Al-Huda
Foundation, NJ U. S. A
the Message Continues ... 10/182
Newsletter for January 2017
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Things to Know About Money Before You’re 50
by M.P Dunleavey
#10
includes free crullers really.
We’ve got bad news and good
news. Which do you want first? OK, the bad
news: Remember Gen X? That’s
you. Gen Xers are the ones who
are poised to turn 50, and they
are not only lagging behind in
their retirement prep like so
many other Americans; they are
pretty apathetic about it. How
Gen X of you.
A really depressing study found
that 45%
of Gen Xers don’t
even want to think about
investing for retirement
compared to 35% in 2011. That
would be the needle moving in
the wrong direction.
Now for the good news: You’ve
still got time to course correct
your financial plan, get those
proverbial ducks in a row
(whatever that means), and maybe
even have enough coffee left to
map out your second act.
Here’s what you need to know
before you hit the big 5-0.
1) This could be the midpoint of
your life.
Remember when turning 50
seemed…old? Not anymore. That’s
not to say that 50 is the new
30, but with more people living
to the century mark,
50 is looking more like a middle
decade than ever before.
In fact, if you live until age
50, you’re likely to live
into your 80s,
according to actuarial data. And
by the logic of how life
expectancies are calculated,
that means you have a 50% chance
of living well beyond that.
What that means: Don’t enter
this decade as if you’re on the
downward slope toward 65.
Instead, reimaging your 50s as
the financial fulcrum of your
life: a pivot point which, if
you seize it now, can help you
leverage the decades to come.
Essentially that means a shift
from inertia to action, from
apathy to optimism. Time is on
your side more time than you
thought. Now is the chance to
carpe your diem, your 401(k),
your career and anything else
you need in order to get more
from the next half of the game.
For example:
2) You have time to plan a
second act.
It’s not just a new movie starring
Robert De Niro: More Americans
are embarking on second careers
later in life. (Yes, De Niro
plays 70-year-old interning at a
start-up. But that’s because he
didn’t read this article before
he was 50.)
In fact, people in their 50s
and 60s are
the fastest growing group of
entrepreneurs, according to the
Kauffman Foundation. With that
exciting news in hand, you have
time to strategize and plan
your Plan B.
Research by psychologist Ken
Dychtwald found that “working
retirees”
tended to fall into four
distinct buckets: Earnest
Earners (28%); Driven Achievers
(15%); Caring Contributors (33%)
and Life Balancers (24%).
Do any of those sound like you
or would you make your own
bucket?
Do you want to switch jobs,
change careers? Do you need
additional training, and what
might that cost? Would you
rather work part-time or
volunteer?
Although 80% retirees who work
say they don’t do it solely for
the money, the additional income
is nothing to cry over. The
extra working years may
even increase your Social
Security benefit.
And as you’ll see next, that
could be a good thing.
3) Your money needs to last
longer.
Living longer could be a
blessing, but you don’t want it
to turn into a curse. So now is
the time to ask: If you retired
at 65 and lived until age 95,
would your money last?
In order to combat “longevity
risk” as they call it, you may
want to save more (some ideas in
#4, below). But you should also
revisit your asset allocation
strategy.
Conventional wisdom suggests
dialing back on stocks and
ramping up on bonds and cash as
you age the better to protect
your assets and minimize risk.
(Some investments, like target
date funds,
make those adjustments for you
automatically). But lately there
has been a backlash against that
traditional ‘glide path’,
in part because people are
living longer, and also because
bonds aren’t delivering the kind
of yields most people can live
on (unless you’ve got a pretty
big nest egg).
This new
research suggests
adding stocks to your portfolio
as you get older, which gives
your money greater potential for
growth. Is that wise? More
stocks also expose you to more
risk. Before you change your
allocation strategy, run the
numbers, perhaps with a
professional advisor, and do a
deep gut check.
And then, think about Mrs.
Buffett.
A couple of years ago, Warren
Buffett announced that he would
put 90% of his wife’s trust into
“a
very low cost S&P 500 index fund.”
