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Pay Down Debt or Save for Retirement?

You can use a variety of strategies to pay off debt, many of which can cut not only the amount of time it will take to pay off the debt but also the total interest paid. But like many people, you may be torn between paying off debt and the need to save for retirement.

Both are important; both can help give you a more secure future. If you’re not sure you can afford to tackle both at the same time, which should you choose?

There’s no one answer that’s right for everyone, but here are some of the factors you should consider when making your decision.

Rate of investment return versus interest rate on debt

Probably the most common way to decide whether to pay off debt or to make investments is to consider whether you could earn a higher after-tax rate of return by investing than the after-tax interest rate you pay on the debt.

For example, say you have a credit card with a $10,000 balance on which you pay nondeductible interest of 18%. By getting rid of those interest payments, you’re effectively getting an 18% return on your money.


That means your money would generally need to earn an after-tax return greater than 18% to make investing a smarter choice than paying off debt. That’s a pretty tough challenge even for professional investors.


And bear in mind that investment returns are anything but guaranteed. In general, the higher the rate of return, the greater the risk.

If you make investments rather than pay off debt and your investments incur losses, you may still have debts to pay, but you won’t have had the benefit of any gains. By contrast, the return that comes from eliminating high-interest-rate debt is a sure thing.

An employer’s match may change the equation

If your employer matches a portion of your workplace retirement account contributions, that can make the debt versus savings decision more difficult.

Let’s say your company matches 50% of your contributions up to 6% of your salary. That means that you’re earning a 50% return on that portion of your retirement account contributions.

If surpassing an 18% return from paying off debt is a challenge, getting a 50% return on your money simply through investing is even tougher. The old saying about a bird in the hand being worth two in the bush applies here.


Assuming you conform to your plan’s requirements and your company meets its plan obligations, you know in advance what your return from the match will be; very few investments can offer the same degree of certainty.


That’s why many financial experts argue that saving at least enough to get any employer match for your contributions may make more sense than focusing on debt.

And don’t forget the tax benefits of contributions to a workplace savings plan. By contributing pretax dollars to your plan account, you’re deferring anywhere from 10% to 39.6% in taxes, depending on your federal tax rate. You’re able to put money that would ordinarily go toward taxes to work immediately.

Your choice doesn’t have to be all or nothing

The decision about whether to save for retirement or pay off debt can sometimes be affected by the type of debt you have.

For example, if you itemize deductions, the interest you pay on a mortgage is generally deductible on your federal tax return. Let’s say you’re paying 6% on your mortgage and 18% on your credit card debt, and your employer matches 50% of your retirement account contributions.

You might consider directing some of your available resources to paying off the credit card debt and some toward your retirement account in order to get the full company match, and continuing to pay the tax-deductible mortgage interest.

There’s another good reason to explore ways to address both goals. Time is your best ally when saving for retirement.


If you say to yourself, “I’ll wait to start saving until my debts are completely paid off,” you run the risk that you’ll never get to that point, because your good intentions about paying off your debt may falter at some point. Putting off saving also reduces the number of years you have left to save for retirement.


It might also be easier to address both goals if you can cut your interest payments by refinancing that debt. For example, you might be able to consolidate multiple credit card payments by rolling them over to a new credit card or a debt consolidation loan that has a lower interest rate.

Bear in mind that even if you decide to focus on retirement savings, you should make sure that you’re able to make at least the monthly minimum payments owed on your debt.

Failure to make those minimum payments can result in penalties and increased interest rates; those will only make your debt situation worse.

Other considerations

When deciding whether to pay down debt or to save for retirement, make sure you take into account the following factors:

  • Having retirement plan contributions automatically deducted from your paycheck eliminates the temptation to spend that money on things that might make your debt dilemma even worse.If you decide to prioritize paying down debt, make sure you put in place a mechanism that automatically directs money toward the debt–for example, having money deducted automatically from your checking account–so you won’t be tempted to skip or reduce payments.
  • Do you have an emergency fund or other resources that you can tap in case you lose your job or have a medical emergency? Remember that if your workplace savings plan allows loans, contributing to the plan not only means you’re helping to provide for a more secure retirement but also building savings that could potentially be used as a last resort in an emergency.Some employer-sponsored retirement plans also allow hardship withdrawals in certain situations–for example, payments necessary to prevent an eviction from or foreclosure of your principal residence–if you have no other resources to tap. (However, remember that the amount of any hardship withdrawal becomes taxable income, and if you aren’t at least age 59½, you also may owe a 10% premature distribution tax on that money.)
  • If you do need to borrow from your plan, make sure you compare the cost of using that money with other financing options, such as loans from banks, credit unions, friends, or family. Although interest rates on plan loans may be favorable, the amount you can borrow is limited, and you generally must repay the loan within five years.In addition, some plans require you to repay the loan immediately if you leave your job. Your retirement earnings will also suffer as a result of removing funds from a tax-deferred investment.
  • If you focus on retirement savings rather than paying down debt, make sure you’re invested so that your return has a chance of exceeding the interest you owe on that debt.While your investments should be appropriate for your risk tolerance, if you invest too conservatively, the rate of return may not be high enough to offset the interest rate you’ll continue to pay

Regardless of your choice, perhaps the most important decision you can make is to take action and get started now.

The sooner you decide on a plan for both your debt and your need for retirement savings, the sooner you’ll start to make progress toward achieving both goals.

 

 

Important Disclosure

 

All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

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Planning for Marriage: Financial Tips for Women

Planning for marriage should involve more than just picking out invitations and deciding whether you should serve chicken or fish at the reception. More importantly, you’ll want to take a look at how marriage will impact your financial situation.

And while there are a number of issues you’ll need to think about, careful planning can increase the likelihood that you’ll have financial success as you enter this new chapter in your life.

Consider a prenuptial agreement

If either you or your future spouse has or may inherit substantial assets, or if either of you has children from previous marriages, you may want to consider a prenuptial agreement.

A prenuptial agreement is a binding contract between future spouses that defines the rights, duties, and obligations of the parties during marriage and in the event of legal separation, annulment, divorce, or death.

A prenuptial agreement typically addresses the following areas:

  • Assets and liabilities–What assets will each of you bring into the marriage? What liabilities do each of you have (e.g., credit card/mortgage debt)?
  • Contributions of each partner–Will there be particular consideration given for special contributions that either of you make (e.g., one spouse limiting his or her career)?
  • Divorce–If you and your future spouse divorce, will there be alimony or a lump-sum payment? How will you divide assets purchased from joint funds?
  • Estate planning–Who gets what at the death of either spouse?

Discuss your financial history

Marriage is the union of two separate individuals … and their finances. While talking about money can be a stressful topic for many couples, you’ll want to sit down and discuss your financial history and your future spouse’s financial history before you merge your money.

Start out by taking stock of each of your respective financial situations. You should each make a list of your individual assets (e.g., investments, real estate) and any liabilities (e.g., student loans, credit card debt) you may have.

This is also the time to address items such as how much each of you earns and if either of you has additional sources of income (e.g., interest, dividends).

