Financial Checkup Checklist

Financial Checkup Checklist

Just like it’s a good idea to get a health checkup every year, it’s a good idea to get a financial checkup as well.  Doing so can help you detect problems early (while they’re still treatable) and will also help you gauge your progress and make sure you’re on track for a healthy retirement.

To help, I put together this Financial Checkup Checklist with areas that you should be reviewing.  Go through it and then touch base with me if you have any questions or there’s anything I can help you with.  Have a great week!

~ Joe

 

Annual Review: 7 questions for your adviser

Annual Review: 7 questions for your adviser

If you work with a financial adviser, it’s a good idea to get together at least annually to review your accounts.  As we get ready to transition into a new year and as our government grapples with the issues surrounding the “Fiscal Cliff,” now may be a good time to call your adviser and schedule that meeting.  Below are seven questions you can ask to make sure that your retirement planning stays on track.

Are there any actions I need to take before the end of the year?  Most of the questions below can wait until next year, but for obvious reasons, you need an answer to this one before December 31.  With changes expected to both dividend and capital gains taxes in 2013, review your holdings and ask your adviser what actions, if any, you should be taking before yearend.  Also, if you are 70 ½ or older you will likely need to make a Required Minimum Distribution (RMD) from your retirement accounts before the end of the year.

How did my investments perform relative to their peers?  It is difficult to gauge performance by returns alone.  If your stock mutual fund drops 20 percent does that mean that it’s bad?  Not if similar funds dropped 40 percent.  When monitoring performance, it’s important to have either a benchmark or peer group that you’re measuring against.  Your adviser should be able to review your holdings and see if the managers you’ve hired are earning their fee.  If so, great.  If not, changes may be in order.

Is my asset allocation still appropriate?  Your portfolio is likely made up of a variety of different asset classes such as U.S. stocks, foreign stocks, small cap stocks, government bonds, corporate bonds and municipal bonds.  How much you have in each area is referred to as your asset allocation.  The balance will vary based on a number of factors such as your age, risk tolerance, goals and outlook for the global economy.  As your circumstances change and as market movements alter your allocation, it is important to meet with your adviser and rebalance your holdings to get them back in line.

Is the amount of risk I’m taking still appropriate?  Investing too aggressively can result in significant losses to your portfolio.  Investing too conservatively can mean that your investments don’t keep pace with inflation.  Either of those outcomes will reduce the purchasing power of your money in retirement.  Work with your adviser to make sure that the amount of risk you’re taking is still appropriate for your circumstances.

Am I saving enough?  There are a number of assumptions that go into calculating how much you need to save in order to retire.  Even small errors in those assumptions can have drastic changes in the predicted outcome.  Rather than making a plan and then waiting 20 years to see if it works, it’s important to make small adjustments along the way.  With each new year, you have new information relating to things like investment returns, savings rates and taxes.  It’s important to evaluate that new information and ask your adviser “Based on these new realities, am I still on track to reach my retirement goals.”  If the answer is no, talk through any needed changes.

Is my withdrawal rate sustainable?  Of course, this question is only appropriate if you’re already retired and drawing income from your portfolio.  Running out of money is a major fear for many retirees.  To avoid that problem, it is important to have a sustainable withdrawal rate.  A suitable rate depends on a number of factors including investment returns, inflation, longevity and even luck.  A popular rule of thumb is to limit withdrawal rates to 4 percent, but everyone’s circumstances are different, so work closely with your adviser to make sure your income lasts.

Do you recommend any other changes?  A good adviser is realistic and honest.  Rather than telling you what you want to hear, he or she is paid to give you straightforward advice that will help you accomplish your goals.  Not only that, but a good adviser should be able to look at your total financial picture and offer comprehensive advice.  Take advantage of that knowledge and experience and ask what, if any, other changes are necessary.

The annual review is an important element to the client-adviser relationship.  It is an ideal time to evaluate performance and make necessary adjustments to help you reach your retirement goals.  Pick up the phone and schedule a meeting today so you can start the New Year off right.

