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Personal Finance

Financial Planners' Keys to a Happy Retirement

February 10, 2017

By Dan Rafter | Money Rates Columnist

You want to boost the money you are stashing away for your retirement years. But now you face tough choices: Should you invest in a traditional individual retirement account (IRA)? How about a Roth IRA?

There are so many types of investment vehicles, choosing the right one for your retirement savings can seem overwhelming. But here's a tip from financial advisors: Don't focus so much on the savings accounts and investment options available to you. Instead, focus on setting goals for your own retirement. Then determine how much money you'll need to meet those goals.

This kind of retirement planning is the most important step in securing happy golden years, these financial pros say.

"What investment vehicle you save in is much less important than determining if your current level of saving and spending are going to allow you to achieve the goals you've set out," says Neal Slafsky, managing director at United Capital in Fort Lauderdale, Florida. "I can't talk about the savings vehicles until I first understand the direction that my clients want to go. There's no point in getting in the car and having no destination in mind."

The point here? Before you start worrying about the differences between Roth and traditional IRAs, you need to determine what kind of retirement you want and how much money you'll need to get it.

Review current spending and saving habits

Everyone wants a happy retirement. And many believe that simply choosing the right mix of annuities, IRAs, stock market picks and life insurance investments will get them there.

But the real trick in saving for retirement is to start planning out those after-work years as early as possible.

Alex Navarro, senior vice president and private financial advisor at SunTrust Investment Services in Miami, says that he first advises his clients to look at their current spending and saving behaviors. Are the actions they are taking today getting them closer to their retirement goals? Or are they putting those goals in jeopardy?

If it's the latter, Navarro works with his clients to determine what changes they can make in how they spend and save.

"To plan for retirement, you need to look at your behavior today," Navarro says. "Then you need to take the appropriate actions that will put you into a situation where you are able to save for retirement."

Take every opportunity to maximize contributions to 401(k) plans

Mary Ellen Garrett, senior vice president of wealth management with the Atlanta office of Merrill Lynch, says some people are not maximizing the contributions they are making every two weeks to their company's 401(k) program. This is another example of current behaviors that do not push retirement savers toward their targets.

To get closer to your retirement goal, you'll need to boost the amount of money you are automatically depositing into your 401(k) account, Garrett suggests.

"The first thing people should look at is what is already available to them," Garrett says. "If they are working for a company that provides a retirement plan, they should take full advantage of that first before they invest in any other retirement savings vehicles. If your company offers a 401(k), it will typically offer some type of matching plan. If you are not taking advantage of that, you are walking away from a great savings tool."

Use a retirement savings calculator

So, how much money do you need to save to have a happy retirement? Not surprisingly, the answer to this depends largely on the type of retirement you want to live.

The 2016 Retirement Confidence Survey by the Employee Benefits Research Institute found workers cite a wide range of figures when saying how much money they'll need in retirement. About 24 percent of workers, for example, told the institute that they think they'll need at least $1 million after calculating how much for retirement to save. Almost two-thirds of employees said they'd need to have less than $1 million saved by retirement.

The study also highlights the differences in confidence for retirement depending on whether workers performed a calculation of how much to save for retirement. Of those who said they were very confident about their ability to have a comfortable retirement, 30 percent crunched the numbers for retirement while 13 percent who had a similar confidence level did not.

Using a retirement savings calculator to estimate their needs after leaving the workforce could better prepare workers for their golden years.

How much to save for retirement investments

What's the right number? One rule of thumb is that you should have a retirement portfolio. Use whatever combination of savings, stocks, annuities, pensions, Social Security payments and other income streams you can muster. Ensure this will allow you to generate 80 percent of your current income every year. If you make $100,000 a year, then, you'll need a retirement portfolio that generates $80,000 in income every year.

Match post-work goals and lifestyle to retirement savings targets

But these retirement savings targets are just an estimate. Depending on your retirement goals, you might not need that much money in your retirement years. It all comes down to what you want to do after you leave the working world.