Agree on a system for budgeting/maintaining bank accounts

Right now, you are probably accustomed to managing your finances in a way that is comfortable for you and you alone. Once you are married, you and your spouse will have to agree on a system for budgeting your money and paying your bills together as a couple.

Either of you can agree to be in charge of managing the budget, or you can take turns keeping records and paying the bills.

If both of you are going to be involved in the budgeting process, make sure that you develop a record-keeping system that both of you understand and agree upon.


In addition, you’ll want to keep your records in a joint filing system so that both of you can easily locate important documents.


Once you agree on a budgeting system, you’ll be able to establish a budget. Begin by listing all of your income and expenses over a certain time period (for example, monthly).

Sources of income can include things such as salaries and wages, interest, and dividends. Expenses can be divided into two categories: fixed (e.g., housing, utilities, food) and discretionary (e.g., entertainment, vacations).

Be sure to include occasional expenses (e.g., car maintenance) as well. To help you and your future spouse stay on track with your budget:

  • Try to make budgeting part of your daily routine
  • Build occasional rewards into your budget (e.g., going to the movies)
  • Examine your budget regularly and adjust/make changes as needed

This might also be a good time to decide whether you and your future spouse will combine your bank accounts or keep them separate.

While maintaining a joint account does have its advantages (e.g., easier record keeping and lower maintenance fees), it is sometimes more difficult to keep track of the flow of money when two individuals have access to a single account.

If you do decide to combine your accounts, each spouse should be responsible for updating the checkbook ledger when he/she writes a check or withdraws funds.

If you decide to keep separate accounts, consider opening a joint checking account to pay for household expenses.

Map out your financial future together

An important part of financial planning as a couple is to map out your financial future together. Where do you see yourself next year? What about five years from now? Do you want to buy a home together?

If you decide to start a family, would one of you stay at home while the other focuses more on his or her career?

Together you should make a list of short-term financial goals (e.g., paying off wedding debt, saving for graduate school) and long-term financial goals (e.g., retirement).

Once you have decided on your financial goals, you can prioritize them by determining which ones are most important to each of you. After you’ve identified which goals are a priority, you can set your sights on working to achieve them together.

Resolve any outstanding credit/debt issues

Since having good credit is an important part of any sound financial plan, you’ll want to identify any potential credit/debt problems either you or your future spouse may have and try to resolve them now rather than later.

You should each order copies of your credit reports and review them together. You are entitled to a free copy of your credit report from each of the three major credit reporting agencies once every 12 months (go to www.annualcreditreport.com for more information).

For the most part, you are not responsible for your future spouse’s past credit problems, but they can prevent you from getting credit together as a couple after you are married.

Even if you’ve always had spotless credit, you may be turned down for credit cards or loans that you apply for together if your future spouse has a bad track record with creditors.

As a result, if you find that either one of you does have credit issues, you might want to consider keeping your credit separate until you or your future spouse’s credit record improves.

Consider integrating employee and retirement benefits

If you and your future spouse have separate health insurance coverage, you’ll want to do a cost/benefit analysis of each plan to see if you should continue to keep your health coverage separate.

If your future spouse’s health plan has a higher deductible and/or co-payment or fewer benefits than those offered by
your plan, he or she may want to join your health plan instead. You’ll also want to compare the premium for one family plan against the cost of two single plans.

In addition, if both you and your future spouse participate in an employer-sponsored retirement plan, you should be aware of each plan’s characteristics.

Plans may differ as to matching contributions, investment options, and loan provisions. Review each plan together carefully and determine which plan provides the better benefits.

If you can afford to, you should each participate to the maximum in your own plan.

Assess your insurance coverage needs

While you might not have felt the need for life and disability insurance when you were single, once you are married you may find that you and your future spouse are financially dependent on each other.

If you don’t have life or disability insurance, you will want to have policies in place in order to make sure that your future spouse’s financial needs will be taken care of if you should die prematurely or become disabled.

If you already have life and disability insurance, you should reevaluate the adequacy of your existing coverage and be sure to update any beneficiary designations as well.

You should also take a look at your auto insurance coverage. Check your policy limits and consider pooling your auto insurance policies with one company (your insurance company may give you a discount if you insure more than one car with them). As for renters/homeowners insurance, you’ll want to make sure your personal property and possessions are adequately covered.

Important Disclosure
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Myths and Facts about Social Security

Myth: Social Security will provide most of the income you need in retirement.

Fact: It’s likely that Social Security will provide a smaller portion of retirement income than you expect.

There’s no doubt about it–Social Security is an important source of retirement income for most Americans. According to the Social Security Administration, more than nine out of ten individuals age 65 and older receive Social Security benefits.

But it may be unwise to rely too heavily on Social Security, because to keep the system solvent, some changes will have to be made to it. The younger and wealthier you are, the more likely these changes will affect you.


But whether retirement is years away or just around the corner, keep in mind that Social Security was never meant to be the sole source of income for retirees. As President Dwight D.


Eisenhower said, “The system is not intended as a substitute for private savings, pension plans, and insurance protection. It is, rather, intended as the foundation upon which these other forms of protection can be soundly built.”

No matter what the future holds for Social Security, focus on saving as much for retirement as possible. You can do so by contributing to tax-deferred vehicles such as IRAs, 401(k)s, and other employer-sponsored plans, and by investing in stocks, bonds, and mutual funds.

When combined with your future Social Security benefits, your retirement savings and pension benefits can help ensure that you’ll have enough income to see you through retirement.

Myth: Social Security is only a retirement program.

Fact: Social Security also offers disability and survivor’s benefits.

With all the focus on retirement benefits, it’s easy to overlook the fact that Social Security also offers protection against long-term disability. And when you receive retirement or disability benefits, your family members may be eligible to receive benefits, too.

Another valuable source of support for your family is Social Security survivor’s insurance. If you were to die, certain members of your family, including your
spouse, children, and dependent parents, may be eligible for monthly survivor’s benefits that can help replace lost income.

For specific information about the benefits you and your family members may receive, visit the SSA’s website at www.socialsecurity.gov, or call 800-772-1213 if you have questions.

Major Sources of Retirement Income

Source: Fast Facts & Figures About Social Security, 2016, Social Security Administration

Myth: If you earn money after you retire, you’ll lose your Social Security benefit.

Fact: Money you earn after you retire will only affect your Social Security benefit if you’re under full retirement age.

Once you reach full retirement age, you can earn as much as you want without affecting your Social Security retirement benefit. But if you’re under full retirement age, any income that you earn may affect the amount of benefit you receive:

  • If you’re under full retirement age, $1 in benefits Page 1 of 2, see disclaimer on final page will be withheld for every $2 you earn above a certain annual limit. For 2017, that limit is $16,920.
  • In the year you reach full retirement age, $1 in benefits will be withheld for every $3 you earn above a certain annual limit until the month you reach full retirement age. If you reach full retirement age in 2017, that limit is $44,880.

Even if your monthly benefit is reduced in the short term due to your earnings, you’ll receive a higher monthly benefit later. That’s because the SSA recalculates your benefit when you reach full retirement age, and omits the months in which your benefit was reduced.