~ Joe

I originally published this article at www.fpanet.org.
Retirement fire drill

Retirement fire drill

If you spend a good portion of your day in a building like an office or a school, chances are good that you’ve participated in a fire drill.  Those faux escapes give everyone a chance to practice evacuating the building and give those in charge an opportunity to identify and fix any potential problems.

If retirement is on your horizon, it would probably make sense to do something similar.  Call it your “Retirement Fire Drill.”  After all, sometimes you get to choose when you retire, sometimes (through illness or layoffs) you don’t.  It’s good to be prepared.

So let’s sound the alarm and pretend that today is the day that you’re transitioning into the next phase of life.  How will the planning you’ve done so far hold up in the real world?  Below are 5 areas to test.

Is your budget going to work?

You have made a retirement budget haven’t you?  If not, download a free budget worksheet at www.intentionalretirement.com/resources.  What will your sources of income be once your paycheck stops?  Do you have a realistic estimate of how much that income will be?  How about expenses?  Some people say you can live on about 70 percent of your preretirement income, but is that realistic for you?  There’s only one way to find out.  Practice living for a few months on the income and expenses that you’ve projected.  Then reexamine your budget and see if anything needs to change.  If it didn’t work for a 2 month trial, it probably won’t work for a 20 year retirement.  Take what you learned and make adjustments as necessary.

Is your asset allocation going to work?

If you retired today, how would your investments fare if we had another downturn like 2008?  Are you invested too aggressively?  Or how about if we got into a period like the late 1970s and early 1980s when inflation increased by double digits each year.  Are you invested too conservatively for your retirement income to keep pace?  Shocks to your portfolio early in retirement greatly increase your chances of running out of money.  You can minimize that risk by having your asset allocation correct and by setting aside a year or so of retirement income in cash so you can draw from that, rather than your investments, in the event of a downturn.

Is your health care going to work?

You won’t be eligible for Medicare until 65.  Are you planning on retiring before that?  If so, how are you planning to bridge the gap?  Even if you wait until 65, do you have enough set aside to pay for the premiums and co-pays required under Medicare?  Have you budgeted in the cost of a Medicare supplement policy?  Are there any health care issues (e.g. dental work, operations) that you should take care of now, before transitioning into retirement?  And what about long term care?  What if you or your spouse became disabled or needed ongoing professional care?  Do you have a plan to pay for that care that doesn’t include spending down all of your assets and leaving the healthy person in a financial bind?

Is your income strategy going to work?

If you and your spouse are 65, there’s a 72 percent chance that one of you will live to age 85.  There’s a 45 percent chance that one of you will live to age 90.  Will your income last that long?  Are you taking a sustainable amount from your investments each year or are you in danger of running out of money because you’re taking too much?  Will part or your income (such as a pension or Social Security) disappear when you or your spouse dies?  Can the surviving spouse live on the remainder?  Rework your budget to factor in one or more of those income shocks and then think about how you would respond.

Is your estate plan going to work?

If you plan on moving to a different state, have you checked with your attorney to see if your will and estate plan documents will be valid in the new state?  What if you became disabled or incapacitated?  Do you have powers of attorney that specify who takes charge?  If that person is your spouse, what happens if he or she dies before you?  Does your will reflect your current wishes?  Do you have the correct beneficiaries listed on accounts and insurance policies?  Are your documents organized and easily accessible?  Do everything you can to have your affairs in order.

How did you do?  If you encountered a few problems, don’t worry.  One of the great things about a drill is that it’s just practice.  Take the information you learned from the fire drill and tweak your plans to give yourself a better outcome.  That way you’ll be ready when the real alarm bell sounds.

~ Joe

I originally published this article at www.fpanet.org.
20 tips to ensure a nice nest egg in 20 years

20 tips to ensure a nice nest egg in 20 years

(Note: This is Part 2 in a three part series that I did for the Omaha World Herald on retirement planning for different life stages.  I’m re-posting it here for all of you who don’t live in snowy, freezing Omaha!)

