Archive for Retirement Planning

Financial resolutions for 30 and 40 somethings

I’ll control the amount of money I spend on a house. What lenders will loan you is not necessarily what you should spend. Your housing decision drives the costs of many other things in your budget: upkeep, insurance, repair costs, and maybe status decisions such as where you send your kids to school and what car(s) you drive. Once you commit, it’s a fixed cost that isn’t easy to reduce. Keep your housing cost (mortgage+interest+taxes+homeowner’s insurance) to 28% or less of your gross and you’ll reduce stress and free up money for savings.

I’ll increase my retirement savings with every raise. Try to add at least half of every raise to your retirement savings. Aim for the maximum allowable contribution of $18,500 to your 401k/403b and fund a Roth if you can. In which order depends on your income, employer match, and investment options in the workplace plan.

I’ll start saving something for my children’s education as soon as they’re born. Just as with retirement savings, the earlier you start, the less you have to save later. No, they won’t earn their own way. No, they’re not so smart they’ll get a full-ride scholarship. Just. No. Save something—anything is better than nothing.

I’ll hold on to my bonuses and any inheritance. Too many people get used to depending on a bonus for their regular lifestyle, but a company can go south and the first thing eliminated is the bonus. Try to regard the bonus as bonus savings—for investment, emergencies, etc. What to do with an inheritance depends on the size, but consider no more than half of it available for spending, and make that spending a worthwhile purchase (such as real estate) that has some potential to grow. Windfalls don’t come that often in life, so don’t blow it.

I’ll do everything I can to become debt free. I don’t think I need to belabor the point about credit cards, but by your 40s it’s time to chip away school debt as well, before you have to start paying for your kids’ college.

I won’t cosign any loans. If the bank doesn’t think the person is creditworthy, why should you? And if were talking about guaranteeing a college loan, understand that if your child drops out, or becomes permanently disabled, or dies, you’ll probably still owe the money. You can always help the kid pay off the loan in the future if you can afford it—just don’t cosign it!

I’ll carefully consider the financial costs before deciding to stay at home with the kids. Deciding to quit employment to be with your children is, of course, not exclusively based on finances. I did it, and I’m glad I did. But there are costs—depending on how long, you can significantly impact your Social Security benefit, as well as your future employability, advancement, and re-entry salary. Most likely, you will have no disability insurance, and if you or the wage earner become ill or disabled, or you get divorced, it can be catastrophic. I urge most clients contemplating this to keep their professional networks alive, keep abreast of their field, and, if possible, get extra training or continue working at least part time.

I’ll expect my kids to contribute to household upkeep and earn money as soon as they’re able. Not only does this build life skills, but it conveys to the children that you respect them as being able to produce value and have worth. Any kind of outside job shows kids a world, life choices, and consequences beyond what they can learn in their family, and gives them the experience of being evaluated without the protection of a family or age cohort. Even the difficulty of finding one, and the perhaps soul-less experience of a really boring or difficult job can teach the kid a lot of motivation.

And, do take a look at my post for millenials–it’s still applicable to you.

Some resolutions for millennials

I thought I might start off January with some financial resolutions for people at different stages of life, based upon what seems to be difficult but achievable. I’m not going to suggest lose weight and get more exercise because I’m going to try to come up with things you and I might actually do. I’ll disclose a secret and say I’m not actually a millennial. But one lives here, and I meet with millennials fairly frequently. Even if you’re not a millenial, some of these will still apply. So here goes:

  1. I will calm down about my student loans. Just about everyone has them, and everyone hates them. It’s probably too late to do anything about what you borrowed, now, so you have to think through how to manage them. They’re not shameful—they were an investment you made in getting a better job. If they’re fairly low, say under $30,000, it’s really the equivalent of paying off a car over 10 years (rather than 3 or 5 for an actual car). If they’re higher, hopefully you have selected a career that made it worthwhile—if not, you should definitely look into the various programs to bring down the monthly payment.
  2. I will assess whether I should pay off my loans early. If your loans are the subsidized kind (under 4%) you’ll probably be better off investing and saving rather than rushing to pay them off—in the long run, the same money judiciously invested will earn more than the loan is costing you.
  3. I’ll make sensibly frugal choices. Don’t buy an expensive car (or even a new one) until you’ve worked out a budget. Watch the rent you commit to paying. Try to downshift spending without denying yourself the fun—go out, but maybe drink beer instead of a craft cocktail. Meet for drinks instead of dinner. Choose a medium priced restaurant and do your gourmet eating and drinking at home—you can buy a pretty darn good bottle of wine for the cost of a glass or two at a restaurant. You get the idea.
  4. I’ll contribute to my retirement plan the day I’m eligible. There will never be a better time in the future when it will be easier. It’s always hard. If you never get used to that 10%, you won’t miss it as much.
  5. I’ll think of that retirement account as gone and locked up. Don’t borrow from it and don’t even think of cashing it in when you change jobs.
  6. I’ll build up an emergency fund before I take a vacation. Or buy a house. Or have kids.
  7. I’ll commit to paying off my credit cards every month, and pay attention to how to maximize rewards. Play that right and you’ll be able to take more vacations.
  8. I’ll manage my career. Think of your career as an investment asset—get all the training you can to continuously upgrade skills. Everyone gets a terrible boss someday, and everyone has co-workers they can’t stand. Get interpersonal skills training, read up on coping skills, and always have a plan B for moving on. Go to conferences and networking events in your field, and learn as much as you can about marketing. If you’re dreaming about a creative or independent job, realize that at least 60% of that job will be selling the product, not creating the product.
  9. Insofar as possible, I won’t quit without lining up another job. If I get fired, I’ll find career services or a job hunting group to get me back on my feet as soon as possible. Losing a job is debilitating and depressing, even if you hate it. Finding a new one is a part time job. Plan for it.
  10. I’ll pay attention to my employee benefits. Employee benefits can be worth 1/3 of your salary. Does the job offer a Flexible Spending Account? Disability coverage? Free life insurance? How much vacation time? What’s the deductible on the health insurance? Decent or crappy investment options in the 401k? Good employer match, bad, or none? Will they pay for more education (which I will definitely avail myself of)? These are things that you should know before you accept a job, because they’re potentially worth thousands to you. I can’t tell you the number of people I’ve seen who have paid for a lawyer to produce a will (or not made one at all) when their employer offers low cost legal service. Just go light your cigar with a $500 bill.
  11. I’ll set savings and required payments on autopilot by setting up auto withdrawals. Making a decision once, by setting them up, is more likely to continue (on time) than if you have to make a decision every month. You can always cancel the auto-pay if you absolutely must.
  12. I’ll learn about investing. Even if you’re a good saver, you need to educate yourself about investing. I can almost guarantee you didn’t learn about it in school, and unless your parents were exceptional, you didn’t learn it at home either. The only way is self-study—and don’t believe anything you hear at one of those free “investing” lunches—nothing in the investment world is EVER free.

