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Strategies to Save

How a Joint Bank Account Works — And Why You Might Want One

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

What is a joint bank account?

A joint bank account is an account owned by two or more people allowing each of the owners to make deposits, withdrawals and other decisions. This could help make it easier to manage shared bills, meet a bank’s minimum account balance requirement, qualify for a higher interest rate or help reach a joint savings goal.

You don’t have to be married or even related to have a joint account depending on the type of account you choose. In this story, we’ll explain all the different types of joint bank account options you have, the rules you should know about and how to choose the right account for your needs.

Types of joint bank accounts

In most cases when you open a joint account you will have to select the subtype, which some banks may refer to as “titling.” A subtype dictates how the account will be handled when an owner dies, gets divorced or can’t make decisions on their own.

Many of the joint account types work similarly in that each owner has equal access to the funds. The key differentiator is what happens when one of the account owners dies — most importantly, and whether or not the funds avoid the probate process. Probate is the legal process of winding up a person’s estate after his or her death, said Atlanta-based attorney, Sydnee Mack, Esq.

Probate can be a lengthy and costly process, and one that most people try to avoid. According to the American Bar Association, the probate process could take six to nine months to settle, with larger more complex estates taking longer.

Below are some of the subtypes you may run into, what they mean and the differences between them:

Joint Tenants with Right of Survivorship (JTWROS)

This account can be opened for two or more people and is the most common joint account option. Most banks, credit unions and even investment firms offer this option. Usually the account holders are married but this is not a requirement to open or maintain this type of account. This option is also common for adults taking care of their aging parents. When an account holder dies, the remaining portions pass on to the other account owner(s) and do not go to probate.

Joint Tenants in Common (JTIC)

Similar to JTWROS, the joint tenants in common account option gives multiple users equal to access to the account. The key difference here is what happens when one of the account owners die. Instead of the account automatically being split among the other owners, the deceased account owner’s portion will go to their estate and could be subject to the probate process.

If you’re looking to avoid any estate and probate issues, you could add a payable-on-death option. This will allow the funds to avoid probate and go directly to named beneficiaries.

Tenants by the Entirety (TBE)

Tenancy by the entirety is a Joint Tenants with Right of Survivorship account but with additional protection, explained Courtney Richardson, a Philadelphia-based tax attorney and founder of The Ivy Investor. The tenants by the entirety option is only available for married couples.

“It’s meant to protect the marital assets from outside creditors because each spouse completely owns the property,” she said.

Because each spouse individually owns 100 percent of the property, as opposed to a 50/50 split like JTWROS, it is generally exempt from judgments, liens and other collection methods when one spouse is sued. When one spouse dies, the property goes directly to the other spouse without going through probate.Tenants by the entirety, however, may not be available in every state.

Joint bank account rules

The various rules between each account type can vary depending on the state and in some cases your bank. Generally speaking, with every account type, each joint owner has equal right to the entire account balance. Any account owner can withdraw or deposit as much as they like, even without the approval of the other joint owner. It is important to check with your state’s local laws; as mentioned earlier, not every state offers tenants by the entirety option.

Also, if you’re married and live in a community property state,  the rules could be very different. In most cases, if you have a divorce in a community property state with a joint account, the money is divided evenly, regardless of how much each person contributed. One of the only ways to circumvent this in a community property state is to keep the accounts separate and enter a prenuptial agreement. In both cases, you should contact an attorney in your area.

Here are some questions you should get answered before you open a joint account.

Questions for the bank:
What happens if I no longer want to be on the account with the other person(s)?
Are there any additional fees for holding a joint account?

Questions you should ask yourself and the other joint owner(s):
What are our goals for this account?
What are the rules for spending and withdrawing from this account?

Opening a joint bank account

The process for opening a joint bank account is nearly identical to opening an account for yourself. You will need the basic account opening information for all account owners such as Social Security numbers, physical address and email address. Most banks also require that each account owner is present to sign any documents. This process generally applies no matter which account title you choose.

Joint bank account pros and cons

Pros:

  • Joint bank accounts may help simplify your finances. If you and your joint owner are splitting multiple expenses, both of you could deposit the money into one account and pay the bills from that new account.
  • A joint bank account may also help you save on fees. Many banks require a minimum balance or a monthly direct deposit to waive monthly fees. Combining your funds may allow you to stay above the minimum balance easier; if you don’t have direct deposit but the joint owner does, this may qualify you to avoid the fee.
  • Also adding joint owners also increases your FDIC coverage. The FDIC covers up to $250,000 per person, per bank, and per deposit type. If you have a joint account with someone, you are granted $250,000 per co-owner. A joint account with two people would have an FDIC limit of $500,000.

Cons:

  • Having a joint account could also cause some problems. If you feel your co-owner doesn’t put in their fair share, it may cause tension in the relationship. For example: If you put in 80 percent of the money into the account and the other owner puts in only 20 percent, that co-owner can legally spend 100 percent of the money and you may have very little recourse if they spend in a way that you disagree with.
  • Additionally, if you enjoy financial privacy to buy gifts or spend money on personal items, know that the co-owner will have access to see and monitor everything that is going on in the account.

Finding the best joint bank account

Joint bank accounts often have the same benefits as individual accounts at most banks. Very rarely will you see a benefit such as no ATM fees or no monthly maintenance fees simply because the account has an additional owner. The easiest way to find the best account option is to look for the best individual account and open it as a joint account.

As with any account, you’ll want to look for a bank that charges very few fees (if any) with benefits that help you accomplish your goals. For most people, this includes free bill pay, no ATM fees, a large number of ATMs, online account access and a low minimum balance requirement. If you’re looking to open a joint savings account, you might also look for a high interest rate. You can begin looking for the best bank accounts here.

Closing a joint bank account

The process for closing a joint bank account will vary by bank, though it is typically straightforward. However, if you are married and you’re closing the account due to divorce, the process could be different, especially in a community property state.

Most banks will allow one joint owner to close the account while others may require all account owners to be present to dissolve the account. Just like a regular bank account, you’ll want to make sure there aren’t any pending automatic bills that are still attached to the account or any outstanding checks. These could trigger the account to stay open, and you could be hit with a fee as well. How the money is split between joint owners should be discussed in advance to avoid any confusion and strain on the relationship.

Joint bank account alternatives

Due to different spending habits and financial responsibilities, joint accounts aren’t for everyone. If a joint account does not work for you, you may want to consider a linked account. Linked accounts are tied together at the same bank but owned individually. This allows funds to be transferred between people more quickly while still maintaining your independence. You will need to check with your bank for their specific rules on which accounts can be linked and how many can be linked at one time.

A convenience account may be a fitting option for those who may be taking care of older family members. Convenience accounts grants someone the ability to write checks, pay bills and perform other banking functions for the account holder, according to the legal, regulatory and business company LexisNexis. These accounts do not offer a survivorship option and the additional person added to the account is not a co-owner. When the account owner dies, the money goes to the estate and not the convenience signer. The option isn’t common and is not available in every state. If it is an option in your state, you may want to speak directly with the bank manager since these accounts are so rare.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kevin Matthews II
Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

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Strategies to Save

How to Choose a Financial Planner

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

How to choose a financial planner
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As you age, your financial needs tend to become more complex. This is often a result of taking on more responsibilities like having children, taking care of aging parents or owning a home, all while managing your own career, student loan debt and retirement savings. Naturally, it can be overwhelming to create a plan, update it and monitor it while maintaining a busy schedule. That’s where hiring a financial planner can be valuable.

