5 Financial Rules of Thumb You Need to Break

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One of my favorite Seinfeld episodes is when Kramer storms into Jerry’s apartment and starts complaining about another golfer who picked up his ball in the middle of the fairway to clean it.

Kramer goes on to say that he penalized his friend a stroke for breaking the rule.

Elaine then asks, “What is the big deal?” and Kramer replies, “Hey, a rule is a rule, and without rules there’s chaos.”

The same can be said for personal finance.

Without money rules, chaos can ensue. However, there are some rules of thumb I believe you should be breaking if you want to get ahead.

Some rules are outdated, and some simply don’t apply to everyone’s individual financial circumstances. So why bother follow a rule that makes no sense?

Here’s my list of 5 financial rules of thumb you should consider breaking:

1) Use Your Age to Determine Asset Allocation

During the 1980s and 1990s, it was standard to give the following asset allocation advice:

“Subtract your age from the number 100 and that is the percentage of your portfolio you should have invested in equities, with the remaining percentage in fixed income, adjusted each year as you age.”

Under this rule, at age 30, for instance, you should keep 70% of your portfolio in stocks and the rest in bonds and other relatively safer securities. At age 65, you invest 35% of your assets in stocks.

The idea behind the rule is to gradually reduce investment risk as you age. But that doesn’t always work. Americans are living longer and retiring later.

Your retirement savings strategy should be adjusted to meet a bigger nest egg. At the same time, the yield on a 10-year Treasury Bill is roughly 2.5%, down from a peak of nearly 16% in the 1980s.

And with the stock market soaring over the past decade, it might not have made a lot of sense to dump a large portion of money into fixed income when you could reap greater gains.

My advice, rebalance your portfolio each year, look at your target retirement age, what you plan on using your funds for in retirement and your risk tolerance.

2) Pay Off Your Mortgage as Fast as Possible

For most, a mortgage is the largest debt they’ll ever owe. So from a risk tolerance point of view, it makes sense to want to pay down the debt as fast as possible.

Although this really only makes sense when interest rates are outpacing the stock market. If interest rates are double digits and investment returns average 7%, yes, it makes sense to pay down your mortgage faster.

But, the majority of homeowners today have a mortgage rate of less than 5%, and are seeing average annual returns above 7%.

So it’s better to make your payments on time, take your mortgage interest deduction on your federal income taxes and have more money invested for higher returns.

3) You’re Throwing Away Money If You Rent

Owning a home is part of living the American dream. And there’s been long held debates over whether or not renting is akin to flushing money down the toilet.

The way I see it, you have to live somewhere and renting affords you a life free of many of the  unpredictable expenses homeownership offers. Not having to pay mortgage interest, property taxes, maintenance and repairs can be a big plus if there are good opportunities to put your money to work elsewhere.

Renting also means you have the flexibility to move to where opportunity exists. If you’re tied to a home, you might not be able to pick up and move to a more lucrative job opportunity in a neighboring state.

Obviously, there are benefits to owning a home too, so take this advice with a grain of salt.

4) Spend No More Than 30% of Your Income on Housing

The 30% rule is a common budget benchmark for housing costs. The gurus tell you to cap your rent or mortgage at under 30% of your monthly income.

This rule of thumb stems from housing regulations from the late 1960s. A US Census Bureau study said the Brooke Amendment (1969) to the 1968 Housing and Urban Development Act established the rent threshold of 25% of family income in response to rising renting costs.

The rent standard later rose to 30% in 1981, which has since remained unchanged, according to the study.

But this 40 year old standard may not be realistic for a lot of people today. A Harvard University study found in 2015, nearly 21 million renters — almost half of the country’s renters — spent more than 30% of their income on housing across the country.

Rather than think 30%, think what can I afford? Look at how much you earn, how much debt you owe, and where you live, your rent could be more or less than 30% of your paycheck.

If you find your rent is eating away most of your paycheck, consider ways of making more income or consider moving somewhere with lower costs.

5) Withdraw 4% of Your Savings In Retirement

When you retire, it’s been said you should start withdrawing 4% from your portfolio in your first year of retirement, increasing withdrawal each year enough to cover inflation.

If you have $2 million saved, you would take out $80,000 for the first year. If the annual inflation rate is 2%, then you withdraw $81,600 the following year ($80,000 plus 2%). And you continue this trend for the next 30 years.

This rule was created on historical data by financial advisor William Bengen in 1994. Where this rule falls short is it doesn’t take into account life’s ups and downs.

Your investment performance might lag one year because of a poor market or economic conditions. Bengen also assumes retirees have a portfolio split between stocks and bonds. He later revised the rule to 4.5%, using a more diversified portfolio.

My advice to you is be flexible and revise your spending rate based on your needs and portfolio performance. Early retirees might have a smaller nest egg, and need to withdraw less than 4% to make their savings last.

And someone with major health concerns and a shorter horizon might want to enjoy more of their savings with the time they have left.

As you can see there is no one-size-fits-all book of rules for personal finance. Use money rules as guidance, but use your best judgement on whether or not a rule should be broken or not.

To a richer life,

Nilus Mattive

Nilus Mattive

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6 HUGE Social Security Mistakes

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One of the biggest Social Security mistakes I see people make is claim their benefits too early.

According to the Center for Retirement Research at Boston College, 60% of seniors are applying for social security benefits before full retirement age.

If you turned 62 last year, your full retirement age will be 66 years and six months. Full retirement age will continue to increase in two-month increments each year until it reaches 67.

Even though you’re eligible to start claiming benefits at 62, it’s ill-advised. Monthly payments are reduced by 25-30% if you claim at 62, depending on your birth year.

In theory, claiming Social Security benefits should be straightforward — after working several decades, fill out an application and get a monthly benefit check for the rest of your life.

But, you and I know it’s not that easy. There are strategies to consider if you want to maximize your benefits, and there are several mistakes that could cost you thousands of dollars over the course of your retirement if you’re not careful.