If you want to travel extensively, you'll need to save plenty of money. If you just want to play golf and spend time with your grandchildren, you can get by with a smaller amount of savings.

The key is to be realistic about what kind of retirement you can have based on your current income stream and the amount of money you've already saved. You might not be able to afford those yearly cruises that fuel your retirement dreams.

Navarro points out some negative outcomes as a result of retirees living outside of their means.

"I'm not a magician. I'm a financial planner," Navarro says. "I have had situations where people have continued living the lifestyles of the rich and famous without worrying about how much money they had left. Then the money ran out and they had to live the lifestyle of Purina cat chow. They were not mature enough to take the proper action at the right time. It's like watching a train wreck. My job is to advise them. Some people choose not to listen."

The above scenario highlights the need to not only have retirement savings goals, but also spending targets that are in line with their savings accounts in addition to their desired lifestyle.

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How to Recover from the 3 Biggest Credit Score Busters

January 31, 2017

By Dan Rafter | Money Rates Columnist

You lost your job and could no longer afford your monthly mortgage payments. You stopped making them and lost your home to foreclosure. Maybe you've made so many financial missteps that you filed for either Chapter 13 or Chapter 7 bankruptcy protection to get a fresh start.

These are big financial disasters. Each will send your credit score plummeting by 100 points or more. And don't expect to qualify for credit cards, a mortgage loan or auto financing anytime soon.

3 Biggest Credit Busters: foreclosure (short sale), bankruptcies

3 Biggest Credit Busters

There is hope, though. It is possible to recover from each of these three financial disasters. It just takes time and good financial habits to boost your credit score and become an attractive borrower once again.

"A lot of times people say that they can't do anything for seven or 10 years after a foreclosure or bankruptcy," says Chris Copley, who has worked as a regional manager for TD Bank. "That's not necessarily true. If you take the steps to rebuild your credit, you might be able to get a credit card or even a mortgage loan before that seven- or 10-year period is up. Don't fall into that trap of thinking that there's nothing you can do."

Foreclosure and short sale

If you began falling behind on your mortgage payments, you may have sold your home through a short sale, a type of home sale in which your lender allows you to sell your residence for less than what you owe on your mortgage loan. Having such a sale on your credit report marks you as a high credit risk, and a far less attractive borrower to lenders.

Losing a home to foreclosure or selling a home through a short sale is a serious blow to your credit, and will send most consumers' scores falling by more than 100 points. Even worse, both a foreclosure and short sale remain on your credit report for seven years.

Chapter 13 bankruptcy

Bankruptcy filings stay on your credit report for a long time, too. If you file for Chapter 13 bankruptcy protection, in which a judge creates a payment schedule that allows you to pay back at least a portion of your debts, your bankruptcy filing will stay on your credit report for seven years before falling off.

Chapter 7 bankruptcy

If you file for Chapter 7 bankruptcy protection instead, this filing will remain on your credit report for 10 years. Under this form of bankruptcy you'll have to sell most of your assets to pay back what you can. The debt that you still can't afford to pay back is erased.

How to Rebuild Your Credit Score After Financial Disasters

But this doesn't mean that you won't be able to qualify for a loan or credit card for a full seven years. The more years that pile up between you and your foreclosure, the less impact a foreclosure has on your three-digit credit score. In year six, your foreclosure will remain on your credit report, but it won't exert the same downward pull on your score.

Make on-time bill payments

After a foreclosure or similar credit-busting incident, avoid being late on bills, eliminate as much of your credit card debt as possible and keep the balances low on your credit cards. If you practice these sound habits, your score will slowly -- but steadily -- rise after a foreclosure.

"Pay all your bills on time. That is the most important thing you can do," says Patrick Simasko of Simasko Law Offices in Mt. Clemens, Michigan. "Don't throw in the towel. Don't think the hole is too deep to dig out of. You can dig out of it. You just have to be fiscally responsible from that point on."