Myth: Social Security benefits are not taxable.

Fact: You may have to pay taxes on your Social Security benefits if you have other income.

If the only income you had during the year was Social Security income, then your benefit generally isn’t taxable. But if you earned income during the year (either from a job or from self-employment) or had substantial investment income, then you might have to pay federal income tax on a portion of your benefit.

Up to 85% of your benefit may be taxable, depending on your tax filing status (e.g., single, married filing jointly) and the total amount of income you have.

For more information on this subject, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

What Is Your Full Retirement Age?

If you were born in: Your full retirement age is:
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

Note: If you were born on January 1 of any year, refer to the previous year to determine your full retirement age.

 

Important Disclosure
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Counting on Your Husband’s Retirement Income? Three Things Women Should Know

Women face special challenges when planning for retirement. Women are more likely than men to work in part-time jobs that don’t qualify for a retirement plan. And women are more likely to interrupt their careers (or stay out of the workforce altogether) to raise children or take care of other family members.

As a result, women generally work fewer years and save less, leaving many to rely on their husbands’ savings and benefits to carry them both through retirement.1

But this reliance creates risk–risk of divorce, risk that retirement funds won’t be adequate to last two lifetimes (a risk that falls disproportionately on women, who outlive men on average by almost five years),2 and risk of bad retirement payout decisions.

Here are three things you should know if you’re relying on your husband’s savings to carry you through retirement.

Qualified joint and survivor annuities

If your husband is covered by a traditional pension plan at work, one of the most important retirement decisions the two of you may make is whether to receive his pension benefit as a “qualified joint and survivor annuity” (QJSA).

While the term sounds complicated, the concept is simple: should you elect a benefit that pays a higher amount while you’re both alive and ends when your husband dies (a single life annuity), or a benefit that pays a smaller amount during your joint lives but continues (in whole or in part) to you if your husband dies first (a QJSA)?


In order to fully understand your choices, it may help to first go over how a traditional pension plan works. Typically, you’re entitled to a “normal benefit,” payable for your lifetime and equal to a percent of your final pay, if you work for a certain number of years and retire at a certain date.


A plan might say that you’ll get 50% of your final pay for life if you work 30 years and retire at age 65. If you work fewer years, your benefit will be less. If you retire earlier than age 65, your benefit will also be less, because it’s paid for a longer period of time.

For example, assume Joe is covered by a pension plan at work, and his plan contains the exact formula described above. Joe retires at age 65. He’s worked 30 years, and his final pay was $100,000.

He’s entitled to a normal benefit of $50,000 per year, payable over his lifetime and ending at his death (a single life annuity).

But in order to protect spouses, federal law generally provides that if Joe is married, the plan can’t pay this benefit to Joe as a single life annuity unless his spouse, Mary, agrees.

Instead, the benefit must be paid over Joe and Mary’s joint lives, with at least 50% of that benefit continuing to Mary for her remaining lifetime if she survives Joe.

(That’s why it’s called a “joint and survivor annuity;” and it’s “qualified” because it meets the requirements of federal law — “QJSA” for short.)

Now, here’s where it gets a little complicated. Because the QJSA benefit is potentially paid for a longer period of time–over two lifetimes instead of one — Joe’s “normal benefit” will typically be reduced.

Actuaries determine the exact amount of the reduction based on your life expectancies, but let’s assume that Joe’s benefit, if paid as a QJSA with 50% continuing to Mary after Joe’s death, is reduced to $45,000.

This amount will be paid until Joe dies. And if Mary survives Joe, then $22,500 per year is paid to her until she dies. But if Mary dies first, the pension ends at Joe’s death, and nothing further is paid.

The plan will usually offer the option to have more than 50% continue to you after your spouse dies. For example, you may be able to elect a 75% or 100% QJSA. However, the larger the survivor annuity you select, the smaller the benefit you’ll receive during your joint lives.

So, for example, if 100% continues after Joe’s death, then the payment to Joe might now be reduced to $40,000 (but $40,000 will continue to be paid after Joe’s death to Mary if she survives him)

You can rest assured that the QJSA option will be at least as valuable as any other optional form of benefit available to you — this is required by federal law.


In some cases, it will be even more valuable than the other options, as employers often “subsidize” the QJSA. “Subsidizing” occurs when the plan doesn’t reduce the benefit payable during your joint lives (or reduces it less than actuarially allowed).


For example, a plan might provide that Joe’s $50,000 normal benefit won’t be reduced at all if he and Mary elect the 50% QJSA option, and that she’ll receive the full $25,000 following Joe’s death.

It’s important for you to know whether your spouse’s plan subsidizes the QJSA so that you can make an informed decision about which option to select.

Other factors to consider are the health of you and your spouse, who’s likely to live longer, and how much other income you expect to have available if you survive your spouse.

You’ll receive an explanation of the QJSA from the plan prior to your spouse’s retirement, which should include a discussion of the relative values of each available payment option.

Carefully read all materials the plan sends you. A QJSA may help assure that you don’t outlive your retirement income — don’t waive your rights unless you fully understand the consequences.

And don’t be afraid to seek qualified professional advice, as this could be one of the most important retirement decisions you’ll make.

Qualified domestic relations orders

While we all hope our marriages will last forever, unfortunately that’s not always the case. And since men generally have larger retirement plan balances,1 the issue of how these benefits will be handled in the event of a divorce is especially critical for women who may have little or no retirement savings of their own.

Under federal law, employer retirement plan benefits generally can’t be assigned to someone else. However, one important exception to this rule is for “qualified domestic relations orders,” commonly known as QDROs.

If you and your spouse divorce, you can seek a state court order awarding you all or part of your spouse’s retirement plan benefit. Your spouse’s plan is required to follow the terms of any order that meets the federal QDRO requirements.

For example, you could be awarded all or part of your spouse’s 401(k) plan benefit as of a certain date, or all or part of your spouse’s pension plan benefit.

There are several ways to divide benefits, so it’s very important to hire an attorney who has experience negotiating and drafting QDROs — especially for defined benefit plans where the QDRO may need to address such items as survivor benefits, benefits earned after the divorce, plan subsidies, COLAs, and other complex issues.

(For example, a QDRO may provide that you will be treated as the surviving spouse for QJSA purposes, even if your spouse subsequently remarries.) The key takeaway here is that these rules exist for your benefit. Be sure your divorce attorney is aware of them.

You can have your own IRA

While it’s obviously important for women to try to contribute towards their own retirement, if you’re a nonworking spouse, your options are limited. But there is one tool you should know about. The “spousal IRA” rules may let you fund an individual retirement account even if you aren’t working and have no earnings.

A spousal IRA is your own account, in your own name–one that could become an important source of retirement income with regular contributions over time.

How does it work? Normally, to contribute to an IRA, you must have compensation at least equal to your contribution.

But if you’re married, file a joint federal income tax return, and earn less than your spouse (or nothing at all), the amount you can contribute to your own IRA isn’t based on your individual income, it’s based instead on the combined compensation of you and your spouse.