Here are just a few mistakes I see people make that could easily be avoided.

Mistake #1 – Claiming Benefits Too Early

I already explained why this is not advised for most retirees. But if you already chose to claim benefits early and now are second-guessing your decision, there are some recourse steps you can take.

Specifically, you are allowed to withdraw your Social Security application and re-claim benefits at a later date, but two conditions apply.

First, you must withdraw your application within the first 12 months of receiving benefits. And second, you have to pay back every cent of benefits you’ve already received. Which can be a lot of money if you weren’t planning on withdrawing.

This is why you should be certain. There are some perfectly good reasons for claiming benefits before your full retirement age, but it’s important to weigh all your options before you make moves.

Mistake #2 – Not Understanding the “Earnings Test”

If you’re still working and haven’t yet reached full retirement age, your benefits can be withheld based on your earnings.

Here are the two “earnings test” rules for 2019:

  1. If you will reach full retirement age after 2019, $1 of your benefits will be withheld for every $2 you earn in excess of $17,640.
  2. If you will reach full retirement age during 2019, $1 of your benefits will be withheld for every $3 you earn in excess of $45,920. This is prorated monthly, and only the months before your birthday month are counted.

To be clear, benefits withheld under the earnings test aren’t necessarily lost. They can be returned in the form of increased benefits once you reach full retirement age.

People who think they can be fully employed and collect their Social Security benefits are often caught off guard when the Social Security office tells them they made too much money and have to repay some of the benefits.

Once you reach full retirement age, you can earn as much as you’d like with no reduction in benefits.

Mistake #3 – Assuming Social Security Is All the Retirement Income You Need

23% of married couples age 65 and older and 43% of unmarried seniors rely on Social Security for 90% or more of their income. Not only is this unsustainable, it’s not how Social Security was designed. The original intent was that Social Security would account for about half of your retirement income.

In reality, the average American can expect Social Security to replace about 40% of their income. The rest needs to come from other sources, like pensions and retirement savings.

Typically you’ll need 70% to 80% of your pre-retirement income to maintain your quality of life after retiring.

Mistake #4 – Not Checking Your Social Security Earnings Record

Do you check your Social Security statement each year? If not, now is a good time to create an account at www.ssa.gov and check it out.

Your Social Security statement has lots of valuable information, including your estimated retirement benefits, disability benefit eligibility, Medicare eligibility and benefits for your potential survivors.

But maybe the most important reason to check your statement every year is to ensure it’s correct. Recently, the SSA said there was about $71 billion in Social Security-taxed wages that couldn’t be matched to any earnings records, and only half of this was eventually resolved.

Because your future benefits are based on your earnings record, it’s important to make sure you keep tabs on this number.

Mistake #5 – Remarrying without Understanding the Consequences

If you’re collecting an ex-spousal Social Security benefit and you remarry, that benefit goes away. And if you remarry someone who is 10 or 20 years younger than you, you might not qualify for spousal Social Security benefits for awhile.

So make sure you understand how remarrying will impact your benefits. Also consider, if your ex-spouse passes away, you will step up to their full benefit amount — not the most pleasant thing to think about but important to consider.

Mistake #6 – Assuming Social Security is Tax Free

A surprising number of people I’ve talked to don’t realize they may have to pay income tax on their Social Security benefits. It depends on how much retirement income you have. But you don’t have to be considered “high income” to be taxed.

If your combined income is greater than $25,000 for single filers or $32,000 for married couples filing jointly, as much as 50% of your benefits could be taxable. If your combined income is greater than $34,000 (single) or $44,000 (joint), as much as 85% of your benefits could be subject to federal income tax.

It really depends on how significant a source Social Security will be for your retirement income. If you have a pension and significant 401(k) income, likely a portion of your Social Security benefits will be taxed.

If Social Security is your prime source of retirement income, you’re unlikely to be taxed. Consider this when estimating how much income you’ll need in retirement.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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How to Retire Rich Without Social Security

This post How to Retire Rich Without Social Security appeared first on Daily Reckoning.

It’s no secret that our country’s Social Security program is running out of money.

The Social Security system is paying out in benefits more than it’s collecting in tax revenue and as a result they’re dipping into the Social Security trust fund to make up the difference.

If Congress takes no action to fix the problem, starting in 2034 retirees are going to see a 23% cut in social security payments.

Today, the average retiree receives about $1,300 per month from SS. If this massive cut happens, your SS cheque will drop to about $1,000. This will lead to an economic crisis worse than the 1930s depression.

Anyone in their twenties, thirties, heck, even forties might be thinking: “Gee, I feel bad for Dad or Grandpa, but you know it’s not my problem.”

Well the reality is it is your problem. Because Congress will find the money…and you know where they’ll find it? Tax increases on American workers.

What can you do?

The key is to start saving. You have to assume you’re not going to get much help from our government, you’re not going to get much help from your employer, and your financial future is all up to you. And that means you need to save more and save a lot.

The issue is we’re really not good at preparing for retirement. The vast majority of Americans are reaching retirement with around $150,000 saved in their 401(k) plans…for the whole rest of their life. That’s clearly not enough.

Here are some strategies that will allow you to retire rich without having to rely on social security:

Max Out Your 401(k) Match

You can’t rely on your employer to bail out your retirement but if they’re offering to help, then at least make the most of it.

In 2019, the IRS allows those up to age 50 to contribute $19,000 to a 401(k) plan or a similarly structured 403(b) or 457 plan. If you’re older than 50, you can contribute up to $25,000 in 2019.

Most workplaces offer employees the choice of using a traditional plan, which offers an immediate tax deduction or a Roth account, which eliminates a deduction on contributions in exchange for tax-free withdrawals in retirement.

The biggest perk to a 401(k) plan is a lot of employers will match a portion of your contributions. This can be set up in different ways, like a dollar-for-dollar match or a percentage match of contributions up to a certain amount. Take advantage of your employer’s match program, it’s an easy way to boost savings.