Wait until you can apply for another mortgage loan

Even if you rebuild your credit score and grow your savings account for a down payment, though, you will have to be patient if you want to qualify for a mortgage.

Applying for a mortgage after foreclosure

You'll have to wait at least seven years after a foreclosure before applying for a conventional loan backed by Fannie Mae and Freddie Mac. But you can qualify for a mortgage backed by the U.S. Federal Housing Administration, better known as an FHA loan, as soon as one year after a foreclosure if you can prove that you fell behind on your mortgage payments because of an economic event outside of your control, such as a job loss. If you can't prove this, you can still apply for an FHA-insured mortgage just three years after a foreclosure.

Getting a mortgage after bankruptcy

If you want to apply for a mortgage loan after bankruptcy, you'll also need to wait. If you want to apply for a conventional mortgage backed by Fannie Mae or Freddie Mac, you'll need to wait at least four years if you filed for Chapter 7 bankruptcy and two if you filed under Chapter 13. For an FHA loan, you'll need to wait two years after Chapter 7 bankruptcy. You can qualify for an FHA loan after you have made at least 12 months of on-time Chapter 13 payments.

Lower credit card debt

If you want to apply for a new credit card or auto loan, you won't have to wait as long as for a home mortgage. You'll simply have to build up your credit score over time by never making another late payment and reducing your credit card debt. Depending upon how low your score fell, you might have to practice these good financial habits for a year or more before you start to see any improvement in your score.

Just as with foreclosure, the negative impact of bankruptcy filings lessens over time. Again, you'll need to pay your bills on time and keep your credit card debt low to see your credit score slowly rise as the years pile up after your filing.

Show you can handle new credit responsibly

You want to reduce your current credit card debt to a manageable level, but what if you want to apply for a credit card? This is probably a good idea, if you can handle this new credit. Once you get a credit card, you can begin making charges each month. Pay off your full balance each month on time. If you do this for a long enough period of time, your credit score will steadily rise.

Look into a secured credit card

Don't expect to qualify for a premium credit card with a low interest rate when a bankruptcy filing is still on your credit report. Instead, Simasko recommends that you apply for a secured credit card. To do this, you'll need to make a cash deposit in an account tied to the card. Your credit limit is set based on the amount of your money in that account. This provides protection for the financial institution giving you a card. If you don't make your payments, the bank behind your card can simply take the money out of your security account.

Banks do, though, report payments on secured credit cards to the three national credit bureaus of Experian, TransUnion and Equifax. Make these payments on time each month and you'll improve your credit score.

Diversify credit types and prove you're a low risk

Another way to raise your financial standing is to diversify the types of credit you have on your credit report, such as an auto loan. You can still qualify for an auto loan as long as you show that you can afford the monthly payments. Prove your ability to pay with copies of your most recent paycheck stubs, bank-account statements and W-2 forms. But do expect to pay higher interest rates. Charging these higher rates provides some protection to lenders who are taking on more risk by loaning you money.

"You are going to have to wait for a while after one of these financial issues to apply for new credit or debt," Copley says. "But just because you filed for bankruptcy doesn't mean that you can never become a fiscally responsible consumer. You can. You just have to make it a habit to pay your bills on time. Do that long enough, and banks and lenders will work with you again."

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Personal finance checklist at age 50

January 23, 2017

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

In a youth-oriented culture, it is easy to feel a little over the hill by the time you turn 50. When it comes to building wealth though, your 50s are the prime of your life - a period when you have a chance to emerge from debt, enjoy your peak earning years and start to see your investments make a serious contribution to your net worth.

To take advantage of this crucial phase of your financial life, it is important to understand some key factors that can help you make the most of your 50s.