 

Happy new year and best wishes for 2018.

Taxes: we’re not Europeans

We don’t want to pay as much tax as the Europeans do. How many times have you heard that? If less than 1,000 times, congratulations—you live without internet service. But, I still retain an old-fashioned interest in verifiable facts, not just what I’d like to be true. I hope one or two readers still feel the same way, so let’s take a look at some numbers on just who pays what taxes, and what those taxes pay for.

The moment you delve into comparing countries, you have to contend with currency conversions, buying power and the cost of necessities (what’s a middle class house in Chicago vs. Lyons vs. Haarlem?) so of course we can argue “not comparable” whenever. We work with what we have, and what I found was some very interesting data on the Forbes website. Forbes states all figures in Euros, but I’m going to use a handy dandy currency converter to put this all in U.S. dollars. (I wish these figures were newer–2009–but it isn’t easy finding facts that are up to date. I just don’t know where all those Freedom Caucus people can get their information.)

Let’s look at a couple earning $108,667 (100,000 euros) with two children. Here’s what Forbes says their after-tax income would be:

United States (overall—some states like Illinois have higher taxes) $84,760
France $78,029
United Kingdom $72,154
Germany $73,676
Netherlands $64,113

 

I could add more countries, but as you might expect, taxpayers in countries with small population bases (Netherlands, Norway, Denmark, etc.) keep less of their gross because there are fewer taxpayers to pay for services.

So, we ARE better off by at least $6,000 and maybe as much as $20,000? Wait a minute—you get what you pay for. And our mythical couple is going to have to pay for a lot more out of that after tax income—stuff that is already paid by government programs in these other countries. I’ll admit I don’t have the specifics on every policy in every other country (but would welcome input from anyone who does), but I do know a few expenses our model couple would need to cover out of pocket:

  • Yearly deductible for health care. Mine’s $3,500/family but employer plans can range anywhere from about $2,000 to $6,000. I’ll be conservative and use just $2,000. Let’s assume the parents’ employers cover all health care premiums—increasingly rare, but I’m trying to be conservative here.
  • Savings needed to cover $30,000 in college costs per year for each of two kids—I’ll again be conservative and assume the kids aren’t going to Harvard, and are 2 years old and newborn, so the amount needed will be on the low side. If the kids were older, more would need to be deducted. According to the SavingForCollege calculator, the parents would need to be saving $613/month for the 2 year old and $558/month for the newborn: a total of $14,052/year.
  • If these parents have such young children, they’re probably not very old themselves. Nevertheless, since in the US people are “free” to pay for their own long term care, and this is covered by many European health systems, let’s estimate a low $1,000/parent per year for long-term care insurance: $2,000. (forget saving for the actual cost of care—it would about double the amount needed if the parents are currently in their 30s and can save for 40 years).
  • I’m not including the value of the living allowance that is given to college students in some countries (Netherlands), the free student exchange programs that are routine, the excellent trades and vocational schools available to non-college Europeans (and which are hard to get at any price in the U.S.), the lump sum children’s benefit given to parents upon birth of a child, or the cost of co-pays and prescription drugs, since these vary and I wanted to look at just a few things we can agree on. So how does that math look now?

 

US $84,760
health care deductible (cost of insurance premiums not included) -2,000
college savings -14,052
long term care insurance -2,000
what you actually have left after being “free” to pay for those services yourself. $66,708

 

Another “but wait”—what if mom and dad are both working and need to obtain child care? In my neck of the woods that’s going to cost around $20-25,000 a year, but Europeans can pretty much depend on free or very low cost service from shortly after the child’s birth. So now, our model couple could easily be down to $46,708 after paying for the same services the European family would get for free (or greatly reduced costs). I’ll try not to go on about the paid-for health spas that are routine in Europe, the far-more-luxurious birth center experience, the well-child checkups and assistance, the earlier retirement age, the longer paid vacations, guaranteed paid maternity leave, the housing assistance for the elderly and low-income families…

Yeah, I’m glad we pay such low taxes. And that we get what we pay for.