inflation

How Bond Prices and Yields Work

Tim Lemke — Wed, 04 Jul 2018 08:30:14 +0000

When we talk about investing, we frequently talk about stocks. Stocks are likely to make up a the bulk of your investment portfolio during the majority of your investing years.

Bonds, which tend to be less risky but also less rewarding, are more important as you get closer to retirement. However, bonds can be a helpful part of your investment mix at any age, and it's important to understand how they work — even if you don't own many of them right now.

Let's examine bonds and why we should pay close attention to them these days. (See also: 5 Crucial Things You Should Know About Bonds)

How government bonds work

A bond is simply a vehicle that governments and companies use to borrow money. People buy bonds, and in exchange, receive interest payments. Our country would barely be able to function without bonds.

For the sake of this discussion, let's focus on government bonds. The U.S. government floats many different securities, but the most common are the 30-year and 10-year Treasury bonds. These bonds pay interest every six months, and the principal of the bond — often referred to as "par value" — is paid in full after 30 or 10 years.

There are also popular securities called Treasury Inflation-Protected Securities (TIPS). The principal of a TIPS can go up or down depending on the movement of the Consumer Price Index.

U.S. Treasuries are very popular worldwide because they are backed by the full faith and credit of the U.S. government, which has historically always repaid its debts.

Yield and price

If you plan to hold onto a bond until it matures, you'll likely want to take a look at its yield, which is simply a calculation of how much money you'll make on the investment. So for example, let's say you have a $10,000 30-year bond with an annual interest rate of 5 percent. This would mean you'd get $500 per year. This is the bond's annual yield. It's also referred to as the "nominal" yield.

There's another factor that determines how much money you make from a bond, and that is price.

Let's say that the owner of the $10,000 bond above chooses to sell the bond before it matures, for $9,000 — maybe because the issuing company is struggling to stay afloat, or because interest rates are about to see a substantial rise. The buyer of the bond will still continue to get interest payments based on the face value of the bond ($10,000). These interest payments are fixed.

Thus, the buyer is receiving the same payments, but because the buyer paid less for the bond, the yield is 5.55 percent. ($500/$9,000=0.0555, or 5.55 percent).

When a bond is selling for more than its issue value, we often hear people say it is trading "at a premium." If it is selling at less than its issue value, it is selling "at a discount."

Generally speaking, people seek to find bonds selling at a discount, because they result in a higher yield.

Why prices rise and fall

The price of bonds is very closely impacted by interest rates. The prevailing interest rate — that is, the interest rate on bonds being issued at that particular time — can make any other bond seem more or less attractive to investors.

To illustrate this, let's say you hold a 30-year bond with a 5 percent interest rate, but rates have been rising and now average 6 percent. Because your bond now has an interest rate that is lower than the prevailing average, it's less attractive to investors. Thus, if you want to sell the bond, you may have to lower the price to ensure investors can get the same yield.

The opposite is also true. When interest rates are falling, any bond with a higher interest rate becomes more attractive and can demand a higher price.

Inflation is known to indirectly impact bond prices because it is accompanied by higher interest rates.

Bond prices are also indirectly impacted by the performance of the stock market. When the stock market is doing well, people tend to flock to stocks and their potential for higher returns, which in turn depresses demand and prices for bonds. But during times of economic distress, investors will often flock to the relative safety of bonds and this can cause prices to rise.

Why it matters now

Treasury yields have been on the rise in 2018, with the interest rate on a 30-year Treasury growing from about 2.8 percent at the start of the year to 3.1 percent as of the end of May. The yield on the 10-year Treasury is more than 2.9 percent, compared to 2.4 percent at the start of 2018.

There are many reasons why yields have increased, but generally they have to do with confidence in the economy and in the stock market. Treasury yields rise inversely to prices. Thus, a high yield suggests that demand for bonds is weak and that's depressing prices.

The trend is only expected to strengthen. The government is predicted to issue a lot of new bonds in 2018 as it looks to cover the cost of new tax cuts. Having more bonds in the market will lower demand for any individual bond, so prices will fall and yields will rise.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

This Is How Much Our Tech Necessities Would've Cost in the '80s

Emily Guy Birken — Mon, 18 Jun 2018 08:30:28 +0000

We all love to look back on the 1980s as a sort of halcyon time. Transformers were still animated rather than CGI, movies were original rather than nostalgia-grabbing reboots, and we all kept our important papers in Trapper Keepers, just as nature intended.

