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A realist's guide to downsizing retirement plans

October 24, 2014

By Dan Rafter | Money Rates Columnist

Your retirement dreams are big. But what if your retirement savings aren't?

Big retirement plans often require significant savings, and if you're like many Americans, you haven't saved enough to fund these post-work dreams. What to do? It's time get realistic and develop a plan to downsize those retirement fantasies.

Thankfully, financial professionals say that this downsizing doesn't have to be that painful -- provided you approach it sensibly.

Reimagining retirement

"Retirement is actually a great time to start simplifying your life," says Clare Levison, a Blacksburg, Virginia-based certified public accountant, author and member of the American Institute of Certified Public Accountants' National CPA Financial Literacy Commission. "If you find that you haven't reached the money goals that you wanted to hit, perhaps some of your wants are a little bit bigger than they need to be anyway."

Too many people as they approach retirement want to ramp up their lifestyles, Levison says. They desire more expensive luxury cars and costly international vacations. But for many, a more sound financial approach would be to go the opposite route: It might be time to sell that large house and move to a smaller, less expensive residence. It might also make sense to downsize the number of cars they need to insure.

"Instead of thinking bigger, think smaller in terms of downsizing your life and expenditures," Levison says.

Too little, too late

If you don't think that you have enough to fund your retirement dreams, you're far from alone. A Gallup poll from April found that 59 percent of respondents worried that they haven't saved enough for retirement.

Saving more money is always preferable to having to downsize your retirement plans, says Joe Franklin, a certified public accountant and owner of Hixson, Tennessee-based Franklin Wealth Management. But many don't think enough about boosting their savings until they are just two or three years away from retirement.

At that point, increasing savings to meet lofty retirement goals becomes an almost impossible task.

"If their dreams are more than their savings are, we will tell them," Franklin says. "You either have to change what you want to do in retirement, work longer or be more aggressive with your investments going forward. Many of our clients have chosen to work longer and delay their retirements. A lot of time that is one route for getting closer to your retirement goals."

Robert Wyrick Jr., managing partner with MFA Capital Advisors in Houston, says that too many couples wait until they are 55 without having saved much of anything for retirement to first begin meeting with financial planners.

"These folks are often trying to make up for a lifetime of not planning, and they have less than 10 years to make it happen," Wyrick says. "Typically, part of the conversation centers around a bit of regret, and it almost always involves a discussion of making lifestyle changes in retirement."

The best approach is for those nearing retirement to work with financial professionals to make a list of their expected expenses and revenue streams during retirement. It's important to be honest here. Once a retirement budget is in place, retiring couples can determine just how many of their retirement dreams are realistic.

"All retirees should have a formal lifetime income plan," says David Schucavage, president of Carolina Estate Planners in Wilmington, North Carolina. "This plan shows where their money will come from over the next 30 or so years."

Some income streams are predictable, such as Social Security payments, pensions and some annuities. Others are less certain, such as stocks and bonds. But they all count, and they should all be considered when couples are making their realistic retirement plans.

Making peace with less

For those who haven't saved enough, there is hope. Melody Judge, founder and managing director of Life Income Management in Southfield, Michigan, says that some retirees can reach more of their dreams by taking on a part-time job -- one that they enjoy -- to supplement their Social Security income. Others can invest in annuities that also provide an additional income stream.

Then there are the smaller steps that retirees can take.

"I have a client who loves the theater, so to save on the cost of theater tickets, she volunteers each month as an usher and gets to see the performances for free," Judge says.

There will be some who will never be able to afford their most extravagant retirement plans. For these retirees, it's time to think about their post-work years differently, says Levison.

"Making the adjustments can at first be disappointing to people," Levison says. "But retirement really can be a time when you downsize and stop putting the focus on your possessions. Once people get over that initial hump, they start to see the value of that. They have extra time to devote to volunteering. They might pick up a part-time job that they really enjoy. The things that they weren't able to accomplish financially will hopefully pale in comparison."

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5 reasons you'll blow your holiday budget again

October 10, 2014

| Money Rates Columnist

Last year, Capital One reported that 74 percent of U.S. adults were making a budget for their holiday spending -- yet 49 percent weren't sure they'd stick to it.