If an aggressive strategy is
good enough for Mrs. Buffett,
who is about 70, it might be
worth considering.
4) There’s more room in your
401(k) now.
Turning 50 means that you can
save a whole lot more, thanks to
the so-called catch-up
provisions for
your 401(k) and IRA.
Let’s assume you’re saving the
annual max in your 401(k) plan
now (e.g. $18,000 in 2015), your
IRA ($5,500), or, if your income
doesn’t exceed the limit,
potentially both (for a total of
$23,500 per year). When you turn
50, you can save an additional
$1,000 in your IRA and up to
$6,000 more in your company plan
according to 2015 rules; the
catch-up amounts may change in
years to come.
Taking full advantage of these
contributions now would mean
saving $7,000 more per year, for
a total of $30,500 in
tax-deferred savings. Now,
socking away that much extra
cash each year might seem like a
stretch. An extra $7,000 is
about $583, pre-tax, per month.
But that’s why we’re giving you
a heads up today.
If you plan head, you might be
able to enjoy the ability to
catch up, even a little, as
those supplemental dollars can
add up enormously
over time.
5) Gender matters a lot.
By now you’ve heard that women
save less for retirement than
men do,
nearly 40% less.
Women typically earn less than
men do, and are more likely to
take time out from full-time
work to care for kids or aging
relatives, thus they save less.
You may have witnessed these
dynamics in
your own life, or your
partner’s. But now consider the
implications for the
long-term—because women also
live longer than men.
Statistically, women live about three
years longer than men do.
But that doesn’t paint the whole
picture: The number of women 65
and older is nearly 30% higher
than the number of men (23.4
million vs. 17.9 million).
How to close the savings gap?
Consider a more aggressive
allocation to stocks in your
portfolio or hers (to add the
potential for growth);
strategize about how to extract the
maximum from Social Security and
pension plans by understanding
spousal and survivor benefits.
Or take advantage of some of the
benefits of getting older: Your
kids are more independent,
you’re at the peak of your
career and this could be a time
to push for bigger promotions or
raises. Video
6) You can make life easier
after you die.
Yes, you’re probably going to
live for a while, but that’s all
the more reason to plan ahead
and make your death easier for
your loved ones. Common sense?
Not common enough. An
AARP survey found that a solid
40% of Americans over 45 haven’t
even drafted a will.
If you’ve been following the
advice in our
handy series,
you know that a will and a
health care directive are
essential. Now it’s time to
flesh out your estate plan and
set up a durable
power of attorney. This
is a document that designates
the person who will manage your
business and financial affairs
if you cannot.
For example, if you’re
incapacitated, you need someone
you trust who can pay your
bills, manage insurance claims,
make deposits, and so on.
Without it, your finances will
fall into the hands of a judge.
Not the outcome you’d probably
want.
7) You can pay off your mortgage
or not
It’s one of those
apple-pie-and-baseball dreams:
By the time you retire, you’re
going to pay off that 30-year
fixed so you can live free and
easy (property taxes
notwithstanding). But is that
the best move, financially
speaking? You have to weigh the
pros and cons.
Let’s say you bought a home or
refinanced your mortgage in
these last few low-interest-rate
years, and you’ve got a super
low-rate loan of 3.75%. Does it
make sense to divert extra cash
to paying down your mortgage
early, when you could invest
that cash for the long-term and
(potentially) get
a much higher return than
3.75%?
Also, keeping your mortgage
entitles you to take the
mortgage interest deduction on
your taxes, assuming you
itemize.
Then again, the amount of
interest you pay declines over
the years; so how much interest
are you able to deduct each
year, really?
Then there’s the emotional
side of things.
You may not care about interest
rates and tax deductions when
you think about the
soul-satisfying goal of “owning
your home free and clear.” It’s
hard to disagree with that.
Whichever way you’re leaning,
you should do
the math now.
Because if you decide you do
want to live mortgage-free in
retirement, you’ll want to get a
jump on it. Conversely, if you
decide that it’s not worth
pre-paying your loan, voila! You
can take the cash you’d planned
to put toward mortgage freedom
and use it to beef up your
portfolio.