But before you decide that life really was better back in the decade that brought us hair metal, spandex, and She-Ra, consider what we take for granted now that would have been nearly impossible to replicate in the 1980s. As it turns out, there is quite a bit that makes modern life better.

Music on demand

A 32GB iPhone or other smartphone can store over 8,000 songs, depending on what other apps you have installed on the device. Alternatively, you can stream music through an app like Spotify or Apple Music, each of which allows you to save playlists and favorite albums. Your phone also offers you a remarkably portable package that you are likely to have on you at all times.

To have all of that in your pocket these days, it will cost you around $450 for the phone, plus about $10 per month for your favorite music streaming service. All together, you might pay $570 in the first year of phone ownership to be able to enjoy your favorite tunes wherever you are in 2018.

To recreate this kind of portable music library in the '80s, it would have been much more difficult. To start, you would need a portable CD player. The Sony Discman was introduced in 1985, and cost $300 at the time — or nearly $700 in 2018 dollars. To have 8,000 songs at your fingertips, you would need 570 CDs, assuming about 14 tracks per album. CDs cost about $15 each in the 1980s, or nearly $35 in 2018 dollars — which means you would have to drop the equivalent of $19,950 on CDs to have access to same number of songs. And of course, you could only really take one or two albums with you at a time, since carting around 570 CDs at all times would be next to impossible.

All told, in 1985 you would have had to spend the equivalent of $20,650 in 2018 dollars to have access to the kind portable music library we take for granted today. (See also: How to Choose the Best Streaming Music Service for You)

Cellphones

Having a mobile phone in your pocket has become so ubiquitous that we have reverse-engineered the term landline for the phone that's stuck at your house. We have become so used to carrying cellphones with us at all times that etiquette rules have sprung up around their usage, including a number of tacit rules about texting vs. calling someone.

Assuming that you have a brand-new iPhone X, it cost about $1,000 to purchase the phone, and cell service generally costs about $60 per month, which means a modern cellphone user can expect to spend $1,720 in a year, including the purchase of the phone.

Back in 1983, the first cellphone went on sale for $4,000, or around $10,062 in 2018 dollars. While there was no cellphone plan for early adopters who purchased this Motorola phone (which was 11 inches long, weighed 2.5 pounds, and was nicknamed "the brick"), the phone only offered 30 minutes of talk time, and only had six hours' worth of battery life.

Streaming videos

Netflix streaming has become a staple of modern entertainment, to the point where the term "Netflix and chill" has gone from solid Saturday night plan to dating euphemism to out-of-touch punchline. Subscribing to Netflix's standard streaming plan costs $10.99 per month, or about $132 per year, and gets you access to over 5,500 titles to watch, including both movies and television shows.

Unless watching Netflix is your job, it would be impossible to watch all 5,500 titles in one year. But let's assume you watch two different titles on Netflix every day, or 730 per year. Back in 1988, you could expect to pay about $2.50 per movie rental at the local Mom and Pop video rental store (remember those?). In 2018 dollars, each rental would cost $5.29, meaning you would spend the equivalent of approximately $3,862 per year in 2018 dollars to watch 730 movies — and that doesn't even account for late fees, if you forgot to take The Breakfast Club or Die Hard back on time. (See also: 3 TV Must-Haves Once You Cut the Cable Cord)

eBooks

Physical books will never completely fade away, but e-readers have made it possible for avid bookworms to carry entire libraries with them, whether they are packing for a trip to the beach or just a long line at the DMV. The Kindle Fire can store approximately 6,000 books, which means you can finish one book and start the next without having to go back to the bookstore or library.

A Kindle Fire HD 8 costs about $80, and you can sign up for Kindle Unlimited for $9.99 per month, or about $120 per year. All together, a voracious reader can enjoy books to her heart's content for about $200 in the first year. If we assume our reader manages to finish one book a week, or 52 books per year, that $200 in a year cost comes to about $3.85 per book.