Is blowing your budget the story of your life as a holiday spender? Do you have great intentions each year that you won't overspend for the holidays, only to find yourself again with a spending hangover on January 1?

Here are five reasons you may struggle to stick to your holiday budget -- and how you can make this year different.

Reason No. 1: You don't actually have a budget

The reality is that you may not have a true budget in the first place.

"Most people have a target spending number, but not a budget," says Isaiah Goodman, a financial representative with Northwestern Mutual in Edina, Minnesota.

Matthew Boersen, a certified financial planner with Straight Path Wealth Management in Grand Rapids, Michigan, agrees: "(Shoppers) may have a general idea of how much they want to spend, but they do not actively budget the intended destinations of the money, nor do they track to make sure they stay on pace."

In other words, if you want to have a budget, you can't simply plan on spending $500 for the season. Instead, you need to break it down into $30 for Aunt Kathy's gift, $50 for food for the family party, $100 for the tree and decorations and so on.

Not only does breaking down your budget into specific numbers help keep you on track, it also makes it easier to quickly identify money leaks.

Reason No. 2: You think money equals love (or at least the appearance of love)

It may feel great to spread holiday joy through gift giving, but that good feeling is yet another reason so many blow their budgets each year.

You may want your loved ones to know they are important enough for you to have spent a whole boatload of money on, but Boersen says it isn't purely love that causes us to overspend.

"Pride plays a big part in gift giving," he explains, "or needing to keep up appearances."

The best way to combat this tendency to overspend may be to simply be aware of it.

"Don't feel obligated to purchase a certain type of gift at a dollar level. If they spent X on you last year, it doesn't mean that you have to spend X on them this year," says Boersen. "Be thoughtful and thrifty versus writing a bigger check."

Reason No. 3: You forget to include people or events in your planning

Even if you are committed to writing down and sticking to a specific dollar amount for each person's gift or expected holiday event, it is almost inevitable you will forget someone or something. What's more, there may be impromptu parties and Secret Santa exchanges you didn't plan for.

"Unexpected expenses always seem to pop up during the holidays," Boersen says. "Extra gifts that need to be bought, an extra hostess gift for an additional party or a decision to host a party at the last second. All have the potential to make a budget almost worthless."

What can you do? The easiest strategy is to simply build in a buffer to pad your budget. Padding your budget with an extra 10 percent may be enough to get you through all those unexpected pop-up expenses or budget overruns.

Reason No. 4: You get sidetracked by deals and displays

At any given time of the year, retailers are all about using clever tactics to get consumers to spend more. They study where to place displays, how to price items and what colors get shoppers' attention.

During the holiday season, shoppers also have to contend with a myriad of sales that scream "one time only" and a festive atmosphere intended to help loosen purse strings. Even Christmas music has been shown in some studies to encourage spending.

As if that weren't bad enough, well-meaning friends can contribute to the tendency to overspend.

"You may have budgeted for a $50 gift, but been given a really good idea costing $90 that you know the person will love," Boersen says. But overreaching in this way is nearly sure to blow your budget.

Reason No. 5: You decide to treat yourself

Finally, you may blow your holiday budget year after year because you can't resist picking up a little something for yourself while shopping for others on your list.

"Don't buy for yourself at the same time," urges Goodman. "There are a lot of deals out there, and if we find something we like every time we buy something for someone else, we will spend more than we thought."

If you think you want to pick up some household items or other goodies for yourself, be sure to write a specific amount into your budget for that.

If you are tired of entering each new year feeling guilty about your holiday spending, then right now is the time to start planning for the months ahead. Before you get caught up in the spirit of the season, sit down and map out exactly what you need to buy and how much you plan to spend for each item. Then, add a little extra as a contingency fund.

Above all, when you've made a purchase and crossed someone off your list, stop shopping for them. Sure, that scarf or box of chocolates or mug with the witty saying might complement the gift you've already purchased, but is it worth jeopardizing your savings account balance? Remember, it's the thought -- not the price tag -- that truly counts.

Assessing the risks of remote deposits

September 29, 2014

By Dan Rafter | Money Rates Columnist

The numbers are clear: Consumers are becoming ever more willing to snap photos of their checks with their smartphones and send those images to their banks. And why not? Remote deposit capture -- the name for this technology -- can save consumers a trip to their bank or ATM.