Forty-five is an interesting age.  It’s like the Junior High of aging.  Too old to fit in with the kids at the Kanye West concert, but too young for the senior discount crowd at Denny’s.  Exactly halfway between 25 and 65, it’s like a weigh station between the carefree and exciting days of your 20s and what will hopefully be the carefree and exciting days of retirement.

With 20 years to go, it’s a good time to reflect on the planning you’ve done so far and see if you are on the right track.  If not, you’ve still got time to do something about it, but the clock is ticking.  Here are 20 ways to make sure you’ll have enough in 20 years.

1. Actually figure out what you need.  Too many people retire based on their birthday instead of their bank account.  Knowing how much you’ll need will help you save with purpose and intention. A good rule of thumb is to shoot for a nest egg that is 25 times larger than the amount you want to take from it each year.

2. Get out of debt.  No one in the history of the universe has gotten rich spending money they don’t have on things they don’t need.  You won’t be the first to crack the code.

3. Perform budget triage.  Most budgets don’t bleed to death from a gaping wound, but rather a thousand little cuts.  Wasting $20 per day for 20 years will shave about $334,000 from your nest egg (assuming an 8 percent annual return).

4. Beware any sentence that begins with “Hey dad.  Can I…”  People in their teens and twenties are incapable of ending that sentence with anything that doesn’t cost you money and put a hole in your nest egg.  Whatever the request, just answer with a firm “Yes, as long as I can move in with you in 20 years because I had earmarked that money for retirement.”

5. Make your saving automatic.  Saving is like going to the gym or eating your vegetables.  You know you should do it, but it takes discipline.  Make it easy on yourself by having money automatically deducted from your checking account or paycheck each month.

6. Focus on the basics.  Saving and investing doesn’t need to be complicated.  You can contribute $17,000 to a 401(k) and $5,000 to an IRA each year.  Start there.  Maxing out your contributions for 20 years would add about $1,006,000 to your nest egg (assuming an 8 percent annual return).

7. Refinance.  Interest rates are at historic lows.  If you still owe money on your house, consider refinancing into a loan with the same payment, but a lower rate and shorter term.  You’ll save thousands in interest and you’ll enter retirement with no mortgage.

8. Get healthy.  In 1900 the three leading causes of death were influenza, diarrhea, and tuberculosis.  Today they are heart disease, cancer and stroke.  All three of those diseases are expensive (even with insurance) and heavily dependent on things like diet, exercise, smoking, drinking, and stress.

9. Beware midlife crisis purchases.  If you’re tempted to buy a Hemi powered midlife crisis-mobile, don’t.  Buy a nice used grocery getter instead and put the difference in your IRA.

10. Add up everything you’ve spent during the last 12 months on beverages (e.g. soda, red bull, alcohol, venti non-fat no foam double shot hazelnut lattes, etc.).  If the number is greater than the world median annual income (about $1,700), reacquaint yourself with the benefits of water.

11. Make it personal.  You’re not planning “retirement,” you’re planning “your retirement.”  Once you realize that and spend some time thinking about the things you are really looking forward to, you’ll be incredibly motivated to make it happen.

12. Avoid mistakes, especially those that result in large investment losses.  At 20 you had plenty of time to recover.  At 45, large losses are like meteors to dinosaurs.  They are extinction level events.  Don’t put all your eggs in one basket (like your own company’s stock) or make questionable investments (like that can’t miss tip from your brother-in-law).

13. Meet with a trusted adviser annually.  Answer three key questions at each meeting: How did my investments do this past year?  Am I still on track for retirement (see number 1)?  What changes do I need to make?

14. Work on your marriage.  Middle age is a risky time for you and your spouse.  Having a happy marriage is reason enough to put forth the effort, but if you need something more, remember this: A sure fire way to derail your retirement is to divide all your assets in half.

