There are some great tools and calculators you can use for free to help plan for retirement. Some of the best ones are those which you may not even know about.
First, not to toot my own horn, but my website, www.helpmy401k.us has a great tab called Investment Tools .
There are calculators there for almost everything. The most commonly used one is the 401(k) Calculator. You could also use the 457(b) calculator if you are a government employee, but the concept is the same.
Simply go to the 401(k) calculator and plug in your own numbers. For example, lets say you are 29 years old with $1000 in a retirement savings account. Lets also say that you earn $50,000 per year and that you follow Dave Ramsey’s advice and put in 10% of your pay into your 401(k) or $5000. If you earn an average return on this 401(k) account of 8% and keep doing this until age 66, you will have saved $1,076,087 for retirement. And that does not include an employer match or a raise in pay – EVER. Personal Finance expert Eric Tyson has an idea which may help provide an incentive to save more in 401(k) or IRAs – instead of calling them those names, we should try calling these “tax-reduction accounts”.
What if we did figure those in? Easy – just enter those numbers.
Well, lets say your employer matches your contribution by 50% of whatever you put in up to 4%. If you put in at least 4% or more (and we are doing 10%, remember?), that means you are getting another 2% ($1000) from the employer. Also, lets assume they will raise your pay by
2% per year as a cost of living increase. Keeping the other earlier numbers the same, you will now have saved $1,598,680 for retirement.
Here is another one which my be helpful if you are planning to pay off credit card debt. And you should absolutely do that! It will have you save more in your “tax-reduction accounts.”
Let’s say you have a balance of $2000 in a credit card account. Your current monthly payment is $125/month and your interest rate on the card is 17.5%. (Ugh!) If you do as Dave Ramsey says and do some “plastic surgery” on your card (cut it up and dont use it anymore!), did you know that you can pay the card off in 12 months by just raising your payment to $183/month? It’s true and very easy to figure out using the “Credit Card Payoff” calculator on the site. This can be very helpful to see yourself making progress towards your goal, if you can’t pay the entire amount, but know you should pay less than the minimum.
In upcoming blog articles, we will look at a few more of the calculators. You can see these calculators and many other helpful ideas on my website, www.helpmy401k.us. You can also follow me on Twitter at www.twitter.com/deanvoelker . I also host a weekly internet radio program “Improving Your Financial Health” at http://www.blogtalkradio.com/401kcoach .
Earlier, we wrote about the need for long term care insurance. The likelyhood of needing to pay for long term care in some form is nearly HALF for those 65 and older. We are simply living longer and our bodies are more likely to break down the longer we live.
The primary reason that people don’t get long term care coverage is of course – COST. So let’s look at some ways which can help someone to control the cost on a policy. Keep in mind also that the cost of the premium is still FAR LESS than the cost of coverage if the entire amount is coming out of your pocket when you have a need. Again, the reasons to own a policy are to protect your savings from having to be spent down, and also to have choices over the type of care you would be able to receive when the need arises.
1. Buy the policy between age 55 aand 65.
This should be obvious. Yet most people don’t think of it, or they put it off and want to look at it later, after age 65. Premiums are much higher at this age, than for someone in their late 50’s. Also you would like to be able to pay for the premium out of savings or dividends from an investment. Lets say your premium is $4000/year. If you have assets of at least $150,000 or more, you should be able to generate enough dividends to pay the premium from that without depleting your nestegg.
2. Meet with your representative to determine the proper per day amount of coverage.
In the previous article, we talked about the IN Partnership. If you looked at a policy with $5000/month coverage that would also work out to $167/day. You can select the amount of years you’d like to be covered for. 4 years at this rate would give you a total policy value of $240,000, which would easily satisfy the requirements for total asset protection in Indiana. You could also opt for less years (2 years or 3 years), which would lower your cost.
3. Look at a longer elimination period.
The elimination period is like the deductible on auto or health insurance. The longer you are able to pay for care out of pocket yourself, the lower the premium will be. Of course, just like the deductible, you need to have the savings to back it up, when you have a need. Look at your savings and determine what is a realistic “out of pocket” amount you can handle, and relate that information to your agent.