A reader looking to buy 52 books a year in the 1980s would have spent a great deal more. In 1985, new books ranged in price from $8.95 to $19.95 ($20.84 to $46.45 in today's dollars). Assuming a reader only purchased books at the lower end of the cost spectrum, they would have to spend $1,083.68 (in 2018 dollars) in one year to be able to read the same number of books that a Kindle owner could read for $200 nowadays. (See also: 5 Easiest Ways to Score Free eBooks)

Living in the future

There are certainly aspects of 1980s life and culture that we'd all like to return to — like having music videos on MTV. But it's also good to stop and reflect on all the great advances we get to enjoy now that would have been simply impossible back when Max Headroom and jelly shoes were still a thing.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Things That Could Wreck an Early Retirement

Denise Hill — Wed, 30 May 2018 09:00:24 +0000

The Financial Independence/Retire Early (FIRE) movement is hot right now. People working toward FIRE are hoping to retire in their 40s and, in some cases, even their 30s. And while the focus of FIRE is to produce financial freedom and not ascribe to a strict definition of the term "retired," it is a tantalizing goal many find worth chasing.

However, if not properly planned, early retirement can be more of a burden than freedom. The earlier you retire, the longer your money has to last. Your life mitigation plan also has to be more solid and thorough than those who retire at the standard age. Below are some things that could derail your finances if you retire early. (See also: 8 Things Millennials Can Do Right Now for an Early Retirement)

1. Health crisis

Proper diet, adequate amounts of exercise, and regular doctor visits are the trifecta of good health. However, genetics and fate are the dynamic duo that can override your diligent efforts of maintaining good health. Failing to properly plan for a health crisis leaves the door gaping open for financial hardship during early retirement.

According to a Fidelity analysis, the average couple retiring at traditional retirement age (65) can expect to spend $275,000 on health care during their retirement years. If you retire at 45, you have an additional 20 years' worth of potential expenses for which to plan. You have to factor this additional cost into your overall retirement number.

Financial experts strongly advise that you keep health insurance coverage during retirement to help offset the cost of a serious illness or injury. There are coverage options available through private companies — which can be pricey. You should also explore Affordable Care Act (ACA) special coverage options. The ACA provides income-based premium subsidies which are based on your modified adjusted gross income during retirement. In addition to keeping health insurance, you must also ensure that you've adequately accounted for out of pocket health costs when determining how much you need during retirement.

2. Failing to live on a budget

One of the biggest myths many retirees fall prey to is the notion that you'll spend less money during retirement. The truth is it is rare that your cost of living will decrease as dramatically as you think it might. This is why living by a strict budget is financial life or death for the early retiree. (See also: 9 Unexpected Expenses for Retirees — And How to Manage Them)

Getting older also comes with hidden expenses. You spend more time engaging in leisurely activities — which usually comes with a cost. You outsource chores as you age. And of course, health care expenses increase with age. Budgeting and tracking expenses isn't just for working folks. Living frugally, budgeting, and strategic spending are habits that should follow you to your grave.

If you find that you are burning through your retirement funds quicker than expected, make sure you readjust immediately. This means you may have to scale back or even cancel some of the leisure activities and find ways to cut day-to-day spending. If an unexpected expense arises which consumes a large chunk of your funds, you may have to consider getting a side gig, working part-time, or rejoining the work force for a few years to replace the loss. You must proactively budget and track your funds to ensure they last. (See also: How Much Can You Afford to Spend in Retirement?)

3. Inflation

Piggybacking on point two is failure to properly plan for and adjust for inflation. As you age, your dollar loses its elasticity. Your fixed cost of living expenses are slowly going to creep up over time. Retiring early means you have to deal with that creep a lot longer.

Your retirement budget and planning should include a yearly (or at least every two years) cost of living increase. Think about the things you do regularly and plan to spend more on those things as time goes on. Your medication, transportation, food, and clothing are going to cost more and failing to adjust your budget to accommodate the increase can prove to be a costly mistake long-term. (See also: 4 Ways to Protect Your Retirement From Inflation)

4. Becoming a caregiver

Boomerang children, caring for the grands, and providing for aging parents are some of the unexpected ways you can find yourself burning through your retirement funds. One of the primary purposes for chasing financial freedom — at least for me — is to be in a position to help others. Helping becomes a problem when a person's need exceeds your capacity.

This is even more true for those retiring early. You really have to be careful to ensure that your money lasts past your life span. If you have children and grandchildren, try to plan for things you know you want to assist with. Do you want to give your children a down payment on their first home? Pay for the grandkids to attend private school or even college? Provide long term-care for aging parents? Whatever you think you may want to do, set money aside for that purpose and don't touch it.