What is a certified financial planner?

Financial planners can help guide you through complicated financial situations and use their expertise to help make tough decisions and manage your emotions. A financial planner may have a variety of qualifications or certifications, but one of the most widely known and accepted is the Certified Financial Planner (CFP) designation.

The designation was created in 1985 by the Certified Financial Planner Board of Standards (CFP Board) to promote “the value of professional, competent and ethical financial planning services, as represented by those who have attained CFP® certification.” CFPs must have have between 4,000 and 6,000 hours of experience, maintain high ethical standards, complete a rigorous set of education requirements and pass the CFP exam.

Those who have obtained the designation have mastered several key areas of financial planning including: retirement planning, income taxes, investment analysis, estate planning, ethics and insurance.

What does a financial planner do?

As mentioned earlier, financial planners help guide you through some of life’s most challenging financial decisions. When doing this, most financial planners will generally perform the following set of steps with each client. For many planners, this entire process could occur over several meetings and will not be completed in one sitting.

First, the planner will gather information and key details about your financial situation. This often includes a discussion about where you are financially and where you plan to be. A planner may also ask for some documents, including tax returns, any investment statements, trust and insurance documents. Next, the planner typically analyzes the data and determines whether there are any changes that need to be made and will present their findings to you.

After discussing the data and potential changes, the next step is implementing the items in the plan. Depending on the scope of your financial plan, this could be done in one meeting or over several meetings.

Lastly, you and your financial planner will typically agree on how often to monitor the plan and make changes. You may re-evaluate the plan every year or once a quarter, depending on the plan’s depth and complexity. However, most planners ask that you come in when major life changes occur like getting married, having a child or a experiencing a significant change in income.

The challenges in choosing a financial planner

It can be tricky to pick a financial planner, including finding someone with the right credentials and experience at a cost you can afford. In the following sections, we discuss some of the biggest challenges consumers face when looking for a financial planner.

The difference between a financial planner and a financial adviser

There is plenty of confusion around the term “financial planner” and “financial adviser.”

“Just about anyone can use the title ‘financial planner,’” said Dan Drummond, CFP Board’s director of communications. “There are also over 170 financial services designations out there — an alphabet soup of letters that may seem overwhelming.”

Not every person who calls him or herself a financial planner or financial adviser has the CFP designation, as the designation is optional and not required to practice. And someone who goes by the title, financial adviser can be a certified financial planner so long as they have completed the designation and are in good standing with the CFP board. CFPs will almost always have the “CFP®” behind their name.

Practically speaking, the differences between a planner and adviser are a bit more clear, though the terms are often used interchangeably. Typically, financial advisers spend the majority of their day focused on selling investment and insurance solutions to clients mostly (but not exclusively) for a commission. While financial planning is something that an adviser may do, it is often a service done on the side and not their main function. On the other hand, a financial planner’s main function is planning and less about selling products. Keep in mind that in this situation, both positions could still be called certified financial planners if they meet the board’s requirements.

Determining whether or not you need a financial planner

Whether you need a financial planner or not will be determined by the complexity of your situation.

The people in the following situations tend to see the most value in a financial planner:

  • New parents and newlyweds
    • Starting a family is not only expensive, it’s also easy to overlook some of your financial needs while you’re adjusting to all the changes you’re experiencing. For example: Newly married couples should check their beneficiary information on their accounts to ensure they are up-to-date and that their life insurance coverage is sufficient.
  • Business owner
    • If you own a business, you have a different set of financial tools at your disposal. One quick example is choosing the right retirement plan for your business. While most people have to choose between a Roth and traditional IRA, business owners have more options with different limits and requirements. Also, depending on how your business is set up, you may need a succession plan to exit the business as well.
  • High-income earners and people with a high net worth
    • Those with a high income or high net worth may find a financial planner useful when navigating tax liabilities and investments.
  • Close to or in retirement
    • If you’re getting close to retirement, a financial planner can help determine how prepared you are for it and how long your money may last in retirement. For those who are already retired, a planner may help you avoid running out of money.
  • Complicated health or estate issues
    • Health care can get very expensive in retirement. Health care expenses for retirees rose to an average of $275,000 per couple, excluding long-term care expenses, according to a 2017 estimate from Fidelity. This is an increase of $15,000 from 2016.
    • For those who own multiple properties and businesses, a financial planner may be able to help determine the types of wills, titles or trusts needed to ensure your assets are distributed according to your wishes.

How much does a financial planner cost?

It can be difficult to compare the costs for a financial planner. This is because each planner may base their cost on different metrics (see below). In some cases, they may charge a flat fee based on a percentage of your total assets, also known as assets under management (AUM), or just a flat dollar amount. The important thing here is that your planner is transparent and upfront with their costs. One way to ensure this is by asking if your financial planner is held to the fiduciary standard. This standard requires that the planner act only in your best interest when providing recommendations.

Commission-based: These planners only receive payments through commissions on products they sell. These products could include life insurance, mutual funds or annuities. This can present a major conflict of interest. They’re incentivized to sell products whether or not those products make sense for you.

Fee-based: Fee-based advisers can earn commissions off product sales, but they also offer services for flat fees paid by their clients. While this eliminates some conflicts, fee-based service models still leave the door open for a planner to make a recommendation that isn’t necessarily the best for their clients.

Fee-only: Fee-only financial advisers are not the same as fee-based. Fee-only advisers are paid a set fee by their clients for the services they provide. They do not earn commissions off product sales. For this reason, there are inherently no conflicts of interest between you and your adviser if they’re fee-only. Fee-only planners are only getting paid by you to provide advice.

How to choose a financial planner

Choosing a financial planner goes beyond picking someone based on their credentials alone. Though the CFP is widely regarded as the gold standard, there are many designations that make it difficult to accurately compare one planner to another. You should also take experience and compatibility into account. Your financial planner should have experience with dealing with clients that fit your profile (e.g. income, business ownership, age) and needs.

Some also prefer planners who have had experience investing in down markets. Additionally, you should seek out a planner you trust — one you feel comfortable speaking openly with and one who listens to you.

Questions to ask a financial planner

The following questions are designed to help you not only understand your financial planner’s background but find out what areas they specialize in and if those areas fit with your goals.

  • What kind of designations do you have?
    • Common designations other than CFP are the certified public accountant (CPA), Chartered Life Underwriter (CLU), Chartered Financial Analyst (CFA) and Chartered Financial Consultant (ChFC). If they do not have a designation, you may want to ask if they are working toward them. Many of these designations require three years or more of industry experience and certification tests that are only offered a few times per year.
  • What services do you offer?
    • Not every financial planner will offer the same services, and can vary significantly based on the planner’s comfort level, team and experience. You will want to ask this information early in the conversation to ensure they can help you meet your needs.
  • What is your specialization?
    • Some financial planners choose to specialize in a particular area such as taxes or estate planning. If your situation is more complex, you’ll want to seek out a planner who specializes in your needs.
  • Do you work with any outside specialist? If so, are you compensated for that?
    • Some areas of your financial plan cannot be executed by your planner unless they are an attorney. This includes things like wills and trust agreements. You’ll also want to know if they are being paid by that outside specialist, as this could be a conflict of interest.
  • What kind of clients do you work with?
    • This will give you more information on the planner’s experience level and expertise.
  • Are you a fiduciary?
    • A fiduciary is required to act in the best interest of the client. If the planner answers no, you should ask them to disclose all potential conflicts of interest.
  • How are you compensated?
    • Generally a financial planner’s compensation will fall into three categories: commission based, fee-based, fee-only (discussed in detail above).
  • What happens if I am unable to get in contact with you?
    • Is there a 24-hour hotline you can call to get help? Is there a backup staff? When you have a financial emergency and your planner is not available, you will still need guidance. Your planner should have some system in place.
  • How often do you communicate with clients?
    • Having a planner is not valuable if you do not communicate with them. At a minimum, you should be having an annual sit-down with your financial planner.
  • What is your investment philosophy?
    • The answer to this question will help you assess your fit with the financial planner. Your financial planner’s philosophy will depend on their investment experience and any additional credentials they may have.
  • How are you evaluated?
    • Some financial advisers are evaluated by management solely on the amount of commissions they generate or the amount of money they manage. Others are evaluated by client surveys or a combination of all three. Ask how they are evaluated, and this should give you insight about how you will be treated as a client.