For example, Mary (age 50) and Joe (age 45) are married and file a joint federal income tax return for 2017. Joe earned $100,000 in 2017 and Mary, at home taking care of ill parents, earned nothing for the year. Joe contributes $5,500 to his IRA for 2017.

Even though Mary has no compensation, she can contribute up to $6,500 to an IRA for 2017 (that includes a $1,000 “catch-up” contribution), because Joe and Mary’s combined compensation is at least equal to their total contributions ($12,000).

The spousal IRA rules only determine how much you can contribute to your IRA; it doesn’t matter where the money you use to fund your IRA actually comes from — you’re not required to track the source of your contributions. And you don’t need your spouse’s consent to establish or fund your spousal IRA.

(The spousal IRA rules don’t change any of the other rules that generally apply to IRAs. You can contribute to a traditional IRA, a Roth IRA, or both. But you can’t make regular contributions to a traditional IRA after you turn 70½.

And your ability to make annual contributions to a Roth IRA may be limited depending on the amount of your combined income.)

 

Important Disclosure

Women are more likely than men to work in part-time jobs that don’t qualify for a retirement plan. And women are more likely to interrupt their careers (or stay out of the workforce altogether) to raise children or take care of other family members. As a result, women generally work fewer years and save less, leaving many to rely on their husbands’ savings and benefits to carry them both through retirement.1
Sources
1U.S. Department of Labor, “Women and Retirement Savings,” www.dol.gov (accessed November 2016)
2NCHS Data Brief, Number 229, December 2015

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Teaching Your College-Age Child about Money

When your child first started school, you doled out the change for milk and a snack on a daily basis. But now that your kindergartner has grown up, it’s time for you to make sure that your child has enough financial knowledge to manage money at college.

Lesson 1: Budgeting 101

Perhaps your child already understands the basics of budgeting from having to handle an allowance or wages from a part-time job during high school.

But now that your child is in college, he or she may need to draft a “real world” budget, especially if he or she lives off-campus and is responsible for paying for rent and utilities. Here are some ways you can help your child plan and stick to a realistic budget:

  • Help your child figure out what income there will be (money from home, financial aid, a part-time job) and when it will be coming in (at the beginning of each semester, once a month, or every week).
  • Make sure your child understands the difference between needs and wants. For instance, when considering expenses, point out that buying groceries is a need and eating out is a want. Your child should understand how important it is to cover the needs first.
  • Determine together how you and your child will split responsibility for expenses. For instance, you may decide that you’ll pay for your child’s trips home, but that your child will need to pay for art supplies or other miscellaneous expenses.
  • Warn your child not to spend too much too soon, particularly when money that has to last all semester arrives at the beginning of a term. Too many evenings out in September eating surf and turf could lead to a December of too many evenings in eating cold cereal.
  • Acknowledge that college isn’t all about studying, but explain that splurging this week will mean scrimping next week. While you should include entertainment expenses in the budget, encourage your child to stick closely to the limit you agree upon.
  • Show your child how to track expenses by saving receipts and keeping an expense log. Knowing where the money is going will help your child stay on track. Reallocation of resources may sometimes be necessary, but help your child understand that spending more in one area means spending less in another.
  • Encourage your child to plan ahead for big expenses (the annual auto insurance bill or the trip over spring break) by instead setting aside money for them on a regular basis.
  • Caution your child to monitor spending patterns to avoid excessive spending, and ask him or her to come to you for advice at the first sign of financial trouble.

You should also help your child understand that a budget should remain flexible; as financial goals change, a budget must change to accommodate them. Still, your child’s ultimate goal is to make sure that what goes out is always less than what comes in.

Lesson 2: Opening a bank account

For the sake of convenience, your child may want to open a checking account near the college; doing so may also reduce transaction fees (e.g. automated teller machine (ATM) fees). Ideally, a checking account should require no minimum balance and allow unlimited free checking; short of that, look for an account with these features:

  • A simple fee structure
  • ATM or debit card access to the account
  • Online or telephone access to account information
  • Overdraft protection

To avoid bouncing checks, it’s essential to keep accurate records, especially of ATM or debit card usage. Show your child how to balance a checkbook on a regular (monthly) basis. Most checking account statements provide instructions on how to do this.

Encourage your child to open a savings account too, especially if he or she has a part-time job during the school year or summer. Your child should save any income that doesn’t have to be put towards college expenses. After all, there is life after college, and while it may seem inconceivable to a college freshman, he or she may one day want to buy a new car or a home.

Lesson 3: Getting credit

If your child is age 21 or older, he or she may be able to independently obtain a credit card. But if your child is younger, the credit card company will require you, or another adult, to cosign the credit card application, unless your child can prove that he or she has the financial resources to repay the credit card debt.

A credit card can provide security in a financial emergency and, if used properly, can help your child build a good credit history.But the temptation to use a credit card can be seductive, and it’s not uncommon for students to find themselves over their heads in debt before they’ve declared their majors.

Unfortunately, a poor credit history can make it difficult for your child to rent an apartment, get a car loan, or even find a job for years after earning a degree. And if you’ve cosigned your child’s credit card application, you’ll be on the hook for your child’s unpaid credit card debt, and your own credit history could suffer.

Here are some tips to help your child learn to use credit responsibly:

  • Advise your child to get a credit card with a low credit limit to keep credit card balances down.
  • Explain to your child that a credit card isn’t an income supplement; what gets charged is what’s owed (and then some, given the high interest rates). If your child continually has trouble meeting expenses, he or she should review and revise the budget instead of pulling out the plastic.
  • Teach your child to review each credit card bill and make the payment by the due date. Otherwise, late fees may be charged, the interest rate may go up if the account falls 60 days past due, and your child’s credit history (or yours, if you’ve cosigned) may be damaged.
  • If your child can’t pay the bill in full each month, encourage him or her to pay as much as possible. An undergraduate student making only the minimum payments due each month on a credit card could finish a post-doctorate program before paying off the balance.
  • Make sure your child notifies the card issuer of any address changes so that he or she will continue to receive statements.
  • Tell your child that when it comes to creditors, students don’t get summers off! Your child will need to continue to make payments every month, and if there’s a credit card balance carried over from the school year, your child may want to use summer earnings to pay it off in order to start the next school year with a clean slate.

Finally, remind your child that life after college often involves student loan payments and maybe even car or mortgage payments. The less debt your child graduates with, the better off he or she will be. When it comes to the plastic variety, extra credit is the last thing a college student wants to accumulate!

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Women: Moving Forward Financially after the Loss of a Spouse

The loss of a spouse can be a devastating, life-changing event. Due to longer life expectancies, women are more likely to face this situation. According to the U.S. Census Bureau’s 2015 Current Population Survey, approximately 34% of women age 65 and older are widows compared to approximately 12% of men.

Becoming a widow at any age can be one of the most difficult challenges a woman must face. Not only is there the emotional loss of a spouse, but also the task of handling everything–including all the finances–without the help of a spouse.

Even if you’ve always handled your family’s finances, the number of financial and legal matters that have to be settled in the weeks and months following your loved one’s death can be overwhelming.