8) A health savings account is
your friend
One thing about wrapping up your
40s: You’ve got a front row seat
to all the health care woes of
your parents’ generation. Now
the predictions that medical
expenses for most couples likely
to exceed $220,000 in
retirement seems possible.
Luckily there’s a solution you
can set in motion right now (if
your health
plan qualifies):
open a health savings account,
stat.
These accounts offer a
tax-deferred way to pay for
qualified medical expenses now
which is likely how you’ve been
using your HSA, if you have one.
But an HSA is also a smart move
for your long-term financial
plan, because it acts as a
stealth health care IRA. Here’s
how it works:
1.
You set aside money pre-tax (up
to $3,350 for individuals,
$6,650 for families in 2015).
2.
The money grows tax free; some
HSA plans allow you to choose
where your funds are invested,
too.
3.
HSA funds aren’t “use it or lose
it”; the money rolls over year
after year, so you can spend it
now or in the future to pay for
qualified health expenses also
tax free.
Yes, you have to be careful as
you would with any retirement
account. Check the account fees,
inquire about investing costs,
make sure you understand the
fine print. But even if the
account is sponsored by your
employer, the money is yours the
same as with a 401(k) and if you
leave your job, or just want a
better HSA plan, you
can move it.
This is what they call a
win-win, win.
9) There are ways to make
college more affordable
With the average cost of tuition
and fees topping
$30,000 per year at a private
school, and even in-state public
options creeping up to $10,000,
the race to fill up your 529 can
feel futile.
But there are ways to cut the
costs of college even if you
make too much money to expect
much financial aid.
One way to help close the gap
between your savings and the
sticker price of a college
education: Set your sights on
merit aid awarded by colleges
based on grades, test scores, or
other accomplishments. The
percentage of undergraduates
getting merit aid has more than
tripled in the past 20 years,
the government reports, and it’s
not just “A” students who
qualify. Make sure to apply to
colleges that offer a sizable
amount of merit aid. Here’s a list
of 99 colleges that give every
freshman a scholarship,
and another of the 10
best private colleges where
everybody gets a scholarship.
Another way to cut costs: Ask
your kid to stay home. Really.
Here’s a list of10
world-class schools in urban
areas where
a college degree can be had for
$100,000 or less by avoiding the
room and board of going leaving
home. That may sound like a lot
of togetherness, but consider
that it may later be easier for
your kids to strike out on their
own if they aren’t saddled with
student debt.
And here’s one more
outside-the-box idea for cutting
college costs: Think outside the
country. The Institute for
International Education reports
that
more than 46,000 American
students were
pursuing full degrees abroad in
2013 (both undergrad and
post-grad). Meanwhile, average
yearly tuition and fees in
the EU, England,
and Canada may
well be low enough to absorb the
extra traveling costs and still
beat your in-state options here
at home.
10) Surprise you’re almost
eligible for AARP!
It sounds too good to be true:
At the tender age of 50 you can
join the American Association of
Retired Persons. Don’t worry, it
doesn’t come with a rocking
chair. In fact, there’s a lot to
like about this perk even if
you’d never admit it to your
friends.
First, joining is as easy as
blowing out your birthday
candles and paying a $16 annual
fee. Your spouse can tag along
at no extra charge. Once you’re
in, there are almost
too many products and benefits
to sort through.
But dust off your bifocals and
you can find plenty to entice
you:
·
A 10% discount on monthly
service charges for AT&T customers.
·
Insurance coverage, including
dental, medical and vision (and
even pets).
·
Vision and prescription discounts
·
Health and financial planning
services.
Surprisingly, you also get
access to a variety of travel
deals and discounts(although,
it goes without saying that you
need to comparison shop).
Not sold? Here’s the freebie
that’s going to close the deal:
Buy a large beverage at any
Dunkin’ Donuts, flash that AARP
card…and you get a free cruller.
Life at 50. It doesn’t get
better than this. |
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