But winter for some of us is coming, so now be the time to prepare for it by switching from accumulating money to beginning to conserve it.

Here is a graph that represents enough money to fulfill your basic needs at retirement.  Once these are covered with investments that are safe, then  “wants” money to put at risk to keep ahead of inflation on the “needs” money and provide income much later in retirement.

Wants are just that, WANTS, not must haves. If you continue to stay fully invested in market-risk assets with all of your money as you approach and enter retirement age, chances are the downturns will destroy your ability provide the needs you will have for your entire life.   

It’s always wise to change investing habits with the seasons of your life.  Be alert and put it on the calendar so you change the way you invest and save your money about 10 years before retirement. Pulling out some of the crop by harvesting the seed and storing it away to protect it is always safer than continuing to harvest and replant all of your seed every year. Doing so puts everything you’ve worked so hard for at terrible risk. Okay, so you won’t make as much if you harvest some of the crop and put it away for safe keeping as  you would if you kept reinvesting, but do you want to take those kinds of chances this late in the game? I don’t.

Make sure NEEDS are taken care of so you know how much assets you have left to fulfill WANTS, then take chances with that money.  Contact me with comments or questions:  peter@moneymastery.com

When Did the Concept of “Retirement” Come to Be?

As you can well imagine, the idea of “retirement” did not exist in Roman times, nor medieval times, and certainly not when Pilgrims discovered America.  What about during the days of Lewis & Clark?  Or when the wild West was being settled?  History teaches us that a Roman peasant had to fight for food every day of their life.  A peasant could not even fathom taking life easy, sitting back to watch the evening news, or going out to eat and taking in a movie. How could an English Lord even conceive of “retiring?” He had to manage a kingdom and train new knights to protect him and his vassal serfs.

Some examples of newly created words, along with the idea of “retirement” in the last 100 years include:

  • Internet
  • World wide web
  • iPhone
  • Light bulb
  • Polyester
  • DVD
  • Contact lens

We have seen so many advances in technology and medical care in the last century that we have a lot more time on our hands than anyone born before the turn of the last century. That extension of life plus all that time we have available has been the reason the idea of retirement even exists.  “Retirement” is a new concept, only around since just before World War II broke out. Up until 1920, most people died before they reached the age of 60, so retirement wasn’t even an option.  When people started to live past age 65, some elderly folks started to save money for when they could no longer work, and thus the concept of retirement was born.

Four problems came along with this new concept. The first problem is outliving your income. Today 92 percent of everyone who is retired is totally dependent upon their Social Security benefit.

A second huge problem is inflation.  Just use your Web browser to see what one gallon of milk cost 20 years ago and you will be shocked.  You will most likely need to double the money you think is needed at retirement, because of inflation.

A third problem is continual taxation.  As you take money from you retirement savings plan to live, this income is taxed and can cause Social Security benefits to be subject to income tax as well.

A fourth gigantic problem is the cost of medical, long-term care and nursing home expenses.  The national average shows costs for a retired couple for medical/nursing care is $250,000 before they die.  This kind of cost is eating up all possible savings most people manage to squirrel away for retirement.  When all resources have been exhausted, the surviving spouse becomes destitute and is classified as being on welfare.

Considering these four problems, now is the time to decide what “retirement” means to you and whether you will be able to make that vision a reality. You have heard about the importance of planning for retirement your entire life, while those who lived before 1920 did not even have an inclination of what that meant. Before it’s too late, define what you want to happen when you reach age 65 because unlike your grandpa and great grandpa you will likely live longer than 60 years, so you will need to be prepared for that long life and how you want to live it.  It’s never too late to get going on this.  Go to moneymastery.com and sign up for the Basic online training package and see for yourself how much money you need to be saving for retirement, or calculate how long your money will last. For more help, contact me directly: peter@moneymastery.com.

Take Caution: Read Disclosure Notices on Investment Projections Before You Sit Back on Your Retirement Laurels

Following is a typical disclosure notice you might see at the end of an investment report. Take the time to read this disclosure,  you might be surprised what you find:

If a numerical analysis is shown, the results are neither guarantees nor projections, and actual results may differ significantly.  Any assumptions as to the interest rates, rates of return, inflation, or other values are hypothetical and for illustrative purposes only.  Rates of return shown are not indicative of any particular investment, and will vary over time.  Any reference to past performance is not indicative of future results and should not be taken as a guaranteed projection of actual returns from any recommended investment.

If you reviewed a report that said your retirement is going to be adequate but then get to the small print at the bottom of the report and it says, “Any assumptions as to the interest rates, rates of return, inflation, or other values are hypothetical and for illustrative purposes only,” how should you feel? How much credence can you place in the numbers from such a report when planning your future?  For example, if an assumed interest rate went from 5% to 3% in real time as you are saving for retirement, you might run out of money with 12 years left to live!

Or let’s say you use the past 40-year average market gains to forecast your future income and then read, “Any reference to past performance is not indicative of the future results.” You probably aren’t going to feel super confident about what your direction is going to be.

Of course we need to plan and project, using the best tools available, but how can you do any of those projections given all the unknowns?