Build Your Own Pension Through Tax-Free Savings

Start saving early at the highest percentage you can even if you’ve been putting this off. But don’t let your savings get eaten up by taxes. Minimize what you owe the government by using IRAs, health savings accounts and your employer’s 401(k).

IRAs offer traditional and Roth options, so you can choose to receive tax savings now or in the future.

But contribution limits for IRAs are significantly lower than for 401(k) plans – $6,000 for workers up to age 50 and $7,000 for those 50 and older in 2019.

If you’re eligible for a high-deductible health insurance plan with single coverage, you can contribute $3,500 to an HSA in 2019. With family coverage, you’re looking at contributions up to $7,000.

When you contribute money to these accounts, your money is tax deductible, grows tax-free and can be used tax-free for qualified medical expenses. At age 65, withdrawals can be made from an HSA for any reason and only regular income taxes will apply.

Invest, Invest, Invest

You can’t just save money for retirement and expect it to grow. You need to invest properly. And I don’t mean just putting all your savings into the S&P 500 and hoping for the best.

Index funds that track the market are great, but shouldn’t be your only strategy. If you’re still several years away from retirement, you may want to put your savings in more aggressive growth funds to maximize potential returns.

And if you’re nearing retirement, you might take the opposite approach and diversify your savings into less risky investments. It all depends on your circumstances but leaving your money sit in a savings account earning half a percent is no good.

Find Other Guaranteed Sources of Income

Social Security gives you a steady monthly income, regardless of how the market performs. But an annuity can do the same.

If you’re looking for peace of mind, a variable annuity might be right for you. Payments are fixed though, so if you happen to die prematurely, any extra principal is pocketed by the insurer. But, annuities can be another source of guaranteed income to look into.

Claim What’s Yours, Early

There’s no telling what could happen to Social Security. While the full retirement age is 66, you can begin claiming benefits as young as 62. If you do claim early, you lock in a permanent 30% reduction in benefits.

But with the future of SS in question, it might not be such a bad move to claim as much as possible before the program runs out.

Still, I think it’s unlikely that Congress will let SS collapse by 2035. So it’s best to wait and maximize your SS benefits. If you’re married, you might be able to hedge your bets by having one person claim benefits early and let the other wait.

SS was never meant to replace 100% of your pay at retirement. It was designed to prevent people from going into poverty like in the great depression.

However even though it’s likely not going to disappear, save like it doesn’t exist and you’ll thank me later.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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How Do You Picture Your Golden Years?

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When you picture yourself in your golden years, are you lying on a beach, hitting golf balls, or working behind a desk?

For a lot of soon-to-be retirees, the office will be where they spend most of their golden years. Working in retirement not only gives you the opportunity to earn more money, but you can maintain structure in your days and keep your social connections alive.

But working in retirement is not for everyone. There are several drawbacks to working during your retirement years as well. For instance, some people are surprised when I tell them their retirement income is subject to tax.

If you’ve started Social Security benefits and you pick up part-time work, your earnings may push your income to a level where your Social Security benefits are taxable. And if you’re younger than full retirement age, working may temporarily lower your Social Security benefits.

Today I’m going to outline some of the pros and cons of working in retirement to paint a clear picture in your mind of what’s ahead if you decide to continue working.

Here are some of the pros to staying in the workforce during your retirement years:

Earn More

A lot of people worry they won’t have enough money saved for retirement. Continuing to work is a good way to allow yourself time to continue boosting your retirement savings until you’re comfortable. If your money is invested, you also get the added benefit of being able to wait out a poor performing market or ride out the highs with less risk.

Also, the longer you delay collecting Social Security, the higher your benefits. So your benefits will be higher if you start collecting Social Security at age 70 than if you started collecting at age 65.

Work Keeps You Mentally Fit

There is plenty of research to support that working delays the onset of age-related diseases like dementia and alzheimers.

Work also keeps you feeling younger. A lot of older workers report feeling younger than their actual age due to their sense of purpose and regular daily routine.

Social Connections

If you choose to work in retirement, you likely have more friends. Work provides opportunities for social interaction.

Some people get bored without work to do. They like having a place to go every day, people to meet, and problems to solve.

Bonus Cash

Even if your retirement is fully funded, some retirees will go back to work part-time to make a little bit extra so they can splurge on small luxuries.

Working a retirement job can give you some bonus cash for traveling, meals out with friends, gifts for your grandchildren or to cover the cost of any other planned and unplanned social activities.

Work-life Balance

If you decide to continue working in retirement, your job will likely become more flexible than your typical career job. Several 60-somethings transition to retirement by arranging part-time work, bridge jobs or a phased retirement.

For example, a lawyer might cut back to three days a week for lower pay. A product engineer might give up his management responsibilities to go back to the laboratory part-time, with flexible hours.

Some retirees will even negotiate work from April through December, and then take off somewhere warm for the winter months.

Try Something New

Just because you decide you want to continue working, doesn’t mean you have to stay in the same field or role. Most jobs offer the opportunity to learn new skills and stay up to date with changes in the industry.

If you know you need mental and intellectual stimulation, staying in a job that offers continuing education might be a good idea.

These are just  some of the pros to working in retirement. Here are some of the drawbacks to working in retirement you should know… 

Taxes

As I said earlier, some people are surprised when I tell them their retirement income is subject to income tax. When you start your Social Security benefits, even if only part time, you run the risk of boosting your income to a threshold where your Social Security benefits become taxable.

Self-employed retirees are hit with almost 15 percent payroll tax. And after age 70, your tax bill could go up again when you’re forced to take distributions from an IRA or 401(k) plan.

Wishing You Were Not Working

This ones obvious but it’s the reality for a lot of eligible retirees. Sometimes your financial situation is such that you can’t afford not to keep working.

Therefore you find yourself in situations where all your friends are retired and you can’t participate in all the fun activities they have planned because you have to go to work.