Sadly, for many women, becoming a widow is a first step toward economic hardship. That’s why it’s critical for you to organize your finances after your spouse’s death and take ongoing steps to secure your financial future and that of your family.

First, take a deep breath

Before you start handling the financial end of things, though, make sure to consider your own needs. The period following the death of a spouse can be a blur of emotions–shock, sadness, despair, anger, denial. It’s important to allow yourself the freedom to feel however you want to feel. You don’t owe it to anyone to feel or act in a certain way.

Facing your loss can ultimately help you as you work to adapt to the new conditions of your life, so that in time you can create something new. This period of adjustment, which can last for several years, is often a time of profound self-discovery for women, who may find themselves examining issues of identity, life meaning, and aging.

During this time, it’s important to surround yourself with people you trust–family, friends, support groups, professionals–who can offer support and advice that’s in your best interest.

The short term: steps to take

There are several financial tasks that must be done in the weeks and months after a spouse’s death. If some matters are too overwhelming to tackle alone, don’t hesitate to ask family or friends for help.

Locate important documents and financial records.

In order to settle your spouse’s estate, you’ll need to locate a number of important documents. These include your spouse’s will and other estate planning documents (e.g., trust), insurance policies, bank and brokerage statements, stock and bond certificates, deeds, Social Security number, birth and marriage certificates, and certified copies of the death certificate.

Set up a communications tracking and filing system.

To help keep track of all the details, set up a system to record incoming and outgoing calls and mail. For phone calls, keep a notebook handy where you can write down the caller’s name, date, and subject of the call. For mail, keep track of what you receive and whether a response is required by a certain date.

Make a list of the names and phone numbers of the people and organizations you’re dealing with and post it in a central location. Finally, create a filing system for important documents and correspondence with separate folders for different topics–i.e., insurance, government benefits, tax information, bank records, estate records, and so on.

Seek professional advice to settle the estate and file tax returns.

Getting expert help from an attorney, accountant, and/or financial and tax professional can be invaluable during this stressful time. Consider bringing a family member or friend with you to meetings so you will have an extra pair of eyes and ears to process information.


An attorney can help you review your spouse’s will and other estate planning documents and start estate settlement procedures. If you are named executor in the will (or if you are appointed as the personal representative), you will be responsible for carrying out the terms of the will and settling the estate


Settling the estate means following certain legal and administrative procedures to make sure that all debts of the estate are paid and that all assets are distributed to the rightful persons. An attorney can tell you what procedures to follow. A tax professional can help you file certain federal and state tax returns that may be due.

A financial professional can help you by conducting a comprehensive review of your financial situation and identifying any retirement and survivor’s benefits that may be available to you.

 

Apply for benefits. You’ll need to contact several institutions for information on how you can file for benefits.

  • Life insurance–Life insurance benefits are not automatic; you have to file a claim for them. This should be one of the first things you do. Ask your insurance agent to begin filing a claim (if you don’t have an agent, contact the company directly). Most claims take only a few days to process.
  • Social Security Administration (SSA)–Contact the SSA to see if you and/or your dependent children are eligible to file a claim for retirement, survivor, or death benefits.
  • Employers–Contact your spouse’s most recent and past employers to find out if you are eligible for any company benefits. If your spouse was a federal, state, or local employee or in the military, you may be eligible for government-sponsored survivor’s benefits.

Update account names.

You may need to contact financial institutions to change account names and/or update contact information.

Evaluate short-term expenses.

You may have immediate expenses to take care of, such as funeral costs or outstanding debts your spouse may have incurred. If you’re waiting for insurance proceeds or estate settlement money, you can use credit cards for certain expenses or you can try to negotiate with creditors to allow you to postpone payment for 30 days or more, if necessary.

Make sure you have one or more credit cards in your name, and when you can, order a free copy of your credit report and review it for accuracy.

Avoid hasty decisions.

For discretionary financial decisions, go at your own pace, not someone else’s. For example, don’t commit to move from your current home until you can make a decision based on reason instead of emotion.

Don’t spend money impulsively. Don’t cave in to pressure to sell or give away your spouse’s possessions. Find out where you stand financially before you make any large purchases, sell property, or loan money to others.

Moving ahead: the big picture

After the initial legal and financial matters related to your spouse’s death are taken care of, you’ll enter a transition phase when you’ll be adjusting to your new financial circumstances. As you navigate this terrain, you might find it helpful to work with a financial professional who can help you by:

  • Suggesting ways to invest any life insurance proceeds or estate settlement money you receive
  • Calculating your net worth by identifying your assets and liabilities, giving you an understanding of how you’ll meet your short- and long-term spending needs
  • Establishing a budget by looking at your monthly income and routine living expenses, and making adjustments as needed
  • Helping you update beneficiary designations on your life insurance, retirement plan, IRA, employee benefits, annuity, and so on
  • Reviewing your investment portfolio at least annually
  • Updating your estate planning documents (e.g., will, trust, health-care directives, power of attorney) to reflect your circumstances and your wishes for disposition of the marital estate (e.g., gifts to children, grandchildren, charities)
  • Updating your insurance coverage to reflect your new circumstances

Generally speaking, women may have a different set of expectations and requirements from their financial professional than men. As you work with a financial professional, make sure he or she is responsive to what you say you need, not what your advisor thinks you want. Don’t be afraid to ask questions, and make sure you understand all your options before making important decisions.

We understand the unique needs and challenges women face. Click here to learn more information from our affiliate company PLJ Advisors

 

As you move forward with your life, remember that at times it may be two steps forward and one step back. Take comfort in the fact that you are doing the best you can to make the best decisions–financial and otherwise–for yourself and your family.

 

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Money Issues That Concern Married Couples

Marriage is an important step in anyone’s life and brings many challenges with it. One of those challenges is the management of your finances as a couple.

The money decisions that you make now as a couple can have a lasting impact on your financial future together. Careful planning of your finances can ensure that together, you achieve financial success.

1. Budgeting your money

► In general

When you were single, you managed your finances in a way that was comfortable for you and that you understood–no one had to approve or disapprove of your financial decisions.

Now that you are married, however, both you and your spouse have to agree on a system for budgeting your money and paying your bills.

► Discuss financial situations

You and your spouse must discuss your respective financial situations and expectations, and take stock of your individual assets (what you own) and liabilities (what you owe).

Revealing your financial situation is an important step when budgeting as a couple. If either of you has a financial problem, it is best to identify it now and begin solving it together.


This is the time to address questions such as what do each of you earn, and what additional sources of income do you have? What do you own? Will both of you work now that you are married?


Who will hold title to property acquired before and after the wedding? In addition, be sure to disclose all of your financial commitments. If you pay child support, let your partner know the amounts. If you have to repay student loans, discuss that as well.

► Discuss financial goals

After you discuss your financial situations, you should discuss your financial goals. You can start by each making a list of your short- and long-term financial goals.

Short-term goals are those that can take anywhere from three to five years (e.g., saving for a down payment on a home or a new car). Long-term goals are those that take more than five years to achieve (e.g., saving for a child’s college education or retirement).

When you have each determined your individual financial goals, you should review your goals together to achieve common objectives.