15. Don’t be too conservative.  The markets have been crazy these last few years and a lot of people responded by moving everything to cash.  That may help you sleep well, but it won’t help you grow your assets and outpace inflation.  Repeat after me: Safe is risky.

16. Review your asset allocation.  If instead of moving to cash, you ignored your investments through the recent market turmoil, there’s a good chance that the ups and downs threw your portfolio out of balance.  Research shows that your asset allocation is responsible for 90 percent of your investment returns.  Work with your adviser to rebalance to a more appropriate allocation.

17. Downsize.  Once the kids are gone, reconsider the necessity of having a house big enough to have its own gravitational field.  A smaller place means that you’ll be spending less on your mortgage, heating, cooling, insurance and property taxes.  Invest that savings for retirement.

18. Take advantage of peak earning years.  You’ll likely make a lot of money in your 40s and 50s.  As the kids grow up and move on, be sure to make your peak earning years your peak savings years as well.

19. Beware of fees.  A good adviser or mutual fund can add value, but pay close attention to the fees you are paying.  It’s not just the fees, but the compound interest those fees would have earned had they stayed in your account.  Over a 30 year period, an extra 1 percent in fees is enough to shave 25 percent off the ending value of your investments.

20. Don’t retire early.  Calling it quits before your full Social Security retirement age could mean a 20 percent permanent reduction in benefits.  It’s worth remembering that the number one reason people retire early is poor health (see number 8).

Unless you’re a trust fund baby or a lottery winner (and let’s be honest, they all quit reading after number 3), you’ve probably got a little work to do.  But have no fear.  You can do a lot in 20 years.  The key, as with most things, is to start.  Ready?  Go.

Essential financial tips for empty nesters

Essential financial tips for empty nesters

If your kids are grown and moving on to the next stage of their lives, it’s time for you to begin thinking about the next stage of yours.  For many, the empty nest years fall in that decade or so just before retirement.  Because of that, it’s an ideal time to make adjustments to your finances and make sure you’re on track to meet your retirement goals.  If your kids have flown the coop, here are seven key financial moves you should consider making.

Adjust your insurance coverage

With your kids out on their own, it’s time to review your insurance coverage.  If they’re no longer driving your cars, ask your insurance agent about removing them from your policy or getting a distant-student credit.  Similarly, if they have health coverage provided by their school or a new employer, removing them from your policy will likely reduce your premiums.  And don’t forget about life insurance.  If your kids are through school and the house is paid for, you probably don’t need as much life insurance, but you may want to consider adding long-term care insurance.  Meet with a trusted adviser to evaluate your circumstances and craft a plan that is appropriate for your current stage in life.

Re-focus your finances

Several studies have shown that the cost of raising a child from birth to age eighteen can run anywhere from $250,000 to $500,000.  That’s a big chunk of change and causes many people to neglect their planning for things like retirement.  With fewer mouths to feed and big expenses like college and braces out of the way, it’s time to re-focus your finances on you.

The good news is that you’re likely in your peak earnings years and retirement plan contribution limits are higher for people over age fifty.  Take advantage of those higher limits by putting away as much as possible. The maximum 401(k) contribution for 2011 is $16,500 plus an additional $5,500 if you’re over 50. IRA contribution limits are $5,000 plus an additional $1,000 if you’re over 50.  That means that a working, married couple could sock away an additional $280,000 in just five years simply by maximizing their 401(k) and IRA contributions.

Re-do your budget

A budget for a family of five looks drastically different than a budget for two.  Take a hard look at your expenses and re-design your budget with your new circumstances in mind.  I’ve already talked about insurance and savings, but don’t forget to consider things like cell phone plans, cable tv channels that only junior watched, the grocery bill, and memberships or subscriptions that you were covering for the kids.  Once you’ve freed up some extra money each month, see point two.

Go back to work

If you stayed home to raise your kids, consider going back to work at something you really enjoy.  Not only can a job replace some of the purpose you derived from raising the kids, but it can also increase the Social Security benefits you’ll be eligible for and provide extra money for savings or meaningful pursuits.