In my experience, the best way to use forecasting projections is to keep track of each year’s projections and review from year to year.  As the years go by you can watch out for adjustments that will surely force some changes.  This way when something isn’t quite working out like you forecasted, you adjust. It’s the simple principle of tracking and you should be applying it when it comes to retirement funds, but what I have found is very few people do, only about 3 percent of us actually track and adjust each year.

Think of you being the navigator on an airplane.  As you fly from San Francisco to Dallas, you are seldom going straight to your destination because of wind and weather.  A navigator must keep adjusting and changing the course according to what affects the plane.  This is the same for each of us financially.  The forecasting is so important, but the adjusting to changes is critical.  So for the 97% of those who don’t forecast, they will not end up in Dallas, financially speaking, but probably Minneapolis.  I hope they like the colder north country. For information on how to create a more predictable retirement that you cannot outlive, contact me for a no cost consultation: peter@moneymastery.com.

What Happens to You Financially If Your Health Changes?

According to the Social Security Administration, 41 percent of all workers are required to retire earlier than planned due to a personal health problem — that’s four out of every 10 Americans. And the National Council on Aging has stated that about 91 percent of older Americans have at least one chronic health condition; another 73 percent have at least two.

What will you do if you’re one of the four out of 10 people who have to retire early?  How will you manage, and do you have enough money?  Get serious and create a plan based on the assumption that you might have this problem. After all, as stated above 91% of all seniors have a serious health problem — don’t gamble with those numbers and hope that whatever condition you get won’t keep you from working as long as you need to.  

Here are three things to do if you physically have to retire:

1.  Cut spending down to what money is available.

2.  Apply for Social Security benefits under handicapped status. This may take 6 months, but can help your income a lot.

3.  Stay mentally engaged with family, community and friends.

As you rearrange living expenses, this may lead you to consider downsizing your home.  This can help lower the cost of utilities and property taxes.  Think long-term when you are making these adjustments.

The Social Security administration has provided for those who get disabled at an age younger than 62.  This could be a source of income for the rest of your life.

When people finally retire, the most successful are those who stay actively engaged with the world.  They volunteer to make a contribution to the community around them.  By staying engaged, they are more alert and have a higher quality of life.

Plan for the event of bad  health and then if it doesn’t happen, you’ll still have the extra money plus you’ll have peace of mind, no matter what happens, and that is worth its weight in gold. peter@moneymastery.com.

Earn a $1,000 Credit for Saving…

The following information is taken directly from the IRS’s Web site on the Retirement Savings Contribution Credit (Saver’s Credit) program:

————————————————–

You may be able to take a tax credit for making eligible contributions to your IRA or employer-sponsored retirement plan.

You’re eligible for the credit if you’re:

  • Age 18 or older;
  • Not a full-time student; and
  • Not claimed as a dependent on another person’s return.

See the instructions for Form 8880, Credit for Qualified Retirement Savings Contributions, for the definition of a full-time student.

Amount of the credit

The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A). Use the chart below to calculate your credit.

*Single, married filing separately, or qualifying widow(er)

2017 Saver’s Credit

Credit Rate

Married Filing Jointly

Head of Household

All Other Filers*

50% of your contribution

AGI not more than $37,000

AGI not more than $27,750

AGI not more than $18,500

20% of your contribution

$37,001 – $40,000

$27,751 – $30,000

$18,501 – $20,000

10% of your contribution

$40,001 – $62,000

$30,001 – $46,500

$20,001 – $31,000

0% of your contribution

more than $62,000

more than $46,500

more than $31,000

The Saver’s Credit can be taken for your contributions to a traditional or Roth IRA; your 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans.

Rollover contributions (money that you moved from another retirement plan or IRA) aren’t eligible for the Saver’s Credit. Also, your eligible contributions may be reduced by any recent distributions you received from a retirement plan or IRA.

Example: Jill, who works at a retail store, is married and earned $37,000 in 2016. Jill’s husband was unemployed in 2016 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2016. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $36,000. Jill may claim a 50% credit, $500, for her $1,000 IRA contribution.

In my experience, anytime you can get “free” money, go for it.  There are many people making less than $36,000 a year and to receive a $1,000 credit for saving $2,000 can make a big difference over 10 and 20 years.  In the above example for Jill, she is trying to save 10 percent of her annual income every year, so in her case that’s $3,600. When she adds this $1,000 credit to that annual 10 percent savings and keeps this money safe over 30 years it will grow to $265,000.  That’s a little over a quarter of a million dollars and an average annual growth rate of 8 percent! 

This may not seem to be a big deal, but a “free” $1,000 a year for someone making $30-35,000 annually, is like getting a 33 percent bonus.  If you will prepare a Get Out of Debt report and a Spending Plan using the Money Mastery tools, you will find even more money.  The younger you start, the better it will be.  Contact me for more information: peter@moneymaster.com.

Spend All Your Money on Paper so You Can See How to Create a Cash Surplus

We all want more money, but how can you make that happen?