Having a Boss

You’ll get to a point (or maybe you’re already there) where you’re tired of constantly arranging your schedule to have enough time to do the things you actually want to do.

If your work is stressful, unrewarding or physically tiring and you have a bad boss, your stress levels will drop significantly after you stop working.

Lots of retirees find their back aches go away, headaches disappear and they lose excess weight when they stop working. Not to mention, you don’t have to deal with an exhausting commute every day.

Hard to Pursue New Goals

Possibly the most important reason not to keep working is the opportunity to pursue a new life and make it your own. Maybe you want to retire while you’re still healthy enough to travel.

Several retirees develop their creative side by taking up music, painting, woodworking, and pottery. While others just want more time with their grandchildren, which you can’t have if you’re stuck at work.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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What to Do If You’re House Rich but Cash Poor

This post What to Do If You’re House Rich but Cash Poor appeared first on Daily Reckoning.

If you are “house-rich” but “cash poor,” a reverse mortgage might be a way to access some additional cash for your retirement years.

On the other hand, it could be a costly temptation with upfront and ongoing expenses that erode the equity in the home you spent years paying off.

Basically, a reverse mortgage is the opposite of a regular mortgage where you gradually pay off the original principal and accruing interest of the home loan.

With a reverse mortgage, you already own the house (or at least a good amount of equity). The loan amount for a reverse mortgage is not paid down. Whatever interest the lender is charging compounds upward.

Advantages of a Reverse Mortgage

Reverse mortgages have a couple of advantages.

They are FHA guaranteed. That means that at the end of the mortgage whatever price the home is sold for, the value of the home will never be less than the amount owed.

Also, if the lender dies, the estate will not have to pay the lender the difference if the home sale is less than the remaining mortgage amount.

The borrower can receive the loan amount in a variety of ways:

  • a line of credit for the maximum amount of the loan
  • monthly payments for a specific number of years, or for the life of the loan
  • a lump sum amount for cash (applies only to fixed-rate loans)

Note: As of December 14, 2018, the FHA has increased the 2019 limit (or “claim amount”) to $726,525. Assuming a 5.25% mortgage interest rate, a borrower aged 73 with a high-value home could realize an additional $22,000 from an HECM.

Eligibility Requirements/Options for Heirs

Single-family or two-to-four-unit owner-occupied dwellings or townhouses and some condos and manufactured homes can qualify for a reverse mortgage.

The youngest borrower on the home’s title must be at least 62 years of age and meet financial qualifications established by HUD. If the home has an existing mortgage, the borrower must pay off the original mortgage with the proceeds of the HECM.

The borrower’s heirs have the option of repaying the reverse mortgage loan and keep the home in the family, or they can put the home up for sale.

Any home equity, if any, passes to the heirs. Again, the borrower or heirs will never owe more than the loan balance, and only the home is considered an asset when it comes to repayment liability.

Know the Costs Involved

The costs of opening a reverse mortgage can be quite high. For example, the lender can charge a loan origination fee based on the value of the home. Allowed fees range from 2 percent for homes worth $200,000 or less.

For more expensive homes, expect to pay $4,000 plus 1% of the home’s value above $200,000. High value homes will generate origination fees up to $6,000. 

Then there is the upfront cost of the initial mortgage insurance premium. The premium is based on the value of the home. If the borrower does stays below the 60 percent limit in accessing the loan principle during the first year, the initial mortgage insurance premium will be $500 for every $100,000 of the home’s value.

Note: The mortgage insurance premium is how the FHA guarantees the value of the property. Even if the lender goes out of business, the FHA will protect both the borrower and lender from loan default.

Ongoing mortgage insurance premiums are due for the life of the loan. Expect to pay an annual mortgage insurance premium equaling 0.5% of the outstanding mortgage balance. Expect to pay a monthly loan servicing fee of up to $30.

So far with loan origination costs and mortgage insurance, the reverse mortgage borrower who owns a home worth about $350,000 is facing over $7,000 in expenses. There are more.

Anticipate a HECM counseling fee for around $125. HUD requires that counseling to make mandatory counseling so that borrowers are fully aware of the consequences of the process.

Also, consider miscellaneous processing fees. Those closing cost includes fees for loan recording, title insurance, credit checks, etc. As in a regular home mortgage, expect to pay an appraisal and home inspection fees which can add another $500 to the upfront expenses.

Regular Costs of Home Ownership Continue

Continuing costs include your annual mortgage insurance payments over the life of the loan.

There are loan servicing fees as well, which add another $30-$35 a month to your mortgage account. Likewise, borrowers are still liable for property tax and home insurance payments.

Signs that a reverse mortgage is not the best idea:

A reverse mortgage might be just the ticket for a senior who needs more retirement income. Reverse mortgages, however, can be difficult to understand, and their interest and upfront fees can cut into a substantial portion of the home’s equity.

For most older adults, there are better solutions. Consider the following four warning signs that a reverse mortgage may not be the best choice:

1. The borrower wants to leave the home as an inheritance.

A reverse mortgage could add complications for the heirs. The only way someone in the family could inherit a home encumbered by a reverse mortgage is to pay off the reverse mortgage debt.

2. Someone else lives in the home.

If the borrower dies, sells out, or moves, and someone who is not on the mortgage lives in the home, that person no longer has a place to live. They must vacate the home immediately when the lender or heirs sell the home.

3. The borrower has medical bills.

Reverse mortgage payments could be a source to pay off medical bills. However, if the borrower’s health deteriorates and must move to a nursing home, the mortgage becomes due.

4. The borrower is financially strapped.

While the FHA requires proof that the lender can afford to stay in the home, unexpected financial emergencies can put a strain on retirement resources. Home maintenance, insurance, and taxes are relentless expenses could make a reverse mortgage a bad choice.

There are alternatives.

A reverse mortgage is an option for someone with lots of equity in their home, but with not enough money coming in for their retirement.