Personal finance checklist at age 50

As you look over your financial situation once you turn 50, here are some things you should attend to:

1. Shift more heavily from borrowing to saving

Early in your career, accumulated savings are likely to be modest and it seems you are taking out one loan after another: student loans, car loans, home mortgages, etc. By the time you reach age 50 though, you should have greatly reduced your debt burden. In its place, you should see a growing portfolio of retirement assets. This is the type of trend that can feed on itself: the more you retire your debt, the more of your monthly budget can go to savings rather than loan payments.

2. Estimate your Social Security benefits

The U.S. Social Security Administration will provide you with a free projection of your retirement benefits based on your career earnings so far. While this will remain subject to change based on your subsequent earnings, by age 50 you should have enough of a track record to get a sense of what contribution Social Security will make to your retirement income. This projection can also help you start to think seriously about the pros and cons of retiring early or working longer to achieve the maximum annual benefit.

3. Reassess your retirement goals

In addition to Social Security, look at your other retirement savings and see how much income they project to provide. Knowing where you stand will help you make more concrete plans about the future, including when to retire and what kind of lifestyle to expect.

4. Use catch-up retirement saving opportunities

Looking at your projected Social Security benefits and your savings accounts relative to your goals may tell you that you have some catching up to do. Fortunately, the government gives you some catch-up opportunities in the form off additional tax-deferred retirement contributions to 401(k) or individual retirement account (IRA) plans that you can make once you turn 50. Use this as an incentive to start making extra contributions.

5. Keep your asset allocation aggressive

People often feel their investments should get more conservative as they get older, but age 50 is too soon to throttle back to a less growth-oriented asset allocation. At that age, you are probably still more than a decade away from retirement, and still have an investment time horizon of some 30 or so years stretched out ahead of you. Plus, if you are contributing heavily to your retirement plans, this positive cash flow will help smooth out some of the volatility from growth investments.

6. Update your will

If you first made a will when you started your family, you might find things are radically different by the time you turn 50. Your kids may be on the verge of adulthood and your net worth may be substantially greater, so it is a good time to take a fresh look at what provisions you've made for your survivors.

7. Don't be shy about discounts

Turning 50 makes you eligible for AARP membership. Don't let that make you feel old - just look at the discounts available, and think of it as an advantage you've earned.

8. Take advantage of senior checking accounts

Some banks offer checking accounts for older customers that have no monthly fees. Eligibility is often set at age 50, and with free checking getting harder to find these days, signing up for one of these accounts can be another advantage of getting older.

9. Survey your career opportunities

Since these can be your peak earnings years, you should assess whether your current employer is the best place to capitalize on those years, or whether you could do better somewhere else. To think more defensively, you should also take an honest look at whether your job skills need freshening up so your employer does not view you as out of date.

With proper attention to your finances, this could be your greatest decade for wealth building. After all, it is too late for procrastination and too early for slowing down. This is prime time.

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15 Steps To Prepare Your Finances For 2017

December 16, 2016

By Dan Rafter | Money Rates Columnist

How many times have you resolved to lose 15 pounds or go to the gym more often? Maybe it's time to make resolutions that you can keep for a better 2017.

The start of a new year is a great time to begin an emergency fund, create a household budget or pay off debt.

Several financial planners share their tips on what resolutions and steps consumers can take today that will result in a healthy financial year in 2017.

Here are 15 steps to prepare your finances for next year:

Personal Finance Steps for 2017

1. Start/build an emergency fund

Wilson Moy, director of financial planning and senior trust officer at AAFMAA Wealth Management & Trust, says that the best move consumers can take is to resolve to build an emergency fund next year.

As its name suggests, an emergency fund is an account -- typically a savings account -- that consumers can tap to pay for life's unexpected events, such as a broken water heater or a blown transmission on the family car.

2. Aim to save 6 to 12 months of expenses

Moy says traditionally, financial experts have recommended that consumers keep three to six months of living expenses in their emergency funds. But that might not be enough today, Moy says.

Instead, Moy recommends building an emergency account that holds six to 12 months of living expenses.