First make a list of why you want more money.  Be comprehensive and make sure you don’t leave anything out.  Dream big and write down as much detail as you can so when you refer back to your list, you will be reminded of all these wonderful things.  Do this now.

Second, write down all the income sources, assets and other resources you have available to spend on this list.  Remember one of your assets is time, time to work extra hours, and time to get a better education and improve your ability to make more money.

Third, subtract the money you have from the list of wants and see if you come up short. This is the amount of money you need to find, learn how to earn, or acquire by selling an asset.

Let’s solve this money shortage problem right now.  In the illustration above let the circle represent all the money you will ever have in your lifetime.  Now you don’t know how long you will live, but just let this circle be the total amount of money you will have.  Don’t be critical of yourself for past mistakes in investments, don’t deride yourself for not getting more education, and don’t get depressed, just stay focused on this activity to the end.  I promise you will soon have more money.

Since this circle represents ALL the money you will ever have, why not spend it?  Use your list of wants and spend your money.  Take a slice of the circle and spend it on food and housing.  Then do the same for medical and dental expenses.  Spend some for vacations and fun activities.  Don’t use a monetary figure, just a percetage, like 1.5% for example.  Slice up your total money supply pie until it is all spent.  Don’t forget transportation costs and travel.  Now sit back and examine the money picture you have just drawn.  Remember you can have anything you want, you just can’t have everything you want.  So if you are a physician and will make $9,000,000 over your working life, you will not be able to spend more than that much money.

Your action item now, something for you to do immediately, is to take your “pie of money,” totaling all the money you will ever have, and spend it is such a way as to have a surplus and accomplish the essential goals of your life.  Don’t just spend it all, spend it so as to have a surplus. Doing this little exercise will help you see where you are spending money foolishly or help you see what you may need scale back on so that you can have a small surplus each month.

 Here are three case histories to put your “pie of money” into perspective in terms of creating a surplus:  The first case study is about a schoolteacher who lives in the mountains of Missouri making $23,000 annually.  She has debt and saves $300 each month.  The second study comes from Florida where he is a plastic surgeon making $100,000 a month, but has over-committed on leasing his building, equipment, plane and automobiles, so when he was called out of military reserves to serve a one year commitment in Afghanistan (making $29,000 a year), this forced him to have to file bankruptcy.  The third case history is a retired 87-year-old woman who lives in Stockton, California successfully living on $1,022 a month. We can see from each of these stories that it matters not how much you make but what you do with your money that counts. The school teacher isn’t making much and has debt but she still manages to create a surplus every month so she can save $300. The doctor is living large and has now lost that massive income on foolish living. He could have amassed a huge surplus by now but has spent it all. The elderly woman on a fixed income is managing her money by being smart about the way she spends so she has money to live on. Donald Horban taught this essential concept:

“We don’t need to increase our goods nearly as much as we need to scale down our wants.  Not wanting something is as good as possessing it.” 

Our financial peace of mind is to learn that a rich person is not one who has the most, but one who needs the least.

Don’t be discouraged, even though in my experience spending all your money on paper so you can see where you lack a cash surplus will be the hardest thing you will ever do.   Don’t procrastinate, create a circle representing your entire income of money and spend it.  Money is not the most important thing, but if you don’t have a surplus of it when you need it, it becomes really important.  I wish you all the very best! peter@moneymastery.com.

The Four C’s of Retirement Planning…

Recently I was sitting in a retirement income training class and the four C’s of retirement planning were presented that just made good sense.  I have changed the details a little so that they fit the Money Mastery Principles and philosophy, but here you go:

First C:  Clarity of thought and action is the first strategy to begin building a predictable retirement income.  I ask these questions of the clients I coach and would like you to answer them as well:

  1. How much income will you need in retirement?
  2. How many years might you live in retirement?
  3. What resources do you have to fund your retirement?
  4. What is your risk tolerance?
  5. Do you plan to leave any assets to your beneficiary?

Second C: Comfort during retirement is a big concern.  Imagine for one minute that you are retired and that Monday arrives and you act like it is Saturday.  Tuesday is tomorrow and you act like it is Saturday, and so forth.  When you are retired everyday is like Saturday and we spend like we do on Saturday.  That is why we tend to spend more money in retirement than when we are working.  It is important to consider what kind of comfort you want in retirement so you are more cautious now during working years and not spend everything we make. 

Third C:  Cost of living is another big strategy to plan for and manage.  Health care costs will be the largest expense in retirement that you must prepare for. These expenses will be well beyond what you spend for food, transportation or living expenses.  In addition, inflation can slowly sneak into your pocket book and erode 20 to 30% of you purchasing power.  Be aware and make sure you are doing something to manage this creepy crawler.

Fourth C:  Certainty of income at a time we can not afford to run out of money.  Though you worked for 40 years, it is entirely possible that you will live 20 and 30 years more in retirement.  Market risks can be a huge drain if you are trying to make money last longer by investing more money, which adds more risks and chance of loss.

These 4 C’s are strategies that must be addressed for you to be at peace when arriving at retirement.  I have lots of great experience and advice with how to deal with these 4 C’s and am happy to share them with you: peter@moneymastery.com.