On the other hand, for someone who needs more income and wants to protect the value of their home, there are other strategies:

  • Refinance the existing mortgage to lower the monthly payments and free up cash.
  • Get a home-equity loan, which is essentially a second mortgage that leverages the existing equity of the home.
  • Sell the home and downsize to something more affordable.
  • Use the proceeds of the home sale to buy a less expensive place to live with lower maintenance and utility expenses.
  • Consider renting and be free of major home-ownership costs like property taxes, insurance and repairs.

Finally, another creative alternative to a reverse mortgage is to sell the home to the heirs. This approach could be a sale-leaseback arrangement. The owner sells the house to his or her children and then rents it from them with the cash from the sale.

This alternative avoids the expenses of an equity-wrecking reverse mortgage. Best of all the senior owner can continue to enjoy living in the home.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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3 Critical Factors for Your Investing This Year

This post 3 Critical Factors for Your Investing This Year appeared first on Daily Reckoning.

Although the S&P 500 is still up almost 10% year to date, it’s dropped roughly 5.7% in the last month.

So as we approach 2019’s halfway mark, you might be feeling like things are turning a bit and it might not be another “sit back and relax” kind of year… one where things just keep going up on autopilot.

Well, here’s how I look at it…

What Can You Control?

As investors, we should always remember that we CAN’T control the markets, the Fed, geopolitics, or other big-picture forces affecting our portfolios.

At the same time, we CAN control what expectations we have as well as the strategies we use to get where we want to be.

It really boils down to balancing a few important factors:

#1. TIME HORIZON

#2. RATE OF RETURN

#3. RISK UNDERTAKEN

Each of these elements needs to be combined in a way that makes sense for YOU.

For example, if you don’t mind waiting a long time for your wealth to really grow, you can easily get lower, steadier rates of return without taking on lots of risk.

Investing in quality dividend stocks – which I’ve been consistently recommending for two decades now – is a perfect example of this type of balance.

When the Dow jumps 30% in a year, your portfolio still surges in value.

When the market dips or goes sideways, your dividend payments keep flowing into the portfolio or buying you additional shares.

And ultimately, over a decade or two, your nest egg will likely end up having increased something like 10% a year on average.

Buying and Holding Assets

The same can be said for buying and holding other assets for the long-term – whether it’s real estate or precious metals.

In contrast, someone who wants better, faster returns is naturally going to have to take on a little more risk to get it… but even in this market, doing so is not impossible.

One way is targeting various shorter-term moves in various stocks and exchange-traded funds (ETFs).

In fact, you can even use ETFs to target moves in plenty of areas beyond stocks and related investments.

For example, there are widely-known ETFs targeting gold, silver, oil, and other commodities.

There are also ETFs and exchange-traded notes (ETNs) that are designed to rise when stock sectors, indexes, or various commodities fall in value… even some that produce two or three times the moves!

Again, you should expect some losers when you follow a more active approach… but the overall result can still give you a more rapid compounding effect even in choppy markets.

And if shorter-term gains of 5% or 12% still aren’t enough? Then you can simply slide the risk scale a bit further out and use greater amounts of leverage!

Using Leverage Isn’t Always a Bad Idea

Contrary to popular belief, using leverage isn’t always a bad thing nor does it even have to involve borrowed money.

For example, some of the funds I just mentioned use a limited amount of leverage to amplify moves in their underlying benchmarks.

Similarly, buying options to speculate on various up and down moves can do the same thing with even more dramaticeffects… while still never exposing you to unlimited risk like short selling, futures trading, or other leveraged approaches do.

And as I’ve proven over and over again, selling options can also help investors get extra investment income while actually LOWERING their portfolio’s overall risk in many cases!

As the market is dropping, selling put options on companies you wouldn’t mind owning is a terrific way to collect upfront payments while possibly getting you into the type of solid long-term investments I mentioned a moment ago.

Likewise, if you sell some covered calls against stocks you already own, you simply stand to collect extra income on top of any regular dividends you’re already earning.

And as long as you write contracts that have higher strike prices than your entry prices, the worst thing that happens is you book some additional capital gains. 

Bottom Line

Even if the major markets keep falling from here… or bouncing up and down without really going anywhere for the rest of the year… there’s no reason to get frustrated or sit on the sidelines.

You have plenty of ways to continue building your wealth whether you want to stay very conservative… get very aggressive… or split the difference with a more active approach like option selling.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post 3 Critical Factors for Your Investing This Year appeared first on Daily Reckoning.

What to Do if You Are Forced into Early Retirement

This post What to Do if You Are Forced into Early Retirement appeared first on Daily Reckoning.

Will you still be working by age 70?

It’s a fair question.

According to a recent survey by the Employee Benefit Research Institute, nearly one-third of workers predicted they’d be working until age 70 or older, and only 10% expected to retire before 60.

The reality is only 7% of the retirees surveyed worked until at least 70, and more than one third quit work before age 60.

And this wasn’t a fluke scenario either. Corporate downsizing, health problems and other unexpected events have led to more than 50% of U.S. workers, over the age of 50, having to retire earlier than expected.

We tend to think we’re going to work up to, or longer than, traditional retirement age, but it’s not usually the case. In fact, more often than not, older U.S. workers are pushed out of their jobs before their planned retirement date.

Since this is the reality we live in today, I think everyone should have an emergency retirement plan. If you find yourself out of a job unexpectedly, here are some steps you can take to deal with the prospect of early retirement:

Don’t Panic

Being let go or having to take an early retirement package is not always easy to stomach. Your pride might get in the way of your best judgement so don’t make any quick decisions with your money.

Instead, give yourself a few days to collect your thoughts on what just happened.

Review Your Finances

After you’ve taken some time to reflect, start reviewing your finances. Most likely you were planning to continue adding money into your company’s 401(k) or other retirement accounts. Those contributions are likely going to end, so the question becomes: Do you have enough saved to retire?

You can use the 4 percent rule to estimate how much you can safely take out of your retirement accounts. But also be sure to include Social Security and any pension benefits you might have coming your way.