"Things change so fast today," Moy says. "If you're the single wage-earner for your household, what would happen if you lost your job? Three to six months might not be sufficient. Without that emergency fund, you might be forced to make big changes, such as selling your home, if you do lose your income for any period of time."

3. Create or adjust your household budget

Drafting a budget for your household doesn't sound like fun. But Craig Robson, senior vice president of wealth management at the Atlanta office of Merrill Lynch, says doing so is a key step in having a healthier financial year in 2017.

4. Update your monthly income in the budget

Creating a household budget isn't overly complicated. Start by listing your monthly income. Account for any increases in salary or bonuses your employer mentioned for next year.

5. Adjust fixed monthly expenses

Then list your fixed monthly expenses, items such as your monthly mortgage payment, car payment and estimated utility bill. Note if there are any modifications in these costs, like a new addition to the family or the additional expenses of a longer commute.

6. Set aside money for other household costs

Finally, determine how much money is left over. This is money that you can earmark for entertainment, weekly groceries and eating out.

7. Put money toward financial goals

Use the remaining money to achieve your financial goals, such as saving for college or building an emergency fund.

Once you know how much money is coming into and out of your household each month, you can take steps to either reduce your expenses or boost your monthly income to meet your specific financial goals, Robson says.

"Studies show that those who create budgets are more likely to achieve their financial goals," Robson says.

8. Target high interest debt

Kevin McCarthy, financial advisor division manager with SunTrust Investment Services, says before making any big financial moves, consumers should resolve to pay off any debts that come with high interest rates.

This usually means credit card debt, which can come with interest rates of 20 percent or higher, making it the most expensive debt you can carry.

9. Limit dependence on credit cards

Kathleen Hastings, portfolio manager with FBB Capital Partners in Bethesda, Maryland, says the biggest mistake people make is running up their debt. The best resolution you can make, then? To use your credit cards wisely.

Consider only making purchases with your cards that you can pay off in full when your bill comes due. Using your credit cards in this way is smart: You don't have to carry loads of cash with you and you can improve your credit score by paying off your debts on time each month.

"Resolve to stay out of this kind of debt," Hastings says. "If debt gets out of control, it's really tough to eliminate. It compounds. It snowballs. The next thing you know, you are $30,000 or $40,000 in debt."

10. Look into transferring debt to a low interest card

The high interest of certain credit cards make them hard to pay off debt. Some consumers may want to look at the option to transfer their balance to a low or 0 interest credit card. Though the promotional interest rate will not last, they can use this opportunity to pay down the debt. Before moving your balance, compare different cards and be aware of transfer fees.

11. Pay off credit card debt

Financial pros recommend several ways to pay off your credit card debt. Start by paying extra each month on the card that has the lowest balance. Once you pay that off, you can then take the extra cash and begin paying off the card with the next-lowest balance.

Or begin paying off the card with the highest interest rate first, no matter how small or large its balance is. Once you pay off that card, take on your credit card that has the next-highest interest rate.

12. Prepare to max out retirement savings contributions

Kevin Houser, manager partner with Allentown, Pennsylvania's Houser & Plessl Wealth Management Group and one of the authors of "The Book on Retirement," says resolving to maximize the contributions to your retirement plans -- whether 401(k) plans or individual retirement accounts -- is a step that everyone should make.

Most people know this. But they instead let emotion, such as worrying that they'll miss those extra dollars being funneled from their paycheck to their 401(k) plan, over numerical facts dictate their decisions.

13. Raise retirement plan contributions

Instead of devoting, for example 12 percent of each paycheck to their 401(k) plan, they instead contribute only 8 percent. That ends up costing them big dollars come retirement time.

"So often, emotions drive our retirement decisions," Houser says. "The black-and-white of the numbers is easy. People know they should contribute as much as possible to their retirement plans. The underlying shade of grey that comes in when emotions get involved is what clouds our judgment."