How to find a financial planner

Now that you know what to look for, your next step is to find a financial planner. Each of the following are all groups who feature fee-only financial planners that uphold the fiduciary standard.

XY Planning Network: XYPN is the leading organization of fee-only financial advisers who specialize in serving Gen X and Gen Y clients. All of their members can work virtually, which means you can choose the best adviser for you regardless of physical location.

Garrett Planning Network: GPN is another organization of fee-only planners who serve clients from all walks of life. Their advisers offer planning services on an hourly basis.

National Association of Professional Financial Advisors: NAPFA is the largest organization of professional advisers who meet the highest set standards in the financial planning industry.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kevin Matthews II
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Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

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Mortgage, News, Retirement

The Risky Way Retirees Use Reverse Mortgages for Extra Income

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you’re approaching retirement, you’re probably already aware that taking Social Security at age 62 results in getting a much smaller benefit than someone who waits until full retirement age. For most retirees today, full retirement age is 66 or 67, but you can earn an even larger pay out if you can wait till age 70 to start tapping in to your benefits.

Living off your existing savings while you wait the extra eight years to start receiving Social Security benefits can be challenging. For that reason, an increasing number of financial experts are encouraging retirees to use a reverse mortgage as a source of additional income while they wait to start drawing on their Social Security benefits.

Using a reverse mortgage for extra income in retirement can be risky — so risky, in fact, that the Consumer Financial Protection Bureau (CFPB) recently spoke out against it.

“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” CFPB Director Richard Cordray said in a statement. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”

Still, retirees with significant equity built up in their homes might be tempted to tap into that equity to bridge the gap between when they retire and when they can maximize their Social Security benefit.

A quick recap of what a reverse mortgage is and how it works:

A reverse mortgage is a special type of home loan that allows homeowners age 62 and over to withdraw a portion of the equity they have in the home. Instead of paying interest and fees each month that amount is added to your overall loan balance. When you no longer live in the home, the total loan must be paid back and you will pay no more than the value of the house. With a reverse mortgage you are no longer responsible for the regular monthly payments on your mortgage loan but you are required to keep the home in good condition, as well as paying the property taxes and homeowner’s insurance.

Most reverse mortgages are federally insured by the Home Equity Conversion Mortgage (HECM) program, which requires a strict set of rules and regulations that must be met in order to qualify. Some of those requirements include: occupying the property as your principal residence, continuing to live in the home and not being delinquent on any federal debt. The U.S. Department of Housing and Urban Development has a full list of requirements here.

The pros of using a reverse mortgage

Using a reverse mortgage can provide some additional, predictable income during retirement. Whereas relying solely on your investments could result in unstable returns depending on your portfolio. But a reverse mortgage loan isn’t a bottomless source of cash.

The amount of money you can receive from a reverse mortgage first depends on your principal limit. That’s the amount a lender will be willing to loan you based on a several factors, like your age, the value of the home and the interest rate on your loan. This is where older borrowers have an advantage. According to the CFPB, “loans with older borrowers, higher-priced homes, and lower interest rates will have higher principal limits than loans with younger borrowers, lower-priced homes, and higher interest rates.”

Another big advantage of reverse mortgages are that the proceeds are generally tax free and will not affect Medicare payments.

The risks of a reverse mortgage

It reduces the amount of equity you have in the home, which can complicate a future sale. The equity in your home is generally defined as the amount of ownership you have in a property less any remaining debt. With a regular mortgage you borrow money from the bank and pay down the balance over time. With each payment the loan balance goes down and your equity increases.

You’ll lose home equity. Since a reverse mortgage allows you to borrow from the equity you have in the home, your debt on the home increases and the equity is lowered. A reverse mortgage may limit the options for someone looking to sell their home in retirement, because the loan must be paid upon the sale and there may not be enough equity left to purchase a new home.

It increases your overall debt. As seen in the images above, a reverse mortgage reduces the amount that you own in your home and adds that amount back into your loan balance. This increases your overall debt.

The cost of a reverse mortgage can outweigh the benefits of increasing your Social Security payments. Though you are borrowing from the money you’ve paid into your home, a reverse mortgage isn’t free. Just like your regular initial mortgage you will have to pay interest and fees. Reverse mortgages are very similar and usually include costs such as: mortgage insurance premiums (MIP), interest, upfront origination fees, closing costs and monthly servicing fees.

In the figure above, the CFPB estimates a reverse mortgage will cost $21,600 for someone who uses the option from age 62 to age 67; but the lifetime gain in Social Security from 62 to 67 is $29,640.

Monetarily, in this scenario a reverse mortgage makes sense. However most borrowers use a reverse mortgage for seven years not five as in the previous example. This would bring the cost to $31,900, approximately $3,900 which is more than the lifetime benefit of waiting until 67 for Social Security.

You’re putting your home at risk. You could also lose your home if you no longer meet the loan requirements. This includes not living in the home for the majority of the year for non-medical reasons or living outside of the home for 12 consecutive months for healthcare reasons.

You’re putting your heirs at risk.  When you pass away your heirs will have to pay back the loan, usually by selling home. If there is money left over after the sale, they can keep the difference. However, if the loan balance is more than the value of the home and they want to keep the home they will need to pay the full loan balance or 95% of the appraised value, whichever is less according to the CFPB.

When does it make sense to use a reverse mortgage for income in retirement?

In general, Chartered Financial Analyst Joseph Hough says reverse mortgages are best for retirees who are in good health and expect to live long after retirement. Also, it can be one of the few options retirees have when their retirement income is simply not high enough to cover their basic needs.

Speak with a financial advisor who can help you weigh the particular pros and cons with your specific situation. Every person is different, and there is no one size fits all answer.

When does it not make sense?

A reverse mortgage may not be a good fit for those in bad health due to the risk of losing the home. If you’re planning on selling your home, having a reverse mortgage can complicate the issue because it reduces the amount of equity you have. You could be left in a scenario where the proceeds of the sale do not cover a purchase of a new home because of the cost and fees associated with reverse mortgages.

What are some other ways I can maximize my SS benefit?