If the numbers look good, then you can safely retire without worry. But if not, you may need to consider part-time work or drastically changing your lifestyle.

Consider Part-time Work Or Consulting

The likelihood of you matching the job you just lost is low, so don’t feel bad about taking a lower paying job or one with less status. Every dollar you earn is one less you’ll have to pull from savings and investments.

Plus, some part-time jobs even offer benefits. Costco and Starbucks, for instance, give part-time staff health insurance and 401(k) plans with company match.

You can also explore the idea of consulting or trying something outside your field of work. Look at early retirement as an opportunity to try something new.

Lower Your Expenses

While you’re on the hunt for new employment, it’s best to tighten up your budget. Searching for work as you get older becomes more difficult and the process can take longer than when you’re young.

Have a look at your monthly expenses and determine which ones are eating up the majority of your household income. For most, housing and transportation will be the biggest culprits.

If you’re single or your spouse is unemployed, you may need to consider some drastic cuts, like selling your house and relocating somewhere more affordable, or selling one of your vehicles to lower expenses like insurance, gas, and maintenance.

File for Unemployment Benefits

If you get laid off, you’re likely eligible for unemployment. You’ve paid into the system all your working life, there’s no shame in taking the benefits now that you actually need them.

You will have to prove that you’re actively looking for re-employment so make sure you follow the necessary steps. And, if you have no income, you might also be eligible for other benefits like food stamps, job training or employment counseling.

Lastly, if you were forced to retire early because of illness, you may also be eligible for disability benefits.

Find New Health Insurance

If you lost your job tomorrow, you can stay on your former employer’s health insurance plan up to 18 months, but you’ll likely have to pay the full cost.

Rather than pay more than you have to, consider applying for new health insurance right away. Since your income will be lower now, you can qualify for subsidies or for Medicaid. These options will most likely be cheaper than the COBRA offered by your employer.

Be Smart About Social Security

If you’re eligible for Social Security benefits, you can start to take them as early as age 62. But, if you do, your monthly benefits will be permanently reduced.

You could lose as much as 30 percent, according to the Social Security Administration, if you collect at 62 rather than waiting until your “normal” retirement age.

What’s more, you can earn “delayed retirement credits” if you postpone your benefits past normal retirement age. Do some research to make sure you’re collecting as much as you possibly can.

Pursue Hobbies

It can be hard adjusting to a life that’s not built around work. So channel your energy into new projects and hobbies that are equally fulfilling.

If you’ve always wanted to spend more time woodworking or gardening, now is the time to do it. And who knows, you might even develop a hobby that will pay you back. A lot of retirees have found ways to make some extra cash buying and selling old antiques, tools, and other usable or collectible items online.

Having to retire early is not always a bad thing. You might get a significant buyout package or you might realize you were ready to retire all along.

Just be prepared for anything and you’ll lessen the shock if the day comes.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post What to Do if You Are Forced into Early Retirement appeared first on Daily Reckoning.

ATTENTION: One Thing All Retirees Need

This post ATTENTION: One Thing All Retirees Need appeared first on Daily Reckoning.

It’s well known that when we’re in the workforce, we need vacations. Vacations can lower your blood pressure, increase your creativity, recharge, and prevent burnout from the day-to-day responsibilities at work.

Yet America is the No-Vacation Nation…

Research found that 47% of Americans didn’t take all of their vacation time in 2017, and 21% left more than five vacation days on the table. 

You might think that after you retire taking time off would no longer be important since retirement is like a permanent stay-at-home vacation.

No so.

Life gets in the way…

You may no longer have to get up to an alarm clock or deal with the stress of commuting to work. But you still have responsibilities, such as paying bills and maintaining your home.

Look at this way:

We’re living longer and retiring earlier and hope to have 25+ years of retirement. That’s about 9,000 days. Do you want to be doing the same thing on Day 2,632 that you did on Day 33?

Probably not.

Breaking Your Routine

It makes sense then, why you need an occasional break from your routine.

We fall into a rut, even when retired. Your day might go like this:

You get up the same time every morning, make coffee, read the newspaper, and check your email. Then you take the dog for walk, have lunch, and do household chores. Next thing it’s dinner time. A few hours watching TV and off to bed.

The following morning you do it all over again.

Sure, you might go to the gym or your volunteer job a few times a week. But it’s pretty much the same… day after day. 

Sitting on the beach while sipping one of those fancy drinks with little umbrellas sticking out of the glass can do wonders for gaining a refreshed perspective on life.

The same can be said for playing golf, fishing, or skiing in a country you’ve never visited. Your brain will get a dose of dopamine, the chemical associated with pleasure. In other words, you’ll feel good.

Meanwhile, you’ll have a freedom from obligations since you won’t be worrying about the weeds in the flower bed or the windows that need cleaning.

Also, boredom is one of the main reasons for the record-high divorce rate for the 50+ age group.

So spending time with your significant other while away from your routine can deepen the relationship and makes for lifelong memories.

There’s an even bigger reason to take a vacation from retirement…

Loneliness Is Deadly

When working, you likely had many social interactions, friends, and acquaintances. But now that you’re retired, those connections might be distant memories and you feel isolated.

According to the American Psychological Association, more than 42 million Americans say they’re lonely. And Census Bureau data indicate that that number will surge since more than a quarter of the population lives alone and nearly half of the population is unmarried.

Some health care professionals see this not only as a pending public health hazard, but an epidemic of increased risk of heart attack and stroke. Loneliness can even be more dangerous to your health than obesity.

Moreover, data from the Harvard Aging Brain Study was used to compare self-reported loneliness with the amount of amyloid, a protein that plays a key role in memory levels, in the brain.

The results as published in JAMA Psychiatry were that 32% of the participants who were identified as lonely tested positive for high amyloid levels — a warning sign for Alzheimer’s disease.

A few days without human contact aren’t going to throw your health into a tailspin. But weeks, months, and decades of loneliness can surely have a negative impact on your physical, emotional, and mental wellbeing.