4. Use a representative who represents a variety of insurers to get the best rate.
Be careful though. You don’t want “cheap” when it comes to insurance. I work primarily with 3 providers – John Hancock, Met Life, and Genworth. These are all major firms with solid reputations who are the leaders in Long Term Care. Of course we can look at all 3 and find which one may provide the best fit (and best value) for the client.
You wouldn’t think of owning a home without insurance to replace it in case of fire or disaster, would you? Of course not. In fact, its required by law when you take out a mortgage. But the chances of losing your home in a fire or disaster are very slim.
Also, car insurance is required by law in case of an accident. You want to be able to cover the cost of replacing the car if something happened. Seat belt laws are also there for our safety. But the chances of being in a car accident and totalling the car are also very slim.
Did you know that there is a much greater risk which could drastically affect your retirement nest egg? And it doesn’t matter how you may be invested?
In fact, the wealthier you are, the more risk you may have. And the chance of “something happening” is much much greater than replacing your house or your car, yet most people aren’t covered at all, or even given it much thought.
What might this be, you ask?
According to John Hancock, 49% of all people turning 65 will need Long Term Care at some point and 72% will use Home Care Services. 49% – that is HALF!!
There are several myths on Long Term Care which should be cleared up. First, most Long Term Care is NOT provided in nursing homes. In fact, also according to John Hancock, 80% of older adults who receive long term care services do so in their own homes.
Another myth is on Medicaid. Medicaid will only cover LTC in nursing homes – and they choose which one you can use. (i.e. “cheap”) Also, before you can qualify for Medicaid you savings MUST be spent down significantly to poverty level. (The actual amount varies from state to state.) Also the government can (and will) look back over your records for the past 5 years before letting you qualify for benefits.
The real risk if you don’t have insurance coverage is how it can wipe out your savings. (Remember earlier how we said that your investment portfolio didn’t matter?) According to Met Life, the annual cost for nursing home stay averaged $75,190 in 2006. And inflation normally grows in healthcare much faster than in other areas. Assisted living facilties, which are more like apartments, averaged $35,616 in 2006. And without coverage – that is 100% out-of-pocket.
Fortunately, there is hope. Since 1993, Indiana has offered a Partnership Program, which can help you to protect your nestegg. What that means is, if you purchase a Long Term Care Insurance policy which meets the program guidelines, you can protect the same amount of assets as the amount of coverage in your policy. Buy a $100,000 policy – protect $100,000 in assets. And if your policy provides at least $228,045 in coverage (2008), you will be able to protect ALL of your assets.
It doesn’t take long to figure that $228,000 is a good benchmark either. Figure 4 years (48 months) at $5000/month and you get $240,000.
Another huge benefit is that premium payments for Indiana Partnership Long Term Care Policies may be deductable on Indiana state tax returns. In a future article, we will look at ways to control costs. But I certainly hope that this at least makes you think. My job as an advisor is to help you “protect” your nestegg.
Watching the news may seem like an ongoing care wreck – especially if you watch Glenn Beck, who always looks like he will suffer a breakdown right on camera – but as horrifying and overwhelming as the news is, you can’t seem to pull yourself away.
We don’t suffer from a lack of information - rather TOO MUCH information. Its all so confusing and you can feel like the rag doll being pulled apart from all directions.
How does all of this affect your ability to save for retirement? Is it possible to still have goals and dreams? Can you still retire with dignity?
Dan Rather was once quoted as saying “If all of the difficulties were known at the outset of a long journey, most of us would not start out at all.”
Nothing great was ever achieved without hardships along the way. As an advisor, my job is to help you resolve your fears. Let’s wipe them out and provide some peace of mind.
This year, when I became an iindependent advisor and opened my own office, I’ve been learning that most people would rather “not lose anymore” than to win with their long term savings. To quote another great American, Will Rogers – “I’m more concerned with the return OF my money than the return ON my money.”
With that in mind, my purpose has been to focus on helping people to find a vehicle that would “not lose” and still let you win. What if I could toss you a “Life Preserver” for your savings? Remember when you first learned to swim? Those kickboards or noodles came in handy, didn’t they? You learned eventually that the water is your friend. Once you stopped fighting it, and let it help you, swimming became more fun, right?