But with new technology can come new security risks -- or at least perceived risks. Is it possible, for example, for hackers to intercept the transmissions customers send to their banks?

Fortunately, several industry studies and remote deposit capture experts agree that consumers shouldn't worry much about that type of fraud when using these applications.

"The banks have gotten very good at the risk-management aspect of data transmissions," says John Leekley, founder and chief executive officer of RemoteDepositCapture.com, an Alpharetta, Georgia-based clearinghouse of mobile banking information. "I have never heard of a hack where information is stolen during the transmission process. What you do hear about is someone hacking into a database or capturing information before it is transmitted."

In other words, while consumers shouldn't cease being vigilant about online security in general, depositing checks through a mobile app shouldn't top their list of worries.

Mobile deposits and security

Leekley says that consumers don't have to worry about exposing themselves to electronic forms of fraud when making mobile deposits because the data sent to financial institutions in this way is encrypted and protected.

This is why few banks have reported losses associated with mobile deposits. According to a 2014 survey by RemoteDepositCapture.com, 80 percent of financial institutions using remote deposit capture reported no losses resulting from the technology.

The biggest threat associated with mobile deposits is an old-fashioned one, Leekley says: You need to take care of that paper check.

Consumers might use their smartphones to make a deposit and then forget to destroy the actual paper check. Their spouses might then see the check and try to deposit it too. Fortunately, banks usually catch these double deposits. If they don't catch them immediately though, consumers might think -- even for a short period of time -- that they have more money in their accounts than they actually have.

Dishonest payees might even be tempted to use remote deposit capture technology to make double deposits on purpose. Banks, however, are good at sniffing out these crimes, Leekley says.

Leekley says that consumers should follow his example: When he deposits a check through his smartphone, he immediately writes a note on the back of the check indicating this. He then destroys the check after the number of days his bank recommends.

Leekley says that this process will become second-nature to consumers as more banks offer remote deposit capture.

A remote deposit world

Given the convenience of mobile check-depositing apps, it's little surprise that the number of consumers signing up for mobile deposits is on the rise.

A May study from RemoteDepositCapture.com and San Diego-based Mitek Systems, a provider of mobile banking technology, found that 63 percent of 250 surveyed financial institutions already offered mobile remote deposit capture. An additional 33 percent planned to offer the service within 12 months.

Scott Carter, chief marketing officer of Mitek, says that mobile deposit is well past the tipping point of early adoption. He pointed out that more than 30 million consumers have already used remote deposit capture to deposit a check.

"Think about the younger consumers. They grew up with digital technology," Carter says. "They don't remember a time when there wasn't a camera on their smartphones, much less a time when the smartphone didn't exist."

Andrew Tilbury, chief marketing officer with Henderson, Nevada-based Bluepoint Solutions, another provider of mobile banking tech, compares the acceptance of mobile deposit to the steady growth of ATMs.

"The same way you can't imagine a financial institution in 2014 not having an ATM, you won't be able to imagine a bank or credit union in 2018 not having mobile banking with remote deposit," Tilbury says.

Leekley says that consumers will continue to outgrow any fears they have about fraud and mobile banking.

"Any time you have a big change, the knee-jerk reaction is fear," Leekley says. "As time goes by and more banks offer mobile deposit, you'll see that fear go away."

Carter adds that this won't just happen with younger consumers, either. Older consumers will also embrace mobile check deposit as the technology ages, he says.

"It will happen much like it has with the adoption of other tech," Carter says. "The younger people are usually the tip of the spear. Then the older generations follow. Part of this is general awareness of the technology. Then there's the building up of the comfort that this is a safe technology."

Tired of Fed-watching, saver? Watch these banks instead

September 17, 2014

| Money Rates Columnist

Since the Great Recession, the U.S. economy has seemed to change direction as often as the wind. But at least one trend has stood throughout this period, much to the dismay of savers everywhere: historically low deposit rates.

After recent speculation that the Federal Reserve may raise rates – or at least signal new intentions to raise rates soon – the Fed today reiterated its commitment to low rates in the statement from its latest meeting.