Working beyond 62 may be the best option to maximize your Social Security benefit. Doing so allows more time to save for retirement and pay off any debt. You could potentially increase your overall Social Security benefits if your latest year of earnings is one of your highest. Also, if you’re married, consider coordinating your Social Security decisions with your spouse. Other alternatives to a reverse mortgage include selling your home and downsizing to a less expensive place or selling your home to your adult children on the condition you get to live rent-free, says Houge.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kevin Matthews II
Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

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Here’s How to Withdraw Your Savings When You Finally Retire

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

There isn’t a shortage of material on how to build up your retirement nest egg. But once you get it, and you’re ready to retire, how do you actually spend it? Withdrawing from your retirement account (also referred to as “taking a distribution”) isn’t as simple as withdrawing from an ATM. In fact, there is an entire strategy as to which account you should take from first, when you should file for Social Security, and how much to withdraw each year.

The main objective of retirement is to have your money outlive you; and making your money last throughout retirement is harder now than it used to be. This can be attributed to three big factors: people are living longer, the number of pension plans are declining, and the costs of living and health care are rising. If your retirement savings isn’t large enough, you could be forced to go back to work, assuming you’re physically capable to do so, or rely on family.

Also, taking from the wrong account could result in losing some of your money to taxes; withdrawing too much can shorten your money’s overall lifespan. Here are some key points you’ll want to know.

Key Rules to Follow

Age matters

Generally speaking, you cannot start withdrawing from pre-tax retirement accounts like a 401(k), 403(b), or traditional IRA until age 59½ without a penalty. This does not apply to Roth accounts, however. You are allowed to withdraw any principal funds from your Roth accounts without penalty because you paid taxes up front on those funds — you just can’t withdraw any of the gains you’ve earned over the years. To keep everything simple, we’ll assume that you’re already over 59½ and all of your retirement savings are in tax advantaged accounts like a 401(k).

Don’t cash out everything at once

Let’s go back to our original assumption that you’re over 59½ and ready to retire. One of the biggest mistakes would be to liquidate all of your account into a lump sum. This causes two problems.

First of all, taxes. Taking large lump-sum distributions could leave you with a very large tax bill because whatever you withdraw will be treated as additional income. The second problem is that once you liquidate your investments, that means they are no longer growing. It may be a mistake to become too conservative with your investments in retirement, because many of us will live well into our 80s. With potentially 20 years ahead of you, you’ll want your money to keep growing, keep beating inflation, and give you the best shot at not outliving your funds.

The solution: periodic distributions

It’s recommended that retirees take periodic distributions, usually on a monthly basis. This allows you to take a portion of your money out to spend while letting the remainder stay in the market to grow. Figuring out how much you’ll need can be tricky. Many retirees stick to the 4% rule, which seeks to provide steady income while preserving the principal. If you had $1 million saved, you could withdraw $40,000 each year. A person with a $1.25 million retirement savings withdrawing 4% could receive $50,000 per year.

It is considered a best practice to withdraw your investments proportionately, also known as pro rata. To understand what that means, say you have a retirement account with four investments: Stock A, Stock B, Stock C, and Stock D, and each of them makes up 25% of your portfolio, or $250,000 each, for a total of $1 million.

If you follow the 4% rule, you need to withdraw $40,000. It could be a mistake to take the full $40,000 from one single stock as this would throw off the allocation. Pro rata means that you would take $10,000 from each stock, which keeps your portfolio balanced.

Depending on how many investments you hold, calculating a pro rata distribution can become difficult. Your best bet is to consult a financial planner in your area or call your investment firm’s customer service line.

Don’t forget to factor in taxes

Remember, if you’re withdrawing from a pre-tax account, the amount you take out and the amount you actually receive will be different. These funds will be taxed as regular income in your top tax bracket. For example: If you need $2,000 per month to meet your needs, you may need to take out an amount closer to $2,500 to leave room to pay taxes.

Tap into non-retirement savings first

It’s common to have more than one retirement account. To avoid taking a tax hit, many financial experts recommend tapping into non-retirement savings first. “Very generally, and depending on your tax bracket, you should typically take money out of your non-retirement accounts first to keep your taxable income lower,” says Neal Frankle, CFP and blogger at Wealth Pilgrim.

This way, you can give your retirement funds an even longer time to grow before you’re ready (or forced by the required minimum distribution) to start making withdrawals.

Of course, this is an oversimplified strategy and won’t fit every case. Again, it’s wise to seek professional help, at least in the last few years before you retire, to map out a game plan. “This takes a little time and may cost a bit, but it is by far the best investment a pre-retiree can make in my experience,” says Frankle.

Delay Social Security withdrawals as long as possible

We’ve saved the best (worst?) for last. If trying to decide whether to dip into your savings account or 401(k) first was complicated, it doesn’t get much trickier than figuring out the right time to start tapping your Social Security.

In an ideal world, you would ignore your Social Security until at least age 70. That’s when you can capture your maximum benefit. The longer you wait to take Social Security, the more you will receive. Sure, you can start withdrawing funds at age 62, but you’ll only get 75% of your potential earnings.

To get 100% of your potential benefit (for those born between 1943 and 1954), you’ll have to wait till age 66.

But the deal gets even sweeter if you can hold off till 70, when you’ll get your full benefit plus another 32%.

Of course, that’s an ideal world.

In reality, most people start tapping their Social Security funds at age 62.

To visualize the benefit of delaying Social Security for as long as possible, check out this chart from Merrill Edge:

Planning Your Social Security Strategy

There are a lot of complexities attached to Social Security and when to start taking benefits; some of which include your tax bracket, life expectancy, marital status, and how much you’ve saved. The easiest way to help sort this out is to decide the amount of money you could live on each year. For some, this amount is 75%-80% of their pre-retirement income. Someone living on $60,000 might be comfortable with having about $48,000 per year in retirement. It is up to you and your financial planner to decide what combination of options can get you to that number.

But here are some things to consider:

If you’re married

The bulk of the complexities around Social Security are with married couples. When you tally up the options, married couples have dozens of strategies to choose from compared to a handful for singles.

The two main concepts you’ll want to be familiar with are the spousal benefit and the survivorship benefit.

The spousal benefit can allow a spouse to collect up to 50% of their spouse’s benefit based on the spouse’s full retirement age. This could allow for the higher earning spouse to wait to file later to receive the maximum benefit. You can look up your full retirement age here.

For example, Jack and Jill are married, and both are 66 years old. Jill earns significantly more than Jack, and her full retirement age for Social Security is 66. Jack could file Social Security on his own age and earnings history or for the spousal benefit. Since 50% of Jill’s benefit is higher than what he would have gotten on his own, he can file for the spousal benefit now, and Jill can file at age 70. This could help them maximize their total benefit as a couple.

The survivorship benefit is much more straightforward; it allows the surviving spouse to collect a portion of a deceased spouse’s benefits. You can learn more here.

If you’re single

Figuring out Social Security if you’re single can be a lot simpler. You could begin taking Social Security at 62 for a reduced benefit or wait until age 70 to get the highest possible payout. Those who are single due to death or divorce may have a few more options.

In the case of divorce, if you were married for at least 10 years and you have not remarried, you may be eligible to claim a spousal benefit. This is also the case for an ex-spouse who is deceased.

How much do you have saved?

This is perhaps the biggest component: the longer you wait to file for Social Security, the more you could earn. If your nest egg can cover the majority of your retirement lifestyle and your health is good, you may be better off waiting until later to start Social Security.

What’s a Required Minimum Distribution?

There’s also the pesky required minimum distribution (RMD) to consider. When it comes to any retirement funds that were set aside, tax deferred during your working years, the RMD rule makes sure that workers eventually withdraw those funds. Why? Because the IRS isn’t going to leave billions of tax dollars on the table forever.