On the other hand, a vacation gives you the opportunity to break the isolationism, interact with others, and restore a sense of identity.

From the Ordinary to the Extraordinary

The kind of vacation you take in retirement can vary widely.

For instance, you can visit grandchildren or friends across the country without spending a ton of money. Or travel to other cities or states to check out places to relocate.

If money isn’t a big concern, you can stay at a five-star wellness resort or take a cruise to just about anywhere.

Yet if you want something out of the ordinary, consider volunteer travel…

Volunteer travel opportunities generally run about the same price as a traditional vacation since the sponsoring organization requests a contribution to its cause. However, you go to places that tourists rarely see.

Habitat for Humanity is one of the organizations that sponsor such trips in the U.S. and abroad. Many are to poor, developing or third-world countries. So don’t expect the creature comforts you’re used to at home. There may be decaying infrastructure, such as washed out highways and questionable toilet facilities.

But you’ll make a difference in the local community and gain friends along the way.

You could also expand your mind by going on a learning expedition. One resource for these types of trips is Road Scholar, which has 1,000s adventures in the U.S. and in countries from Albania to Zimbabwe. 

A recent listing is to Mexico to witness the gray whale migration.

If you are more of the thrill-seeking type, why not learn a sport that you just never had time for? Sailing, snorkeling, skydiving may be on your bucket list. So if not now… when?

For example, CrewSeekers International posts available crewing positions from around the world. Many don’t require experience, only a good attitude and willingness to learn.

Want to take your skiing to the next level? Well, now you have the time…

Bumps for Boomers is a program meant to teach older folks how to handle moguls and powder. You’ve worked for decades and looked forward to a long and healthy retirement. But that doesn’t mean you’ve retired from living. Stretch your mind and imagination by breaking the routine.

Let retirement take a vacation… 

Strive to do different things, such as learning new languages and customs, tasting new foods, and meeting new and interesting people. Take a lot of pictures, share them with others, and cherish the memories.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post ATTENTION: One Thing All Retirees Need appeared first on Daily Reckoning.

Thinking About Retiring? Here’s How Much You’ll Really Need…

This post Thinking About Retiring? Here’s How Much You’ll Really Need… appeared first on Daily Reckoning.

One million dollars has long been the benchmark for how much retirees need to have saved for a comfortable retirement.

However, it appears a cool million doesn’t go too far these days. A new report by GoBankingRates, looked at how long a nest egg of $1 million would last in the U.S.

The study compared average expenses for people age 65 and older, including groceries, housing, utilities, transportation and health care.

Not surprisingly, the longevity of the $1 million nest egg really depends on where you live. The money stretched furthest in states like Arkansas, Mississippi and Tennessee, where retirees could live in leisure for at least 25 years.

But, in Hawaii, that same $1 million will only get you just shy of 12 years — mostly because of the higher cost of living and expensive real estate in the Aloha state. 

The study also points out the average person retires at age 63 and has a life expectancy of 85 years. So if you’re expected to spend 22 years in retirement, how much will you need to retire comfortably?

That’s the burning question everyone has. While there’s no exact formula to determine this magic number, there are some pretty good rules-of-thumb that’ll get you close.

Here are few questions to get you started:

1. How Much Will You Spend Once You’re Retired?

Step one is figure out how much you spend now. Build a budget and start tracking your expenses so you know exactly where your money goes each month.

There are a couple different schools of thought when it comes to calculating your retirement nest egg goal based on your burn rate. Some experts suggest you’ll need 70-80% of your pre-retirement income after you finish working.

Others say you’ll need at least 100% for the first 10 years into retirement. It’s a myth that spending slows down once you’re retired — if anything it goes up, at least in the first few years.

Another strategy is to have 10 times your final salary in savings if you want to retire by age 67. If you follow the 10x rule, here’s what that might look like for your savings over 30+ years:

  • 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

2. How Long Will You Live?

This is nearly impossible to predict so it’s sort of an unfair question. However, people are living longer now. A healthy, upper-middle-class couple who are 65 today have a 43 percent chance that one or both partners will live to see 95.

If your parents or grandparents lived well into their 80s and 90s, then chances are you’ll live that long too. But living longer comes at a cost.

The Bureau of Labor Statistics estimates that mean healthcare spending for seniors is close to $6,000 annually. And seniors are statistically more likely to experience major health emergencies.

It’s also worth noting that Medicare won’t shield you from high healthcare costs. In fact, you’ll need to pay Medicare premiums as well as coinsurance costs, which can be quite high.

Having a dedicated fund, ideally in a health savings account, to cover health care costs during retirement is a good idea.

3. Should You Follow the 4% Rule?

You’re probably familiar with the 4% rule, also known as the safe withdrawal rate. Which is basically the rate at which you can spend your money without running out because withdrawals primarily consist of interest and dividends. 

To figure out how big your portfolio needs to be, you divide your annual spending by 0.04 (or multiply it by 25).

For example, say your family spends $45,000 per year.

$45,000 x 25 = $1,125,000

You’ll need a $1.12 million nest egg to support yourself for at least 25 years.

If you’re wondering why 4% and not 2% or 10%? The four percent rule is calculated based the average rate of investment returns minus inflation. Historically, the stock market has returned an average 7% per year and on average inflation is about 3%.

7% – 3%  = 4%

So your net worth should increase by about four percent each year. If you spend that four percent, you should end the year with the same amount you started with and the cycle will continue.

The 4% rule is a solid rule of thumb. Since the early 1900s, it’s held true. However, experts are less optimistic about what future markets hold so there’s been a push for a more conservative 3% rule. But living off 3% is a lot less attractive so you’ll have to be the judge of what you can sustain.

The other option is to aggressively ramp up your savings. Savers can double, on average, their nest eggs in the last decade or so of their working lives, thanks to compound interest.