Russell Pearlman recently wrote an article titled, “Problems? What Problems?” from the November 2009 issue of “Smart Money” magazine. His article focused on annuities, which have become much more popular with investors as a life preserver for long term savings.
“Don’t tell that (regarding annuity cost) to baby boomers looking for retirement security at a time when their 401(k) plans are still hurting; they just keep buying annuities. Through the first six months of the year, total annuity sales were almost $127 billion, only a 3 percent drop from 2008.” he writes.
Again, the message I get from my clients and others I meet is “We want SAFETY and Peace of Mind.”
Can we get “Guaranteed” growth for our long term savings?
Will it be better than current CD rates?
Can we get “Guaranteed” income when I retire – also better than current CD rates?
Can we make sure the income never goes down?
And lasts for a lifetime – even if we live to 100 or beyond?
And when that lifetime does end, can we leave something for our family and loved ones?
In short – YES! Mr. Pearlman goes on to write “Are annuities for you? Experts say the peace of mind may be worth it.”
Another of my favorite articles this year was written by Leslie Scism of the Wall Street Journal. “Long Derided, This Investment Now Looks Wise”. “Because of such guarantees, many holders of variable annuities actually saw their accounts increase 6% or more in value last year, when the Standard & Poors 500 stock index dropped nearly 39%.” Ms. Scism writes.
Contact me today to learn more about how to get a life preserver (or noodle if you prefer) for your savings. Treat yourself to some Peace of Mind!
Last week, we asked “Where’s the Beef?” Today, we ask “Where’s the Fat?”
Its very important to trim the ‘fat’ in your 401(k) plan – or fund expenses. Today on my Blog Talk Radio program, I had a listener ask about fund expenses. These can really affect your long term return on your retirement savings.
Expenses come from managing the mutual fund. The fund family charges a percentage of the assets invested to manage the fund – deciding what to buy, what to sell, and how much to buy or sell and when to do it. Less trading = lower expenses. Also the advisor on the plan may be paid from these expenses.
Knowing this, it would make sense to look for funds in your plan which have a lower expense rate. If its about 1%, that isn’t too bad, much more than that can negatively affect your returns over time.
To give you an example, I did some figuring on my financial calculator . Let’s look at a 22 year old college graduate, starting their 401(k) plan. Of course you would expect them to bump up their contributions over time, but lets say they put in $300/month with an 8% average return until age 66. They would have saved $1,340,048 in 44 years.
What if they were using a fund with expenses that were 1% more? In other words, the fund may have averaged 8%, but the real return was 7% due to higher expenses. With all the other factors being the same, we now have a total savings of $993,985, which is a difference of $346,063. OUCH! If you figure on taking 4%/year of the nest egg at retirement for income, that means we would need to live on less income -$13842 per year less. See where 1% can make a big difference?
So look carefully at your statement. Don’t just look at ‘performance’ but also fund expenses, which do affect long term performance. Have an advisor help you with this and also help you determine how much to save, so you can have the type of retirement you want.
During the 1980’s there was a very popular commercial by Wendy’s. An elderly lady ordered a burger at a generic fast food counter. Upon seeing how puny and pathetic her tiny burger was, she grilled the sales clerk repeatedly – “Where’s the beef?” The commercial was a huge hit and “Where’s the beef?” was a well known catch phrase.
These days “Where’s the beef?” could easily be applied to the 401(k)s & IRAs of many people. In Daniel R. Solin’s book, “The Smartest 401(k) Book You’ll Ever Read”, he points out that “the typical twenty-something only invests 50.4% of his or her account in stock mutual funds.” You can’t keep up with inflation that way! Mr. Solin goes on to say that as we get older, that figure is also pretty timid. “The typical worker in their forties invests only 54.3% in stock funds.”It doesn’t matter how old you are. Even people on the verge of retirement should be invested in stock mutual funds with a good part of their long term savings. After all, you could be retired for 20-30 years.