In a nutshell, the RMD is the amount of money you have to begin withdrawing from your tax-deferred retirement accounts by age 70½. There’s a whole complex way to figure out what your RMD is exactly, but the truth is that you probably won’t have to worry about it.

In fact, most retirees who are living off of their retirement funds meet the RMD by default. Someone with $100,000 in a traditional IRA on December 31 of last year would have to withdraw about $3,780 if they turn 71 this year. If you’re close to 70½ and want to estimate your RMD, you can use this link.

Not taking your RMD, or less than what is required, from a traditional IRA or 401(k) will cost you. The IRS will levy a 50% penalty on the difference between the amount you withdrew and the amount you should have withdrawn.

What if you’ve got more than one retirement account?

If you have multiple traditional IRAs, your RMD will be calculated using the combined value of each account. This allows you to choose which IRA to withdraw from, or to divide the RMD between the accounts.

What if you’re still working in your 70s?

If you are still working beyond 70½, you do not have to take an RMD from your 401(k) until the year you retire. You would still have to take it from your traditional IRA whether you’re working or not. If you are not working and you still have old 401(k)s at different employers, you would be forced to calculate and withdraw the RMD amount from each account separately.

What about Roth retirement accounts?

The RMD rule does not apply to Roth accounts. “Your money grows tax-free in the account and will pass to heirs without any tax obligations,” says Joseph Hogue, a Chartered Financial Analyst. Roth accounts can be a great tool when you’re withdrawing because you have much more control of what you pay in income taxes while in retirement.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

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The 3 Secrets to Retiring Early

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

The 3 Secrets to Retiring Early

You’ve likely read articles about people retiring early. Is it possible for you, and if so what will it really take? First let’s establish the age at which most people retire.

Age 66 is considered full retirement age by the Social Security Administration, but that clearly hasn’t stopped people from exiting the workforce a lot earlier. According to a 2016 Gallup survey, retirees said they stopped working at an average age of 61.

The definition of early retirement can be pretty subjective. You cannot draw from Social Security until age 62, but under certain circumstances you can begin withdrawing from your 401(k) at age 55 (age 50 if you’re a public safety employee like a firefighter). So for the purposes of this conversation we’ll peg early retirement as any age before 50.

The key to retiring early? Low expenses, no debt, and high income.

Retiring early is no easy feat, and in most situations it will require several events to occur, some of which you may not have control over. In the vast majority of cases you will need to keep your current cost of living extremely low, earn a high salary, and have little to no debt. These barriers automatically make it harder for the 42.4 million Americans with student loan debt, according to latest data from the U.S. Department of Education; the class of 2016 alone had an average of about $37,000 in loans.

Though debt always plays a factor, cost of living may be the biggest hurdle to overcome on your path to early retirement. Peter Adeney, who runs a very popular financial blog called Mr. Money Mustache, retired at 30 and has become one of the most popular names behind the FIRE (Financial Independence Retire Early) movement. (Pete does not reveal his last name to media to protect his family’s privacy).

But he is hardly kicking back at an island villa sipping cocktails all day. According to an interview in MarketWatch, his family of three subsists on $25,000 per year in Longmont, Colo. Not everyone is able (or willing) to cut back their expenses to fit under such a low threshold. Where you choose to live can determine how much of your income you can save. MagnifyMoney recently analyzed over 200 U.S. cities to find the best and worst places to retire early.

Choosing the right career with a high salary on the front end can be a huge boost, Travis and Amanda of the blog Freedom with Bruno saved $1 million by 30 and retired to Asheville, N.C., according to Forbes. Thanks to a career in tech they were earning a combined income of $200,000. Jeremy of Go Curry Cracker, who made nearly $140,000 per year at Microsoft, saved 70% of his income, and lived on less than $2,000 per month, also retired at 30. It is also important to know that Pete and his wife (mentioned earlier) were also in the tech industry.

Not everyone can relocate to an inexpensive region of the country due to their job or the need to be close to their family, nor do most Americans have the privilege of a six-figure salary, but there are some great lessons that can be applied to your situation, no matter your income or age.

What you would need to retire early

Regardless of salary, debt, or cost of living, having a clear and defined goal is what gives people the confidence to retire early. Without it, they wouldn’t know the amount needed to leave their jobs. You will need to know how much you should be saving toward retirement each year and how much you will need while in retirement. Bankrate has a free retirement calculator here to help you visualize your retirement savings.

The typical rule of thumb is to live off of 4% of your total retirement savings. If you can live comfortably off of $40,000 per year in retirement, you would need about $1 million by the time you retire. If you could live comfortably off of about $25,000, you would only need about $600,000; this is what Pete from Mr. Money Mustache saved when he retired. Another easy way to get to that number is by multiplying your ideal retirement income by 25. So someone needing $55,000 in retirement would need $1,375,000. Once you figure out what you would be comfortable living on, you’ll need to select quality, low-cost investments. For many early retirees this comes in the form of index funds.

If you’re looking into cutting your cost and putting more toward retirement, you may have to get creative or put some serious efforts into increasing your income. This may include keeping a car on the road that’s 19 years old, cooking for every single meal, or moving in with your adult siblings to pay off your debts. Early retirement will require serious commitment and discipline. If you’re in the right position to do it, then this may be the path for you.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kevin Matthews II
Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

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Should My Spouse and I Have the Same Investments?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

 

Should My Spouse and I Have the Same Investments?

One of the golden rules of investing is not to have all of your eggs in one basket. This is pretty easy to do when you’re planning by yourself. It can get complicated when you are married. Should you both have the same investments or is it better to do something different?

Unlike combining checking accounts or getting a joint credit card, combining your investment goals and objectives with your spouse is a bit more complex. Legally, it is not possible to combine retirement accounts like a 401(k) or IRA. However, it is possible to align your retirement saving strategy. Typically these are the biggest investment accounts, and how you choose your investments will determine your level of financial freedom during retirement. Before you sit down with your spouse (possibly with help from a professional financial adviser) to determine how you can both approach your savings in order to maximize your joint benefit, it’s important to consider these things first.

Before you align your investments, start by aligning your investment goals

Before deciding on what investments you may need, you and your spouse should figure out your investment goals. If you’re around the same age, do you both plan on retiring at the same time? If there is a significant gap in age, there is a chance that one of you could be working much longer than the other, and your investments should reflect that.

A common example could be shown with target-date funds (TDFs). Currently, TDFs are offered by 70% of 401(k) plans, and they give investors the ability to invest according to the year they plan on retiring. Someone planning to retire in 2040 would choose the 2040 target-date fund. If you and your spouse are the same age, it would be OK to invest in the same TDF. But if one of you is choosing to retire in 2040 and the other in 2030, it may be in your best interest to choose funds that correspond to your individual goals instead.

Even if you don’t choose TDFs, your investment choices should be based primarily on your tolerance for risk and the amount of time you estimate working before you retire (also known as time horizon). If you and your spouse have different risk levels, then you should definitely have different investments.

If the younger spouse earns significantly less income, this presents a special challenge best left to a financial planner. A discrepancy in income would directly affect the amount you’re able to save and how it is allocated. In some cases you may have to adjust your allocation to compensate. Again, because there are several individual factors which could affect your investment decisions in this specific situation, you will want the guidance of a financial planner.