You can then focus your energy on those common objectives and strive to attain those goals (short- and long-term) together.

► Decide on the type of bank account(s) you will keep

Decide whether you and your spouse will have separate bank accounts or a joint account.

Advantages to consolidating your checking funds into one account include easier record-keeping, reduced maintenance fees, less paperwork when you apply for a loan, and simplified money management.

If you do choose to keep separate accounts, consider opening a joint checking account for household expenses.

Caution: When sharing a checking account, be sure to keep track of how much money is in the account at all times since both of you will be writing checks that draw from the same account.

► Prepare an annual budget

The first step in developing a financial future together as a couple is to prepare an annual budget.

The budget will be a detailed listing of all your income and expenses over the period of a year.

You may want to designate one spouse to be in charge of managing the budget, or you can take turns keeping records and paying bills.

Tip: Make sure that you develop a record-keeping system that both you and your spouse understand. Also, keep your records in a joint filing system so that you can easily locate important documents.

  • Begin with your sources of income–list salaries and wages, alimony and child support, interest, and any other form of income that you and your spouse may have.
  • List your expenses. It may be helpful to review several months’ worth of entries in each of your checkbooks to be sure that you include everything. Put all the expenses that are paid monthly into one category, and put all other expenses (every other month, quarterly, semiannually, annually) into another. Some common expenses are:
  • Savings
  • Rent or mortgage payments
  • Student loan payments
  • Groceries
  • Pet care
  • Utilities
  • Car payments
  • Credit card payments
  • Alimony/child support
  • Household items
  • Personal care/grooming
  • Major purchases
  • Insurance
  • Car repairs
  • Clothing
  • Tax payments
  • Medical expenses
  • Gifts
  • Automobile gas
  • Child day care
  • Entertainment/dining out
  • Estimate your expenses for each category. How much money do you spend on these items on a monthly basis and on an annual basis? Try to come up with a realistic amount for what you think you will spend in a year’s time. Add another category to the irregular expenses list, and call it Contingencies. This can be a catchall category for expenses that you might not anticipate or budget for. The amount to budget for contingencies should be about 5 percent of your total budget.
  • Add your sources of cash and uses of cash on an annual basis. Hopefully, you get a positive number, meaning that you are spending less than you are earning. If not, review your expense list to determine where you can cut your spending. Consider using computer spreadsheets or programs like Quicken for assistance.

► Create a cash flow system

After you have developed a budget, you should create a system for managing your monthly inflow and outflow of cash.


It is a good idea for both you and your spouse to become involved in this process–at least at first–so that both of you have a clear understanding of the costs of running the family and household.


Cash flow systems like the one described below are simple and painless to operate.

Once they are established, you will find that making financial decisions becomes much easier because you have done your homework.

  • Separate your regular monthly expenses from irregular expenses (every other month, quarterly, semiannually, annually) by using a different bank account for each. Otherwise, you may be tempted to use money that has been earmarked for something else. You should limit the number of checking accounts that you have in order to avoid confusion.
  • Each time you get paid, deposit some money into an account for irregular expenses. The amount of money you deposit should be equal to the total amount needed for the irregular expenses, divided by the number of paychecks you each receive annually. In so doing, you will have the money for the outlay when it arises. The rest of your pay should go into your checking account, to be used for regular monthly expenses and savings.
  • One variation to this system of cash flow management is to establish one or two additional bank accounts for one or both of you for personal spending money. Allocate the budgeted amount for personal expenses (e.g., lunches, haircuts, gifts) to this account. This way, you are free to spend the money in this account in any way you like without having to worry about meeting regular monthly expenses. However, all of these bank accounts may have fees.

2. Saving and investing your money

► In general

At some point in your married life, you will almost certainly encounter some large expenditures, such as a new home, your own business, or a college education for your children.

Chances are, you won’t be able to meet these expenditures from your current income. You and your spouse must discipline yourselves to set aside a portion of your current income for saving and investing your money to ensure its steady growth or, at the very least, protect it against loss.

► Save a percentage of your earnings

When figuring out your budget, savings should be considered one of your monthly expenses. Think of savings as a fixed payment (like a car payment) that must be made every month.

If you don’t and you wait until the end of the month to save whatever you have not spent, you’ll find that nothing ever seems to go into your savings account.

A good rule of thumb is for you and your spouse to save 4 to 9 percent of your combined gross earnings while you are in your 20s and then double that savings percentage as you reach your 30s and 40s.

In some cases, a dual-income couple may be able to live off one spouse’s salary and save the other salary.


Example(s): Mary and Richard, a married couple in their 20s, earn a combined annual gross income of $60,000. Together, Mary and Richard save 5 percent of their combined gross income each year, or $3,000.

Example(s): As another example, Christine and Tom, a married couple in their 30s, earn a combined annual gross income of $80,000. Together, Christine and Tom save 10 percent of their combined gross income each year, or $8,000.


► Build an emergency cash reserve

The savings that you accumulate can serve as an emergency cash reserve. Ideally, you should have in savings an amount that is comfortable for you to fall back on in case of an emergency, such as a job loss.

A common formula used for calculating a safe emergency fund amount is to multiply your total monthly expenses by 6. When determining how much cash should be in your emergency fund, a major factor is your comfort level.

If you and your spouse feel secure with your jobs and are confident that if you lost your current jobs you would be able to find a new one fairly quickly, an emergency fund of three times your monthly expenses should be sufficient.

However, if either of you has an unpredictable income, you may want to have an emergency fund that is equal to 12 times your monthly expenses.


Example(s): Christine and Tom, a married couple in their 30s, plan to build up an emergency cash reserve. Both Christine and Tom are attorneys and feel quite secure with their present jobs. Christine and Tom have monthly expenses of $3,000 and plan to build up an emergency cash reserve that is equal to 3 times their monthly expenses, or $9,000 ($3,000 x 3).

Example(s): As another example, Mary and Richard, a married couple in their 20s, plan to build up an emergency cash reserve. Both Mary and Richard are employed as freelance writers and feel that their incomes are at times unpredictable. Mary and Richard have monthly expenses of $1,500 and plan to build up an emergency cash reserve that is equal to 12 times their monthly expenses, or $18,000 ($1,500 x 12).


► Investing your money

When you have established an emergency cash reserve, you can begin to invest your money to target your financial goals.

There are three fundamental types of investments: cash and cash alternatives, bonds, and equities. Cash and cash alternatives are relatively low-risk investments that can be readily converted into currency, such as money market accounts.

Bonds, sometimes called debt instruments, are essentially IOUs; when you invest in a bond, you’re lending money to the bond’s issuer–usually a corporation or governmental body–which pays interest on that loan.

Because bonds make regular payments of interest, they are also known as income investments. Equities, or stocks, give you a share of ownership in a company.

You have the opportunity to share in the company’s profits and potential growth, which is why they’re often viewed as growth investments. However, equities involve greater risk than either cash or income investments.

With equities, there is no guarantee you will receive any income or that your shares will ever increase in value, and you can lose your entire investment.

In addition to these three basic types of investments–also known as asset classes–there are so-called alternative investments, such as real estate, commodities, and precious metals.