These are just a few ways to find your retirement target. Once you have a number in mind, there are three things you should do:

  1. Save as much of your income as you can. If your employer has a 401(k), the contribution limit for 2019 is $19,000 for workers under age 50. If you’re funding a Roth IRA or traditional IRA, the maximum yearly contribution is $6,000 for workers under age 50.
  2. Automate your savings. Have your employer deduct your savings from your checking account straight into your retirement account. You can’t spend what you don’t see.
  3. Increase your savings consistently. Either every six months or at the end of every year when you get a raise, you should be upping your savings. You can do this by setting up “auto-increase,” so you don’t forget.

If you follow these three steps, you’ll be in good shape to hitting your retirement number.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post Thinking About Retiring? Here’s How Much You’ll Really Need… appeared first on Daily Reckoning.

5 Financial Rules of Thumb You Should Break

This post 5 Financial Rules of Thumb You Should Break appeared first on Daily Reckoning.

One of my favorite Seinfeld episodes is when Kramer storms into Jerry’s apartment and starts complaining about another golfer who picked up his ball in the middle of the fairway to clean it.

Kramer goes on to say that he penalized his friend a stroke for breaking the rule.

Elaine then asks, “What is the big deal?” and Kramer replies, “Hey, a rule is a rule, and without rules there’s chaos.”

The same can be said for personal finance.

Without money rules, chaos can ensue. However, there are some rules of thumb I believe you should be breaking if you want to get ahead.

Some rules are outdated, and some simply don’t apply to everyone’s individual financial circumstances. So why bother follow a rule that makes no sense?

Here’s my list of 5 financial rules of thumb you should consider breaking:

1) Use Your Age to Determine Asset Allocation

During the 1980s and 1990s, it was standard to give the following asset allocation advice:

“Subtract your age from the number 100 and that is the percentage of your portfolio you should have invested in equities, with the remaining percentage in fixed income, adjusted each year as you age.”

Under this rule, at age 30, for instance, you should keep 70% of your portfolio in stocks and the rest in bonds and other relatively safer securities. At age 65, you invest 35% of your assets in stocks.

The idea behind the rule is to gradually reduce investment risk as you age. But that doesn’t always work. Americans are living longer and retiring later.

Your retirement savings strategy should be adjusted to meet a bigger nest egg. At the same time, the yield on a 10-year Treasury Bill is roughly 2.5%, down from a peak of nearly 16% in the 1980s.

And with the stock market soaring over the past decade, it might not have made a lot of sense to dump a large portion of money into fixed income when you could reap greater gains.

My advice, rebalance your portfolio each year, look at your target retirement age, what you plan on using your funds for in retirement and your risk tolerance. 

2) Pay Off Your Mortgage as Fast as Possible

For most, a mortgage is the largest debt they’ll ever owe. So from a risk tolerance point of view, it makes sense to want to pay down the debt as fast as possible.

Although this really only makes sense when interest rates are outpacing the stock market. If interest rates are double digits and investment returns average 7%, yes, it makes sense to pay down your mortgage faster.

But, the majority of homeowners today have a mortgage rate of less than 5%, and are seeing average annual returns above 7%. 

So it’s better to make your payments on time, take your mortgage interest deduction on your federal income taxes and have more money invested for higher returns.

3) You’re Throwing Away Money If You Rent

Owning a home is part of living the American dream. And there’s been long held debates over whether or not renting is akin to flushing money down the toilet.

The way I see it, you have to live somewhere and renting affords you a life free of many of the  unpredictable expenses homeownership offers. Not having to pay mortgage interest, property taxes, maintenance and repairs can be a big plus if there are good opportunities to put your money to work elsewhere.

Renting also means you have the flexibility to move to where opportunity exists. If you’re tied to a home, you might not be able to pick up and move to a more lucrative job opportunity in a neighboring state.

Obviously, there are benefits to owning a home too, so take this advice with a grain of salt.

4) Spend No More Than 30% of Your Income on Housing

The 30% rule is a common budget benchmark for housing costs. The gurus tell you to cap your rent or mortgage at under 30% of your monthly income.

This rule of thumb stems from housing regulations from the late 1960s. A US Census Bureau study said the Brooke Amendment (1969) to the 1968 Housing and Urban Development Act established the rent threshold of 25% of family income in response to rising renting costs.

The rent standard later rose to 30% in 1981, which has since remained unchanged, according to the study.

But this 40 year old standard may not be realistic for a lot of people today. A Harvard University study found in 2015, nearly 21 million renters — almost half of the country’s renters — spent more than 30% of their income on housing across the country.

Rather than think 30%, think what can I afford? Look at how much you earn, how much debt you owe, and where you live, your rent could be more or less than 30% of your paycheck.

If you find your rent is eating away most of your paycheck, consider ways of making more income or consider moving somewhere with lower costs.

5) Withdraw 4% of Your Savings In Retirement

When you retire, it’s been said you should start withdrawing 4% from your portfolio in your first year of retirement, increasing withdrawal each year enough to cover inflation.

If you have $2 million saved, you would take out $80,000 for the first year. If the annual inflation rate is 2%, then you withdraw $81,600 the following year ($80,000 plus 2%). And you continue this trend for the next 30 years.

This rule was created on historical data by financial advisor William Bengen in 1994. Where this rule falls short is it doesn’t take into account life’s ups and downs.

Your investment performance might lag one year because of a poor market or economic conditions. Bengen also assumes retirees have a portfolio split between stocks and bonds. He later revised the rule to 4.5%, using a more diversified portfolio.

My advice to you is be flexible and revise your spending rate based on your needs and portfolio performance. Early retirees might have a smaller nest egg, and need to withdraw less than 4% to make their savings last.

And someone with major health concerns and a shorter horizon might want to enjoy more of their savings with the time they have left.

As you can see there is no one-size-fits-all book of rules for personal finance. Use money rules as guidance, but use your best judgement on whether or not a rule should be broken or not.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post 5 Financial Rules of Thumb You Should Break appeared first on Daily Reckoning.