Understand diversification and asset allocation

The concepts of diversification and asset allocation are the cornerstones of sound investing. By diversifying your assets, you are spreading out your risk over several different types of assets, rather than simply owning one or two. This is why mutual funds have become extremely popular. Because mutual funds consist of a broad range of investments across the stock and bond market, they provide instant diversification. But it may not be necessary or helpful for you and your spouse to own different mutual funds in hopes of diversifying yourselves even more.

Sometimes it is best to keep things simple. You and your spouse could own the same investments but in different proportions.

For example, the two of you may decide to own Mutual Fund A, which is made up of stocks, and Mutual Fund B, which is made up of bonds. Because you’re older and more conservative, you may choose to invest in a portfolio that is split down the middle: 50% in Mutual Fund A and 50% in Mutual Fund B. Your spouse, especially if they are much younger, may choose a more risky asset mix, investing in a mix of 75% Fund A and 25% Fund B. Both of you would still own the same investments but own different amounts due to your preference for risk.

Additionally, if you invest consistently in funds from the same investment firm, such as Franklin Templeton Investments, MFS, or American Funds, you could qualify for discounts after investing a certain amount called breakpoints. Most companies will charge you a percentage to invest in the fund. For example, if you invest $10,000 consistently every year, you could be charged 2.25% or $225. When you hit a breakpoint, however, the fee goes down. After 10 years, you’ve invested $100,000 and anything you put in after this point will be 1.75%. Instead of paying $225 on every $10,000 you invest each year, you would now pay $175 until you hit the next breakpoint. Every company has their own breakpoint levels and fees they charge, which can vary wildly depending on the type of fund and philosophy of the company.

Most experts agree that it is better to choose a few mutual funds with one fund manager and take advantage of the breakpoints rather than choose one fund from several different managers. Using more than one manager can also make it more difficult to track your investment performance.

The Bottom Line

If you and your spouse are the same age and plan to retire around the same time, you should be OK holding the same investments, assuming they are solid investment choices. But if your age difference is more than three years, this should be reflected in your separate portfolios.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kevin Matthews II
Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

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4 Ways to Get Out of a Loan if You Are a Cosigner

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

4 Ways to Get Out of a Loan if You Are a Cosigner

Being a co-signer has risks. If the primary borrower does not pay, you may be on the hook for debt and your credit score could be negatively affected. You may have signed on for a child’s student loans to help them through college or helped your brother get a new car or credit card. After some time has passed, you want to remove yourself as the co-signer.

According to the Federal Trade Commission, 75% of cosigners end up paying some portion of the loan because the primary borrower was not making payments on time.

Here are 4 ways to remove yourself as a co-signer:

1. Refinance the Loan

One of the best ways to get your name removed as a co-signer is to have the loan refinanced in the primary borrower’s name, which will essentially replace one loan with another, usually with a lower interest payment or better terms. For mortgages, car loans, and student loans the process for refinancing is pretty straightforward.

To get started, the primary borrower would need to go through a process very similar to the one used to obtain the original loan. He or she would need to provide their credit history and income information to the lender, which could be a bank, a credit union, or an online lending company. If the loan is approved, it can replace the old debt, which would release you from the liability and establish new payments and terms for the borrower.

Note: The borrower will need to have a good credit score in order to refinance his or her loan. If their credit is poor, unfortunately, this may not be an option and you may be stuck as their cosigner. They will need to improve their credit score and try again later.

2. Ask to Be Removed

Depending on the credit history of the primary borrower, some lenders may give the co-signer the option to be removed after a certain period of time, though this situation is rare, as it does not benefit the lender. Check the loan documents to see if your loan allows this. You may also call the lender to inquire. In some situations, the primary borrower may be able to have you removed as the co-signer.

3. Transfer the Balance

Sometimes you may have to be more creative to be removed as a co-signer. One way to do it is by using a 0% balance transfer credit card. If the primary borrower can get approved, it could allow them to pay down the balance without paying any interest while also letting you off the hook. You can use a balance transfer from several different types of debts, including student loans, home equity loans, credit cards, auto loans, and personal loans.

In terms of the borrower, transferring certain types of debts makes more sense than others. For example, most balance transfer credit cards give you 12-18 months before they start charging interest. If you cannot pay the debt in full by that time, the interest rate could be a lot higher than it originally was. Large amounts like student loans and auto loans may not be the best move unless the borrower can pay them off within the 0% interest time frame.

4. Sell the Asset/Pay Off the Balance

Depending on your relationship with the person you cosigned for and the type of debt, you could just pay off the debt or ask them to sell the asset and take whatever financial loss you might face. It may not be the most financially savvy method, but it works. As a co-signer, you agreed to be the backup in the event the primary borrower does not make payments. Though you might have their best interests at heart, you’ll want to make sure that you’re in the position to make any payments to protect your own credit.

Additional Questions to Answer:

What are the pros and cons of removing yourself as a co-signer?

Financially speaking, there aren’t many cons to removing yourself as a co-signer. Without the co-signer tag, you’re back in full control of what happens to your credit score. The one potential con could be what happens to your relationship with the borrower.

If you’re attempting to end a co-signer relationship due to a missed payment or financial irresponsibility of the borrower, you could sour a close relationship. But this doesn’t always have to be the case. If you set the right expectations going into it, removing yourself as the co-signer could be a welcomed event instead of a painful breakup. If the borrower’s credit has improved, being removed could be seen more like a financial graduation.

What if the other co-signer won’t cooperate? 

If the borrower does not cooperate, unfortunately your options are limited.

“There is very little you can do. The only path is to seek legal advice,” says Neal Frankle, certified financial planner at Credit Pilgrim. You may have to get a lawyer to write a letter on your behalf to the lender seeking to be removed from the loan. But if you signed a legitimate contract, chances are low that they’ll release you. Says Frankle: “The issue is getting the lender to agree.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kevin Matthews II
Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

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Am I On Track For Retirement?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Am I On Track For Retirement?

Inquiring about your path to retirement is one of the most important financial questions out there. Every year thousands of Americans are polled, and the overwhelming majority are worried about being on track for retirement or running out of money in retirement. According to Prudential’s 2016 Retirement Preparedness Survey, for 59% of current retirees, “not running out of money” in retirement is on the top of their priority list. Among those who are still approaching retirement, about one in four Americans are worried about not having enough money, with millennials leading the pack at at 29%.

There also seems to be a huge disconnect between our fears around money and the confidence in our ability to remedy those issues. Seventy-one percent of people consider themselves capable of making wise financial decisions, but only 2 in 5 don’t know what their money is invested in. Couple that with the fact that 25% of Americans have less than $1,000 in retirement savings, it is clear to see that we’re overconfident and underprepared.

While there isn’t a wealth of information as to why we’re so confident with our money, a part of the problem is not knowing where to start, not feeling like there is enough money to invest for retirement and paying down debt.

Some estimates say you’ll need as much as $2.5 million to retire comfortably, while the average 401(k) account balance is just $96,000, according to Vanguard. The truth is there is no one-size-fits-all figure. The number you need to retire comfortably depends heavily on when you plan to retire, your cost of living, your health, and how long you live in retirement. Additionally, those living in rural areas usually don’t need as much as those in metro area.

Here are a few ways to figure out how much you need and to check if you’re on track.

1. Do the math

Retirement planning calculators can get pretty complex, but to simply find out if what you have saved already is on par for what you will need in the future, there are some very easy calculations that you can use. One popular way to see if you’re on track is by using retirement benchmarks.