For depositors, these words confirmed that the era of abysmally low rates on savings accounts, money market accounts and certificates of deposit will remain for the foreseeable future.

“The Fed’s low-interest-rate policy has been a boon to borrowers, but devastating to people who have seen the interest on their savings wiped out,” says Richard Barrington, CFA, senior financial analyst for MoneyRates.com.

Yet not all hope is lost for savers. One unique feature of today’s interest rate landscape is that the range of deposit rates, in a way, has never been wider.

How so? While the average savings account is paying a dismal 0.06 percent annually, the top accounts in that category are offering rates near 1 percent. That means you can find rates roughly 15 times the national average if you’re willing to shop around today – something that’s not usually possible in a normal interest rate environment.

In more concrete terms, that means a $100,000 nest egg can today either earn about $60 annually in a savings account with an average rate – or nearly $1,000 in an account that pays a leading rate.

“It’s easy to look at these small percentages and dismiss the differences as trivial,” says Barrington. “However, when you look at it in dollar terms, it’s clear that shopping for rates is still worth the time.”

Yeah but still …

OK, so fraction-of-a-percent advantages still may not be enticing enough for you to switch banks, particularly if your current balance is below $100,000. But ignoring the trends in banking today may cost you more dearly once rates finally reverse course and begin to rise.

While rates remain low overall, a number of banks – many of them online-only institutions – have led the pack for competitive rates for some time now. This apparent eagerness for deposits makes them some of the best institutions to watch when rates finally start climbing – and the discrepancies between bank rates take the shape of percentage points instead of basis points.

To help acquaint you with some of the current deposit-rate frontrunners, here are some of the top-paying banks, in no particular order, as revealed by recent MoneyRates.com research.

1.  Barclays

This UK-based financial giant took a bold step into the U.S. retail banking space in 2012 with the introduction of a line of online-only accounts. Its savings account rate has stood at highly competitive levels ever since, earning that account a top-three finish in the MoneyRates.com America’s Best Rates survey – a quarterly study that examines the savings and money market rates offered by top banks – in each of the last four quarters.

2. Synchrony Bank

Like Barclays’ vehicles, Synchrony’s Optimizer Plus accounts are based online. Also like Barclays, Synchrony has signaled an aggressive desire for consumer deposits through its industry-leading rates in recent months. Its savings account topped that category in the second-quarter installment of America’s Best Rates, posting an average annual percentage yield of 0.95 percent over that period.

3.  Doral Bank

Not sure about the online-banking thing? As the top branch-based institution for savings accounts in the latest America Best Rates survey, Doral Bank may have what you’re looking for. The only caveat? The award-winning Doral rates were offered through its New York-based branches, so if you want high rates and branch-based service, you’ll need to be positioned accordingly. (Doral also has U.S. branches in Florida, but as of this writing, its rates there were well below that of its New York-based offerings).

4. Ally Bank

Despite slipping slightly in the last America’s Best Rates survey – it finished sixth place in the savings account category and tied for third in the money market account bracket – Ally can still claim a certain consistency in its rates: Its savings account topped the rankings in MoneyRates.com’s Best Savings Account 2014 feature, a study that averaged four quarters of rate data to identify the top-performing accounts for the year. Thus if you’re looking for a bank that has a strong history of competitive savings account rates, you could certainly do worse than Ally.

5. Your local midsized bank  

The America’s Best Rates data also measures how well specific categories of banks are paying on their accounts. (In case you couldn’t guess from the list above, online banks are the foremost standout category, offering average rates several times that of those at brick-and-mortar banks.) But if you’d like to stay local and branch-based in your banking, you may do best to skip both the behemoths and the micro-banks: Midsized banks, or those with between $5 billion and $10 billion in deposits, offered average rates more than 10 basis points higher than their smaller and larger counterparts – though their average of 0.28 percent is still well below all of the banks noted above.

While the Fed’s inaction may be yet another disappointment to depositors, it might also be seen as a call-to-arms for them to reject today’s average deposit rates. As a bonus, when the Fed finally does nudge rates upward, having an account that offered decent rates throughout the hard times may suddenly pay off in a much bigger way.   