No matter what your investment goal, your overall objective is to maximize returns without taking on more risk than you can bear.


You’ll need to choose investments that are consistent with your financial goals and time horizon.

A financial professional can help you construct an investment portfolio that takes these factors into account.

Click here to get more information from our affiliate company PLJ Advisors.

3. Establishing good credit

► In general

Establishing good credit is an important step in the path towards a solid financial future. A good credit history can enable you to make credit purchases for items that you might not otherwise be able to afford.

Most creditors will require a good credit history before extending credit to you. If you do not have a credit history, it is important to establish one as soon as possible. If you have a poor credit history, you should take steps toward improving it right away.

► Individual or joint credit

Married couples can either apply for credit individually or jointly. One of the benefits of applying for joint credit is that both you and your spouse’s income, expenses, and financial stability are considered when a creditor evaluates your overall financial picture.

However, applying for separate credit has its advantages. If you and your spouse ever run into financial problems (e.g., illness or job layoff), separate credit allows one spouse to risk damaging his or her credit history while preserving the other spouse’s good credit.

In addition, separate credit can also protect you and your spouse from each other. If you and your spouse cosign a loan or apply for a credit card, you are both responsible for 100 percent repayment of the debt.

In other words, if your spouse does not pay his or her share, you can get stuck with paying the whole amount. On the other hand, if your spouse takes out a loan or applies for a credit card on his or her own, generally your spouse is solely responsible for the debt.

Tip: While the general rule is that spouses are not responsible for each other’s debts, there are exceptions.

Many states will hold both spouses responsible for a debt incurred by one spouse if the debt constituted a family expense (e.g., child care or groceries).

In addition, in some community property states, both spouses may be responsible for one spouse’s debts, since both spouses have equal rights to each other’s incomes.

You may want to discuss your state’s laws with an attorney if you live in a community property state.

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A Woman’s Guide to Health Care in Retirement

At any age, health care is a priority. But when you retire, you should probably focus more on health care than ever before. That’s why it’s particularly important for women to factor in the cost of health care, including long-term care, as part of their retirement plan.

How much you’ll spend on health care during retirement generally depends on a number of variables including when you retire, how long you live, your relative health, and the cost of medical care in your area. Another important factor to consider is the availability of Medicare. Generally, you’ll be eligible for Medicare when you reach age 65. But what if you retire at a younger age?

You’ll need some way to pay for your health care until Medicare kicks in. Your employer may offer health insurance coverage to its retiring employees, but this is the exception rather than the rule. If your employer doesn’t extend health benefits, you may be able to get insurance coverage through your spouse’s plan. If that’s not an option, you may need to buy a private health insurance policy (which could be costly) or extend your employer-sponsored coverage through COBRA.

Medicare

As mentioned, most Americans automatically become entitled to Medicare when they turn 65.


In fact, if you’re already receiving Social Security benefits when you’re 65, you won’t even have to apply—you’ll be automatically enrolled in Medicare. However, you will have to decide whether you need only Part A coverage (which is premium-free for most retirees) or if you want to also purchase Part B coverage.


Medicare Part A, B, C

Part A, commonly referred to as the hospital insurance portion of Medicare, can help pay for your inpatient hospital care, plus home health care and hospice care.

Part B helps cover other medical care such as physician services, laboratory tests, and physical therapy.

➢ You may also choose to enroll in a managed care plan or private fee-for-service plan under Medicare Part C (Medicare Advantage) if you want to pay fewer out-of-pocket health-care costs.

And if you don’t already have adequate prescription drug coverage or belong to a Medicare Advantage Plan, you should consider joining a Medicare prescription drug plan offered in your area by a private company or insurer that has been approved by Medicare.


Unfortunately, Medicare won’t cover all of your health-related expenses. For some types of care, you’ll have to satisfy a deductible and make co-payments. That’s why many retirees purchase a Medigap policy.


Medigap

Unless you can afford to pay out of pocket for the things that Medicare doesn’t cover, including the annual co-payments and deductibles that apply to certain types of services, you may want to buy some type of Medigap policy when you sign up for Medicare Part B.

➢ In most states, there are 10 standard Medigap policies available. Each of these policies offers certain basic core benefits, and all but the most basic policy (Plan A) offer various combinations of additional benefits designed to cover what Medicare does not.

Although not all Medigap plans are available in every state, you should be able to find a plan that best meets your needs and your budget.


When you first enroll in Medicare Part B at age 65 or older, you have a six-month Medigap open enrollment period. During that time, you have a right to buy the Medigap policy of your choice from a private insurance company, regardless of any health problems you may have. The company cannot refuse you a policy or charge you more than other open enrollment applicants.


Long-term care

Long-term care refers to the ongoing services and support needed by people who have chronic health conditions or disabilities. Long-term care can be expensive. An important part of planning is deciding how to pay for these services.

Buying long-term care (LTC) insurance is an option. While premiums may be costly, having LTC insurance may allow you to elect where you receive your care, the type of care you receive, and who provides care to you. Many LTC insurance policies pay for the cost of care provided in a nursing home, assisted-living facility, or at home, but the cost of coverage generally depends on your age and the policy benefits and options you purchase. And premiums can increase if the insurer raises its overall rates.

Even with LTC insurance, you still may have some expenses not covered by LTC insurance.

For example:

➢ Not all policies provide coverage for care in your home. While the cost of in-home care may be less than the cost of care provided in a nursing home, it can still be quite expensive.

➢ Most policies allow for the selection of an elimination period of between 10 days and 1 year, during which time you are responsible for payment of care.

➢ The LTC insurance benefit is often paid based on a daily or monthly maximum amount, which may not be enough to cover all of the costs of care.

➢ While lifetime coverage may be selected, it can increase the premium cost significantly, and some policies may not offer that option. Another option that can be valuable, but also increase the premium expense considerably, is cost-of-living or inflation protection, which annually increases the daily insurance benefit based on a certain percentage.

➢ Most common LTC insurance benefit periods last from 1 year to 5 years, after which time the insurance coverage generally ends regardless of whether care is still being provided.

To encourage more individuals to buy long-term care insurance, many states have enacted Partnership programs that authorize private insurers to sell state-approved long-term care Partnership policies. Partnership policy owners, who expend policy benefits on long-term care services, will qualify for Medicaid without having to first spend all or most of their remaining assets (assuming they meet income and other eligibility requirements).

Medicaid and government benefits

Government benefits provided primarily through a state’s Medicaid program may be used to pay for long-term care. To qualify for Medicaid, however, assets and income must fall below certain limits, which vary from state to state. Often, this requires spending down assets, which may mean using savings to pay for care before qualifying for Medicaid.

If you are a veteran, you may be eligible for long-term care services for service-related disabilities and for other health programs such as nursing home care and at-home care through the Department of Veterans Affairs (VA). If you don’t have service-related disabilities, you may also be eligible for VA benefits if you are unable to pay for the cost of necessary care. Visit the Department of Veterans Affairs website (www.va.gov) for more information.