Consider downsizing

Selling the home you raised your family in can be difficult, but it might make sense if you don’t need the space or if you plan on moving when you retire.  Even if you don’t initially downsize your house, work at downsizing your stuff, especially those things that you no longer need now that the kids are gone.  Here’s a great article by Leo Babauta on how to de-clutter a room.  Paring down your stuff will make the transition easier if you eventually decide to move to a smaller place or retire in a different state.

Downsizing can also help you unlock the value in your home.  For many, their home is their biggest asset.  If your house made sense for a growing family, but is overkill now that the kids are gone, moving to a smaller place could free up tens or hundreds of thousands of dollars for retirement.

Get out of debt

The typical empty-nester has about ten or fifteen years to go until retirement.  That’s plenty of time to make sure your debt retires when you do.  Retiring debt free can slash 20-40 percent off the amount you need to save for retirement.  For more information, read my earlier post on how (and why) to retire debt free.

Review your asset allocation and retirement plans

As you get closer to retirement, you will likely want to adjust your investments to make your portfolio more conservative.  Meet with a trusted financial adviser to make sure your asset allocation is appropriate and to track your progress towards retirement goals.  If married, it’s also a good idea to talk with your spouse about your retirement plans and dreams to make sure you’re both on the same page.

As you can see, sending the kids out on their own can be a major transition, both emotionally and financially.  By taking a few simple steps and being intentional with your planning, you can enter the next stage of life with confidence and purpose.

Anxious?  Keep your focus on what you can control.

Anxious? Keep your focus on what you can control.

It’s understandable if you’re feeling a bit anxious. Not only was the U.S. credit rating just downgraded for the first time in history, but over the last few years we’ve had a housing bubble, a credit bubble, runaway government spending, soaring gas prices, a global recession, high unemployment, the risk of a U.S. debt default, and a fiscal crisis in Europe.

Add to that things like the tsunami and nuclear disaster in Japan or the Arab revolts in the Middle East and you can almost see our national blood pressure rising. This is especially true if you, like 78 million other baby-boomers, are getting close to retiring.

In the face of so much uncertainty, how can you minimize anxiety and head into retirement feeling confident and assured?

Answer: Focus on things you can control.

Legendary basketball coach John Wooden once said: “The more concerned we become over the things we can’t control, the less we will do with the things we can control.”

Here’s an exercise that can help keep the focus on things you can actually do something about:

Take out a piece of paper and divide it into two columns. At the top of the left column, write “Things I can control about retirement.” At the top of the right column, write “Things I can’t control about retirement.” Now start filling in each.

You’ll probably notice that the right column is full of the things we mentioned earlier, like the markets, political uncertainty and unemployment.

The left column will be made up of things like saving, reducing debt, creating a retirement budget, evaluating housing options, creating a distribution plan, deciding when to take Social Security, planning meaningful pursuits and completing your estate plan.

As you look at those two columns, ask yourself this question: “During my typical day, do I spend my time and attention focusing more on the left column or the right column?” If you answered the right column, chances are that your stress level is high and your productivity is low. Focusing on things you can’t control is a recipe for frustration.

If you shift your focus to those things in the left hand column, you’ll notice that your productivity will go up and your anxiety will begin to go down. This is especially true in the area of your finances, because that is what is causing most people to lose sleep.

According to a recent poll by Gallup, the No. 1 retirement fear (held by 53 percent of Americans) is not having enough money. Only about a third of people felt that way when Gallup did the same poll in 2002. Thankfully, this is an area that you can actually do something about. Here are eight things you can do to boost your income security.

Save more

One obvious way to pad your nest egg is to save more. If you are still working, make saving a high priority. Both 401(k)s and IRAs have higher contribution limits for people over 50. Take advantage of those limits by putting away as much as possible. The maximum 401(k) contribution for 2011 is $16,500 plus an additional $5,500 if you’re over 50. IRA contribution limits are $5,000 plus an additional $1,000 if you’re over 50.