5 reasons retirement planning is tougher for women

September 11, 2014

| Money Rates Columnist

The gender pay gap has garnered all sorts of media and legislative attention, prompting marches, committee hearings and petitions to Washington. There is even an Equal Pay Day (it was April 8 this year) to mark how far into the new year females must work to earn as much as men did the previous year.

While the gender pay gap is a real phenomenon, it has overshadowed another inequality that has the same potential to threaten the long-term financial stability of women: the glaring gender gap in retirement savings.

A 2013 report from the Employee Benefit Research Institute, based on 2011 numbers, found the average IRA owned by a man had a balance of $114,745 while the average balance for a woman was $66,529. At age 70, median balances were $72,971 for men and $42,926 for women.

While this gap is troubling on its face, financial advisers say there are also several reasons why women need to save more aggressively than their male counterparts. Here are five of them.

1. Women often have fewer years in the workforce

"Many women don't earn as much as men and often end up working less because they take time off to have children at some point during their careers," says Douglas Goldstein, a certified financial planner and author of "Rich as a King: How the Wisdom of Chess Can Make You the Grandmaster of Investing."

In fact, a 2013 Pew Research Center study found 27 percent of mothers say they have quit a job to care for a child or family member, compared to 10 percent of fathers. In addition, 49 percent of mothers have reduced their work hours to provide care and 39 percent have taken a significant amount of time off work. Meanwhile, only 28 percent and 24 percent of fathers said the same.

"Many women who take off time to be home with their kids don't think long term and don't fund a private retirement account, such as an IRA," says Goldstein. "This can be a big mistake later on, as their contributions to Social Security are lower, and they may not benefit from the more generous retirement plans offered by full-time employers."

2. Women may be more conservative in their investments

"Women have a tendency to be more conservative, sometimes to their determent," says Keith Klein, a certified financial planner and owner of Turning Pointe Wealth Management in Phoenix.

While conservative investing can keep money safe, it may also mean women don't earn high enough returns to build a comfortable nest egg. However, it's not all bad news for women. Klein says the conservative approach also means women tend to ask more questions and be more likely to stick with their investment decisions, which can be a good thing in a tumultuous market environment.

"Once women make a decision, they stick with it," says Klein. "They understand the ups and downs of the market and are less likely to react emotionally."

3. Women don't necessarily plan for themselves

Whether it be letting a man make their investment decisions or thinking a husband's Social Security or pension will sustain them, many women make the mistake of not being in charge of their own retirement plans.

"It surprises me that even today, after all of the changes in traditional roles, the men still dominate the financial decision-making in most couples I meet," says Goldstein.

Klein suggests part of the problem may lie with advisers who assume men are the decision makers. He says women shouldn't be afraid to speak up during investment discussions and that women are involved in more than 60 percent of the decisions made by his clients.

"Women shouldn't feel like a burden asking questions," he says. "If they do, they should look for a new adviser."

4. Women outlive men on average

Part of the reason women shouldn't leave all the decisions to the men in their life is that those men may not be around as long as them. Longevity doesn't necessarily contribute to the gender gap in retirement savings, but it is a reason women should be very concerned about it.

"About 50 to 60 percent of women will be single (at some point) in retirement," says Klein.

Those women might be divorced, widowed or single by choice. Regardless of the reason, they need to be prepared to care for themselves during their final years. Goldstein says women, even divorced women, should check for the availability of spouse's benefits from Social Security and pension plans, but that money may only go so far and help may not be available from other sources.

"In the past, the children and grandchildren looked after Grandma, but today and also in the future, that's no longer necessarily the case," says Goldstein.

5. Women may place others' needs ahead of their own

It's unfortunate that children and grandchildren may not feel an obligation to help their mothers and grandmothers because, in some cases, those older women may not have retirement savings since they prioritized their families above themselves.

"They overlook themselves," says Klein when asked to name a common mistake women make. "They worry about everyone else."

That means college funds get money before retirement plans, and family needs are placed before savings.

"Widows may be concerned about how much they will leave to their children when the first thing they need to do is protect themselves," says Klein.

Goldstein agrees. "A woman should always be financially independent and aware, doing the best that she can to plan her finances," he says.

If enough women take control in these ways, today's gender gap in retirement savings could become a thing of past.

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