Other health-care factors to consider

It’s clear that health care is an important factor in retirement planning. Here are some tips to consider:

➢ Evaluate your present health and project your future medical needs. Considering your family’s health history may help you determine the type of care you might need in later years.

➢ Don’t presume Medicare and Medigap insurance will cover all your expenses. For example, Medicare (Parts A and B) does not cover the cost of routine eye exams, most eyeglasses or contact lenses, or routine hearing exams or hearing aids. Include potential out-of-pocket costs in your plan.

➢ Even if you have Medicare and Medigap insurance, there are premiums, deductibles, and co-payments to consider.

You may have already begun saving for your retirement, or you could be retired already, but if you fail to include the cost of health care as a retirement expense, you’re likely to find that health-care costs can sap retirement income in a hurry, potentially leaving you financially strapped.

Need help with your insurance and retirement planning? Click here for a no-obligation planning session. Our goal is to help make sure health care expenses do NOT deplete your hard-earned life savings! We’ve helped hundreds of women in the Los Angeles community against this growing problem.

 

VIDEO: Are Soaring Health Care Costs Hurting the U.S. Economy?

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Five Things to Watch Out for When Buying Long-Term Care Insurance

You’ve researched long-term care insurance (LTCI) and are seriously thinking of buying a policy. Just make sure you’re doing it for the right reasons–don’t be swayed by unsubstantiated sales pitches. Here are some claims you’ll want to think twice about.

A long-term care policy is a great tax write-off

Though it’s true that premiums paid on a tax-qualified LTCI policy can reduce your tax burden, you must itemize deductions to be eligible. When you’re older, perhaps you’ll no longer itemize deductions. And even if you do, LTCI premiums fall under the write-off for medical and dental expenses, which is limited to expenses that exceed 10 percent of your adjusted gross income. So, for example, if your adjusted gross income is $60,000, you are able to deduct only that portion of your unreimbursed medical and dental expenses (including LTCI premiums) that exceeds $6,000.

And there’s another caveat. Even if your LTCI premiums exceed 10 percent of your adjusted gross income, you can’t include all of the premiums in your deduction for medical and dental expenses. Instead, your premiums are deductible according to a sliding scale that depends on your age. So what might look like a great tax write-off at first glance may not be so great after all.

Note: The threshold is 7.5 percent for those age 65 and older until 2017, at which time it increases to 10 percent.

You should buy a policy now so you can lock in the price forever

With most LTCI policies, your age at the time you purchase the policy is a factor in determining your premiums. However, this doesn’t mean that your premiums will stay the same as long as you own the policy. In fact, your premiums can increase if your insurance company establishes a rate increase for everyone in your class, and that increase is approved by the state insurance commissioner.

As a relatively new type of insurance, LTCI may be particularly susceptible to rate increases, because insurance companies lack a sufficient amount of underwriting data to predict the number and size of claims they can expect in the future. And unfortunately for you, if your insurance company does raise your premium, it may not be so simple to take your business elsewhere. Any premium on a new LTCI policy will still be based on your age, which will be higher, and your health, which may be worse. So no matter when you buy your policy, make sure you can afford the premiums both now and in the future.

It doesn’t matter how the policy defines “facility”

Currently, there are no national standards on what constitutes a long-term care facility. This means that an “assisted-living facility” or “adult day-care facility” may mean one thing in a particular policy or state and another thing in a different policy or state. This can pose a problem if you buy the policy in one state and then retire to another state–there may be no facilities in your new state that match the definitions in your policy. To protect yourself, make sure you understand exactly what types of facilities the LTCI policy covers before you buy it.

It’s not necessary to check the financial rating of the insurance company

A large number of unexpected long-term care claims could potentially devastate an insurance company that isn’t financially strong. So before you buy an LTCI policy, it’s always a good idea to check the company’s financial rating by using a rating service like Standard & Poor’s, Moody’s, A. M. Best, or Fitch. You can also check with your state’s insurance department for more specific financial information on particular companies.

You should get rid of the policy you have now and buy a new one

Although in some cases a new LTCI policy might have an attractive added benefit that your old policy doesn’t, red flags should go up if an insurance agent encourages you to ditch your old policy for a new one without providing a clear explanation of the added benefits. For one thing, your premiums are based on your age and your health at the time you purchase the policy, so all other things being equal, your new policy will be more expensive. For another, you run the risk that a pre-existing condition won’t be covered under the new policy.

If you’re unhappy with your current policy, an alternative may be to upgrade it rather than replace it (though the agent earns a larger commission if you replace it). Unfortunately, there are unethical agents who make misleading comparisons of LTCI policies in an attempt to get you to switch policies for no reason other than their commission. If you’re considering switching policies, make sure you understand exactly what the new policy offers, whether this additional coverage is important to you, and what you’re giving up.

 

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Inflation Trends 101

When it comes to investing money in the stock market, there are no guarantees.

Even financial experts, who have devoted every waking hour to understanding the market, cannot promise a return on investment. If they could, they would never have to work another day in their lives. Instead, many experts look at many factors to try and anticipate what might happen, and then they invest accordingly.

Inflation is a Major Concern for Many Investors

This can be a tough reality for new investors who are trying to make a decent return on their retirement savings. Add elements like inflation to the mix and you may end up with people who don’t know what to do.

In fact, a recent report by the Society of Actuaries showed that 69 percent of pre-retirees polled cited inflation as a key concern – tied with long-term care.1

Stay Calm, Get the Facts

First thing’s first: don’t panic! People who panic are often vulnerable to bad advice and sometimes shady advisors who put their profit over yours.

➢ Here’s a smart rule to follow: learn as much as you can about your investments and the market, so when you talk to an advisor you understand how your money is being allocated.

It’s Anyone’s Guess!

If you’re keeping up with the financial news, you’re probably seeing a lot of speculation about whether or not inflation will rise. As with the stock market, there’s no guarantee when or if it will – there is just speculation based on many factors.

↳ For long-term investments, a diverse portfolio with stocks can be a good hedge against inflation. In the short-term, you may want to also consider bonds; this is because as inflation rises, you may be able to take advantage of climbing interest rates.

↳ Commodities, like gold, may also be an option for short-term investing. But, for long-term investments, their track record for performance has not been ideal. Gold has returned only 0.7 percentage point per year more than inflation over the past two hundred years2 – you can get a higher return than that with a simple savings account.

Talk to Your Advisor Regularly

The message here is that it’s important to understand the market and be sure your advisor is keeping up with current trends as well as your retirement goals. You should make sure your advisor reviews your portfolio if inflation does rise to be sure you adjust your investments to stay on target for your goals.

Remember, you can’t get a second opinion from the same advisor who gave you the first!

 

Inflation aside, it’s always a good idea to talk with your advisors at least twice yearly as you get closer to retiring. Never leave a meeting with unanswered questions or confusion – a good advisor will make sure you understand how your money is being invested, what fees you’re paying and the strategy he or she is employing in helping you plan your retirement income streams.

 

 

1https://www.soa.org/press-releases/2016/survey-examines-retirement-concerns/
2http://www.kiplinger.com/article/investing/T052-C019-S001-stocks-the-best-inflation-hedge.html