Using the chart below from JPMorgan is pretty straight forward. If you’re 35 years old with a household income of $75,000, you should have a total of $120,000 invested today. These charts, however, aren’t perfect because the underlying assumptions can vary wildly.

screen shot 1.2

This chart from Charles Farrell, author of Your Money Ratios, suggests at 35-year-old making $75,000 per year should have $67,500 saved. This is $52,500 less than the JPMorgan chart shown earlier. This is because different models use different assumptions about how much your investments may grow, how much you continue to save, and at what age you plan to retire.

screen shot 2

The JPMorgan chart assumes you will only save 5% per year versus 12% in Farrell’s model. Also when comparing both charts JPMorgan would have you on pace for saving just 8.4 times your salary versus 12 times your salary; a difference of $270,000. No benchmark is perfect. These estimates are meant to provide a quick assessment to let you know if you’re on the right track in terms of how much you have invested. They do not suggest which investments you should be holding.

2. Use a retirement calculator

In addition to doing the math yourself, there are some free tools to check your progress to retirement. Fidelity has a calculator that works very similar to the Charles Farrell mode, which gives you a factor that you need to have saved. Using the same example of a 35-year-old making $75,000, Fidelity’s calculator suggests having 2 times their salary, or about $150,000.

Get your retirement savings factor

It is worth noting that Fidelity’s assumptions of how they reached this figure were not on the site, but by age 65 they suggest having a factor of 12 times your salary saved.

The Vanguard Retirement Nest Egg Calculator takes a different approach. Instead of taking your age and spitting out the amount you should have saved, this calculator asks you your current savings and investment allocation and gives you a prediction of whether your money will last or not. This is done by using what is called a Monte Carlo simulation. Vanguard tests the factors 5,000 times by changing different variable such as investment performance and cost of living.

Keeping all factors the same, someone who has saved $900,000 (which is 12 times their annual income of $75,000) would have a 50% chance that their money would not run out in 30 years.

screen shot 3

Again, it is always important to consider the assumptions. In this calculator Vanguard is assuming you’re investing 20% of your money in stocks, 50% in bonds, and 30% in cash (indicated in the pie chart). This highlights the importance of asset allocation and its effect on your investment success. When we change the allocation, the success rate changes as well.

screen shot 4

In this example, by reducing the cash from 30% to 10% the chances of success increased to 68%. Vanguard also assumes you’re withdrawing 5% of the portfolio per year, meaning that from the $900,000 you saved, you should be spending $45,000 of it each year.

screen shot 5

If you were to increase or decrease this number, the chances of your money surviving would change as well.

By changing the withdrawal rate by just 1% to $36,000 per year, the probability shoots up to 92%. Most experts agree that a 4%-5% withdrawal rate is standard; what you decide to withdraw depends on what amount of money you think you can live off of at that point in time.

Finally, SmartAsset’s retirement calculator takes somewhat of a combined approach from the previous two we covered. Their calculator runs a Monte Carlo simulation like Vanguard and also takes into account what you’re currently making and when you want to retire, like Fidelity and JPMorgan. What makes SmartAsset’s calculator stand out, however, is that it takes into account your current location, monthly savings, and marital status. If you are falling short of your goal, the calculator tells you how much you need to save to catch up.

screen shot 6

retirement savings ove time graph

 

Meet with a financial planner

Finally, you can seek professional advice. Financial planners will take your investments, savings rate, and several other factors and show you if you’re on track. Additionally, a financial planner may also suggest better investments to get you closer to your goals.

Many banks and brokerage firms will run a comprehensive financial plan with no cost if you’re a customer. Independent financial planners may charge from $1,000 to $2,500 for a plan. Many people believe independent financial planners go more into depth with their analysis versus those who work in a bank. But it really comes down to a matter of preference, how well the person listens to you, and if they have your best interest as their top priority.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kevin Matthews II
Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

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How to Set Up Your Investment Strategy for 2017

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

How to Set Up Your Investment Strategy for 2017

The end of 2016 is upon us, and it is the perfect time to reflect and retool your investments for the coming year. Fortunately for investors, 2016 was a pretty good year by most standards. Unemployment dropped to its lowest point in more than 9 years, and the stock market reached record highs at multiple points this year.

But before you set your sights on 2017, how do you figure out how well your investments did this year — and how to set yourself up for success next year? We’ll guide you in the right direction in this post:

Find out where you stand

To set an effective investing goal for next year, it is important to find out exactly where you are today. Openfolio allows you to compare your investment performance with more than 70,000 investors and benchmarks like the Standard & Poor’s 500 index. You can also create your own benchmark by comparing investors around your age and investing habits. Once you’ve got a handle on where you are, you can start to focus on your objectives for next year. 

As a guideline a good investment return in any given year is determined by the overall economy and your age. A gauge of the overall economy would be an index like the S&P 500; though difficult, any return near or above above the index is considered very good. This year the S&P 500 is up more than 10%. Usually a return between 5-8% is considered solid. A return below 4% is conservative if you’re at or in retirement and poor in you’re decades away from retirement. The average investor earned 5% in 2016 according to Openfolio.

If your investment performance falls below these thresholds in one year, don’t be too quick to ring the alarm. It could be that your investments aren’t properly allocated (more on that below) or it was simply a bad year. These thresholds are averages and it is rare that you’ll earn an exact percentage every single year. It is better to evaluate your performance by looking at 3, 5 and 10 year averages and make adjustments based this information.

Ask yourself: What are my goals and objectives for 2017?

Ask yourself: What are my goals and objectives for 2017?

Some people are looking to improve their investment performance generally, while others are investing for specific goals like retirement or college. Before deciding how to invest for those goals, you need to determine how much time you have. Your time horizon is the amount of time between today and the goal you want to reach. The amount of time you have to invest will determine what investments are best and what type of accounts are most beneficial for you.

Typically, for short-term goals (1 to 3 years) you’ll want to be more conservative in your investment strategy. This is because you’ll want to play it safe in case the market turns against you. Most goals that fall into this category are usually best suited for certificates of deposit or high-yield savings accounts. For goals that are four years away or more, you can usually afford to take on a bit more risk. This is where you’ll want to find the right mix of stocks and bonds in your portfolio.

One exception, however, is retirement. Unlike investing to pay for a down payment on a home or for college at some time in the future, retirement is not a financial goal that happens at one point in time. Though you may choose a specific retirement date, your money needs to be properly invested to last as long as you do. Your goal for retirement should be to invest “through” retirement not “to” retirement. Your tolerance for risk and the age at which you want to retire will be the biggest factors in determining the right mix of stocks and bonds. To find out what mix works best for you, you can use a risk-tolerance questionnaire.

Get organized

Get organized

Where are all of your accounts? When was the last time they were checked? Do you know what you’re investing in? All these are questions you need answered before heading into 2017. It can become very difficult to understand how well your investments have done and what investments you own if they’re scattered in different places. Take inventory of your investment accounts, including any accounts like a 401(k) left at a previous job. Also, be sure to update any beneficiary information on your accounts. You may have had an account at a previous job before you were married or had children, or in some cases you may have a different spouse. Outdated beneficiaries or no beneficiaries listed at all, can be a huge headache for families. If your account is at your previous job, you will need to contact them to make any changes. Alternatively, you can choose to roll over the old account to your new job (if they allow it) or roll it over to an IRA. 