To calculate how much to increase contributions to meet your goal, use a retirement savings calculator.

14. Review your insurance

If you haven't had a chance to look over your insurance, from health to life insurance, make sure to go over costs, deductibles and other expenses for next year. For example, you may want to increase your amount of life insurance if your income is now higher.

15. Consider housing options

Are you renting when you should be buying a home or find yourself in a place that is too small? Assess your current living situation, research new housing options and calculate whether you have the finances to make a move. If not, grow a savings account to relocate or see about refinancing to lower mortgage rates.

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Fundamentals of budgeting for beginners

December 8, 2016

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Budgeting is a simple concept, yet many people fail to follow.

What best describes your household budget:

  1. A series of mason jars with money stashed for different expenses?
  2. You simply spend until you start getting overdraft notices when you try to use your debit card?
  3. A theoretical concept with few details that you expect will get easier when you win the lottery?
  4. A carefully-planned, electronically-monitored program that helps you meet your current and future needs?

If number 4 is your answer, then good for you - you are probably in the minority of people with disciplined, well-executed budgets. It's a shame so few fit into that category because efficient budgeting can not only help you use your money better, but it can help grow your wealth and your savings account. A better financial standing can ultimately save you on credit card interest and other borrowing costs, and help you invest your savings more effectively.

The following is a comprehensive overview of budgeting basics to get you on the path toward meeting your financial goals.

Match income and expenses

Budgeting is a way of planning for the flow of money in and out of your bank accounts - usually a checking account, since that is the best suited to regular transactions.

Think of it as an old balance scale. On one side, you have your income and any other money you expect to receive. On the other side, you have expenses and any other money you expect to pay out of your account. The primary objective is to make sure the expense side does not outweigh the income side.

That might be fairly simple if it were a one-time, static comparison, but of course income and expenses are occurring in all the time. That's why another fundamental component of budgeting is planning not just how much you will receive and spend, but when these transactions will occur. Getting the timing to line up is crucial.

Look at recent transactions

If you are starting from square one, the best way to do this may be to look at your check register for the past few months. You can see what amounts flowed in and out, and at what intervals those flows occurred. Now try to project that same pattern forward for the next few months. Once you do that, you will have the beginnings of a budget.

How to deal with expenses that happen irregularly

What makes this a little more difficult is that income and expenses don't always come in regular increments. You might receive an annual bonus, or do project work with variable earnings. Certain expenses, like a dental bill, may only come up now and then. In addition, the cost of seasonal items might be considerably greater in the winter than in the summer, like a heating bill.

Think through these types of things, and try to anticipate them. This is one of the values of budgeting: It helps you see things coming even when they are not routine, month-after-month expenses.

Budget for future needs

The type of budgeting described so far helps you deal with expenses as they come up, but another benefit of budgeting is to anticipate future needs far in advance. For example, if you start setting a little aside for your next car each month, it will cut down on how much you need to borrow when your current vehicle finally needs replacing. Then, of course, there is the big one - creating room in your budget to save for retirement.

Budgeting makes future needs easier to meet because you can spread their cost out over a longer period of time, rather than having to scramble for the money when the need is imminent.

Don't expect to get this all right the first time. An essential part of budgeting is regular monitoring. This is so you can see where you went wrong and adjust accordingly. Budgeting is always a work in progress, rather than a one-time project.

Should you use budgeting spreadsheets and apps?

There are a variety of tools you can use to help automate your budgets. A simple Excel spreadsheet can work, but there are also several web-based programs and apps, many of them free. The advantage of these is usually a managed interface that will help guide you through the budgeting process. Also, being able to access and update tools on a smartphone or other mobile device can help you manage your spending in real time. Just be mindful of security because this also make a lot of sensitive material vulnerable to loss or theft.

You can use state of the art technology, or you an use an old paper ledger. However you do it, making a budget and sticking to it can help grow your money and shrink your financial anxiety.

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