Stocks have been the only investment which has beaten inflation over the long term. And we NEED to prepare for inflation! Did you know that in 1989 (20 years ago), a loaf of bread costs an average of 0.67? And a postage stamp was just 0.25?
Mr. Solin also points out that “If you invested $1.00 in blue chip stocks in 1926, it would be worth $3077.33 today. That pencils out to a 10.42 average yearly return.” Don’t be too fancy trying to pick the “right” fund. Look for mutual funds with long histories (10 years or longer) and low expenses. High management fees can really affect the return on your investment.
We will be looking at a few other ways to put some “Beef” back into your 401(k) in a future article.
. You can also follow me on Twitter at . I also host a Weekly Internet Radio Broadcast “Improving Your Financial Health on Blog Talk Radio
Do People still invest in CDs anymore? (Don’t answer that.) I know that they are the “investment” of choice for a number of folks and for banks. Let’s be honest though – Rates are TERRIBLE!! As of today, Oct. 2, 2009, according to bankrate.com, the best rate on a 12 month CD in the USA is 2.05 at India Bank. For a 3 Year CD, the best available rate is 2.97 at Flagstar Bank. When I called banks in the area, I actually had to keep a straight face when Diana told me about their “Special Rate” of 1.5% on a 13 month CD – only for current customers, though. Woo-Hoo!!
CDs do appeal to those who want “safety”, which means the FDIC Guarantee. That means your money is guaranteed by the Federal Deposit Insurance Corporation (i.e. the U.S. Government) OK, I feel MUCH BETTER about THAT!!
About a year ago, as part of the new financial legislation, the FDIC raised its limit on the maximum amount guaranteed from $100,000 to $250,000. I’m not sure exactly how that helps Joe Lunchbucket, but there was quite a bit of fuss made about it last October.
Dave Ramsey has often referred to CDs as “Certificates of Depression” and with good reason. Did you know that for 11 of the past 20 years, CDs actually have a “Real Return” that is Less Than 1%? Once you consider inflation and taxes on the interest, it is really about the same as burying your savings in the backyard.
As a retiree, wouldn’t you like to get a better return on your savings? What if you could have your nestegg generate income for you of at least 5% of the principal – and have that income paid to you for the rest of your life? Often when I meet with clients, I learn about their situation and their goals and suggest an appropriate solution which will help them with their long term savings. Clients normally can see the value, but may get hung up on time frames with CD money. A common response may be “That sounds great. I’ve got a CD due in a couple of months. Call me back then, and we will get back together. I can’t touch it until then.” (The Early Withdrawal Penalty looms overhead like the ‘Grim Reaper’.)
So, being a good guy (I don’t want to see anyone lose money.) I mark the date on my calendar and follow up with them as they asked me to. Except now the situation has changed. The CD was renewed. OR the due date was different from what they thought. OR the dog needs braces. OR….. Bottom Line - EVERYONE (most of all the client) LOSES.
Soooo, this being October, I called 3 leading banks in South Bend to see just how “scary” the Early Withdrawal Penalty is. At Wells Fargo , I was told that the penalty would be forfeiting 6 months of interest on a 16 month CD and 3 months of interest on a 12 month. First Source Bank had the best rate locally on a CD – 1.5% on a 13 month CD, which also came with a penalty of 6 months of interest for early withdrawal. National City Bank (soon to be PNC) told me that you could lose 1/2 of your interest for the remainder of your term or 3 months of interest, whichever is greater.
OK, lets do the math. Let’s say you have a CD of $10,000. You have about 3 months left on the term. Let’s give you the BEST rate (a whopping 1.5%) and the stiffest penalty for taking it out early (6 months interest). $10,000 x .015 x .5 (6 months is 1/2 of a year) = a loss of $75.
But what do you gain? There are only 2 types of money – liquid cash (you need it NOW) and investment savings (you need it LATER). What if you invested it into something that gave you an average return of 5% or more? $10,000 x .05 = $500 after 1 year. Last time I checked, $500 – $75 = a GAIN of $425. And I want the best for my clients. So let’s leave the “scariness” to the little ghouls and goblins on Halloween.
There are some great tools and calculators you can use for free to help plan for retirement. Some of the best ones are those which you may not even know about.