Get properly allocated/balanced 

Get properly balanced

Your asset allocation should be aligned with your tolerance for risk, age, and how many years you have until your retirement date. If you do not reallocate at least yearly, you could be taking on more risk than you bargained for. A conservative 50/50 portfolio (stocks/bonds) could become a 70/30 portfolio if it goes unchecked for too long. The latter is considerably more risky, because 70% of the assets are in stocks. Staying properly balanced is much easier said than done. Because when the market does well, as we have seen this year, most investors prefer to ride the wave of growth. Though your portfolio could be growing, it could be growing too much in the wrong investments. When the market pulls back, you will not have enough in bonds and cash to balance the portfolio out.

To make sure you’re properly allocated for 2017 there are a few steps you can take. The first, as I said earlier, is getting organized. It can be extremely difficult to properly evaluate your total asset allocation across different accounts with different types of investments. For example, it would be hard to determine how to rebalance if you had a target-date fund at your previous job, individual stocks in your IRA, and index funds at your current job. The main reason this is difficult is because target-date funds don’t need to be rebalanced, they automatically change as you get closer to your retirement date. But if that fund is a small portion of your overall portfolio, you may need advanced software to determine what the allocation is when you factor in all of your investments. If you need help figuring out your allocation across different accounts, Personal Capital is a great, free tool.

Once you’ve gotten organized, you need to determine what your current allocation is. Most investment companies will show you a summary of your asset allocation, as seen below.

Now that you know what your allocation is, it is time to find out if you need to rebalance. Use your company’s risk-tolerance questionnaire or click here to use one from Personal Capital. 

Assest Classes

Comparing the two graphs, I would be very close to my ideal allocation and I do not need to rebalance; 82% of my money is in stocks and 18% is in bonds (as seen in the first chart). It is best to do this at least once a year, and if the numbers are too far off, sell some of the stocks, buy more bonds, or vice versa.

Screen shot 1 5th Janunary

There are two instances in which you will not have to rebalance your portfolio: if all of your money is invested in a target-date fund, or it is in an automatically managed account. Both will rebalance periodically according to your goals and time horizon.

Stay focused

Take advantage of your age and experience to expand your possibilities

Once you’re clear on your goals, stay the course. As we learned in 2016, those who were properly allocated and stayed the course after Brexit and the presidential election profited. Investing is a long-term game, and if you’re doing it right, it should be boring. While many investors check their accounts monthly, and in some cases daily, you’re much better off checking your progress no more than four times per year. Studies have confirmed that investors who check their progress frequently tend to get in their own way.

Additionally, remember that investing is a hurdle, not the high jump. It takes consistent efforts to succeed, not huge dramatic gains. Every year there are about 250 trading days; each will change the value of your investments. Do not make decisions because of one bad day. You will have 249 others to help you recover and grow. And if you’re holding for the long term, you have thousands more.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kevin Matthews II
Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

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Featured

5 Clever Ways to Give Money as a Gift

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

It is truly better to give than to receive. But sometimes the best gifts aren’t the traditional ones that can be wrapped or worn but ones that can change your financial future for the better. Though cash and gift cards are always appreciated, here are a few ways to think outside the box.

Give Stocks

Gift cards are one of the most popular gifts for the holidays. But instead of giving your friends and family money to shop at their favorite store, you can give them ownership of that store through owning stock.

There are several ways to do this. You can use a service like Stockpile, GiveAshare or Unique Stock Gift. If you already own a stock and you want to transfer the ownership, you can do it through your brokerage firm where you purchased the stock. Below I will explain the benefits and drawbacks of each method.

Of the three services, Stockpile is the most affordable option and offers the most features (read our full review of Stockpile).

Stockpile offers more than 1,000 different stocks and ETFs (exchange traded funds) to choose from. In addition, you’re allowed to buy fractional shares of any company that you choose. Instead of paying full price for the stock, you have the option of buying a portion of it. For example, as of this date, Google, also known as Alphabet, Inc. (GOOG), is trading around $800 per share. If that price is above your budget, you can choose to buy just 10% of a single share or $80 worth. You also have the option of giving a gift card, allowing the recipient to buy shares in a company of their choosing. One they’ve bought the stock, they can track their performance with the Stockpile app.

Stockpile giftcard

GiveAshare and Unique Stock Gift are similar services that allow you to buy a physical stock certificate and frame it. These are excellent gifts for your home or office. GiveAshare offers more than 100 of the most well known stocks such as Nike, Disney, Facebook, and Microsoft. Purchasing a stock through them legally registers you as a shareholder, which means you would be entitled to receive dividends, annual reports, and other stockholder benefits just as if you bought the stock online. The price will depend primarily on the company you choose and what framing options you select. Unique Stock Gift is very similar to GiveAshare but offers more than 190 stock choices.

If you already own shares of a company and you’re looking to transfer ownership, you have to contact your brokerage firm to ask for a transfer form. If you’re transferring stock to a minor, they will have to open up a custodial account to receive the stock. A custodial account is an investing account a parent can set up for their child. All investing decisions must be made for the benefit of the child, and when he or she reaches a certain age (usually 18 or 21, depending on the state), they take control over the account. Any cash or investments that go into the custodial account may not be transferred out of the account and back to the parent.

Pay a Student Loan Bill

Students Studying Learning Education

It may not sound like much of a gift but student loans have become a huge burden for millions of people. Making one student loan payment for someone can really make a difference, especially for the 40% of Americans who are behind on their payments or can’t pay at all.

For starters, you could take the most obvious route and write a check for the amount of their monthly bill. For some, this may seem too impersonal, nor is it guaranteed to go to the loan. So far, there is one service offered by Gift of College that allows you help pay off student loans online or with a gift card. Gift of College uses the concept of a gift registry but allows you to contribute to paying off student loans or saving for college with a 529 plan. More on the 529 plan option below.

Start a 529 College Savings Plan

Start a 529 College Savings Plan

Want to help someone get a head start on the cost of college? A 529 plan allows you to save and invest toward the cost of education. To start a 529 plan, you could simply open the account at your favorite brokerage firm or with your financial adviser. Unlike custodial accounts, a 529 plan grows tax free and can be used only for college expenses. Additionally, anyone can help contribute to the plan, which can help multiply your initial efforts. Instead of making a one-time gift, you and other family members could contribute to the plan every year for birthdays and the holidays. Gift of College allows you to contribute to a 529 plan in the same way you would buy a gift card, making the process much easier by allowing you to contribute online and at select Toys R Us stores. To research college savings plan options, a great place to start is the College Savings Plans Network.

Help Save for a Goal

Wealth growth savings investing save

If you’re looking to teach your child how to set financial goals and save, iSow is the perfect platform. Think of it like GoFundMe for gift giving. The site allows kids ages 13 and older to save for one of three options: Savings, Causes, or Wishes. If your child is under age 13, you will have to sign up for them. Once you goal is set, you receive a customized link to share on social media, or you can add the link for special events like birthdays.

The Old-Fashioned Piggy Bank

Piggy bank wrapped in Christmas string lights

A piggy bank might seem like the least exciting gift idea on the list; however, teaching your children how to save could be the most powerful gift of all.  Go a step further and open a savings account under a loved one’s name. The entire family can contribute to the savings account instead of giving physical presents. Good financial habits start at home. Research has found that adults who learned financial literacy as children received better mortgage loan performance including a lower rate of foreclosure. With the right financial education, your kids can make the best decisions with any financial gift.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kevin Matthews II
Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

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