That means that a working, married couple could delay retirement by five years and sock away an additional $280,000 simply by maximizing their 401(k) and IRA contributions. The delay also could give markets time to move higher which, when coupled with the new additions to your portfolio, could significantly improve your financial position in retirement.

Pay off debt

Debt adds risk and reduces cash flow. Those things are especially troublesome to someone in retirement. By retiring debt free, you can greatly reduce the amount of savings necessary to fund your retirement. Assuming a 4 percent withdrawal rate, it takes $25,000 in savings to generate $1,000 in income each year (25 to 1).

That means if you’re mortgage is $1,300 per month and you’re able to pay it off before you retire, you could slash $390,000 from the amount you need to save for retirement.

Work longer

Working longer may not sound fun, but neither is running out of money. If you haven’t saved enough, one option is to keep working and earning a paycheck. This strategy has multiple benefits: it allows you to save more, it gives your portfolio more years to recover and grow, it could help boost your potential Social Security benefits and it decreases the overall amount of income you need to draw over the years.

If the amount you need to make up is smaller, you also could consider working part-time. This could mean doing a phased retirement with your current employer or choosing something else entirely. Either way, it could give you increased freedom to begin following your retirement dreams while still providing some income.

Cut retirement expenses

If the idea of working longer doesn’t appeal to you, consider retiring on schedule and make up for any shortfall by reducing your retirement expenses. Examine your retirement budget for items you can reduce or eliminate.

Housing and transportation are often major expenses. Consider downsizing to a smaller home or sharing a car with your spouse. Staying active and healthy can save on health care co-pays and prescription costs. Substituting planned hobbies or activities with less expensive alternatives also can trim costs without significantly changing the quality of your retirement.

Taken cumulatively, these adjustments to your retirement budget can help reduce the strain on your nest egg and still provide a meaningful retirement.

Delay Social Security

If you delay collecting Social Security until after your full retirement age, you will get a permanent increase in your benefits. The increase is based on the year you were born. For example, those born after 1943 will get an 8 percent credit for each year they wait. The increase caps out at age 70, so a person waiting until then could see an increase of 24 percent to their benefits.

Review your asset allocation

The market upheaval of the last several years and investors’ response to that upheaval has wreaked havoc on many people’s asset allocations. Rather than having a balanced, diversified portfolio, many have sought safety by moving everything to cash or bonds. That could cause serious problems in the future if inflation picks up or the bond market stumbles. To protect your assets and maximize your returns over time you should meet with a trusted adviser and make sure the investments you hold are appropriate based on your risk tolerance, goals and time frame.

Protect against sequence risk

Stock and bond returns can be volatile.  Sequence risk is simply the risk that you will retire and begin withdrawing money during a period of low (or negative) investment returns.  Those early negative returns greatly increase your odds of running out of money.

One way to minimize sequence risk is to have a year or two of withdrawals sitting in cash.  If you retire just prior to a bull market, you can pull income from your growing investments.  If you retire on the cusp of a bear market, you can take withdrawals from your cash.  That way you won’t be forced to sell investments in a down market in order to fund retirement and you will be less likely to run out of money.

Draw a greater percentage from your nest egg

Deciding how much to take from your portfolio each year during retirement is one of the most important decisions you will make. You don’t want to run out of money, but you don’t want to live like Scrooge either. Most experts peg the “safe” withdrawal rate at around 4 percent per year. If 4 percent of your nest egg isn’t enough to meet your needs, you can always take more. Keep in mind, however, that the more you take, the greater the chance that you will outlive your assets.

As you can see, by focusing on those things that you can control, you can minimize anxiety and maximize security as you approach retirement. Statistically speaking, the world doesn’t come to an end very often. Rather than worrying about all the things that make headlines, focus instead on giving your very best to those areas that you can do something about.

Thanks for reading.  If you enjoyed this article, use the share buttons on our site to share it with your friends.  Touch base if I can ever help.

Joe

I originally published this article at www.fpanet.org.