It is strongly advisable that you establish a "friends and family fund." This is money that you set aside specifically to help a loved one out of a financial jam. It can pay for health care, funeral expenses, the added cost of caring for your kids, grandkids, parents, or all of them. Most importantly, it can help offset the heightened cost of living that occurs when loved ones come to live with you for an extended period of time. It's better to live on less in order to set money aside for "just in case" in lieu of trying to adjust when life happens. (See also: How to Save for Retirement While Caring for Kids and Parents)

5. Incurring debt after retiring

One of the biggest mistakes you can make is to carry debt into retirement. Retiring with no debt can be a bit tougher when you retire early, but it should be your goal. You don't want to waste your precious resources making years of interest payments. You should aggressively work to eliminate all debt before retiring. You could even opt for a partial retirement and work part-time or get a side gig just to pay off your debt. (See also: 6 Great Retirement Jobs)

It's also ill-advised to incur new debt while retired. If you need to make home improvements, buy another car, or make another major purchase, try to do it with cash — and even then, proceed with caution. If you must use credit for any reason, make a deal with yourself to find some other means to finance the purchase. That may mean going back to work temporarily until the debt is paid.

You also should avoid taking on debt to help friends and family. Steer clear of co-signing — always — but especially during retirement when funds are limited. Helping friends and family members is one thing, but using debt to do it is a bad idea. If you can't afford to give it, you can't afford to lend it. In other words, if you need to be paid back, you really can't afford to loan the money. Consider gifting a portion of the money to the asker in lieu of lending them the whole amount. That way, they are not indebted to you, you haven't financially endangered yourself, and you provide assistance while simultaneously preserving the relationship. (See also: What to Do If You're Retiring With Debt)

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This article is from Denise Hill of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Reasons You're Never Too Old to Buy Stocks

Tim Lemke — Mon, 12 Mar 2018 09:00:06 +0000

One common rule of thumb for investors is to move away from stocks into more conservative investments as you get older. The thinking behind this is that stocks always carry the risk of losing value, and that's not something you want to see with your retirement fund.

But completely abandoning stocks may not be the right strategy, either. Holding some stocks in your portfolio can be a hedge against inflation, and can help ensure that your retirement money lasts as long as you do.

Here's a look at some reasons why, even for older investors, stocks are always a good buy.

1. You may live longer than you think

Many people assume that once you approach retirement age, all of your efforts should be focused on protecting your assets rather than growing them. But the reality is that many retirees will need their money to last 30 years or more, and the only way to make money last that long is to continue to accumulate it.

Having some money in stocks will, in most years, allow you to replenish money that you spend from your portfolio. Consider this: If you have a nest egg of $1 million and spend $50,000 annually, your savings will be gone in about 20 years. But if you are able to add 4 percent to your portfolio each year from stocks, your savings could last another decade or more. (See also: 5 Ways Longevity Is Changing Retirement Planning (And What to Do About It))

2. Many stocks can be safe investments

We tend think of stocks as risky and volatile investments, but that's not always the case. Many stocks are actually very common and useful investments for people looking to bring stability to their portfolio.

Dividend stocks are a common component of retiree accounts, because they generate income for the investor and generally don't rise and fall dramatically in price. There are also some industries, such as consumer goods, that have offered steady returns year in and year out. Some stocks, such as Wal-Mart, are good bets even during bad economic times. You don't have to lay off stocks entirely as you get close to retirement age. It's just a matter of finding stable, income-producing stocks that can serve you well as you get older.

3. Markets rebound fairly quickly

No one likes to see the stock market take a big dive, but the good news is that it always goes back up. There are only a handful of times in history when the stock market has had consecutive down years. Moreover, years with negative returns are often followed up with positive returns of greater magnitude. History shows that if you lose money in the markets one year, you'll likely make that money and more back within a few years. In other words, even if you are well into your senior years, you're unlikely to see your entire savings gone in a single swoop. (See also: 6 Confidence-Inspiring Facts About the Stock Market)

4. Stocks don't need to comprise your whole portfolio

Buying stocks when you are at or near retirement age is only a bad idea if you're not also invested in more stable things like bonds and cash. Stocks don't have to make up 100 percent of your retirement fund. They don't even have to make up 50 or 25 percent. But having stocks as a relatively small percentage of your portfolio can help make your money last longer without adding much risk.

For example, let's say you have $1 million in your retirement fund. And let's say 10 percent of that ($100,000) is in stocks, with the rest in bonds and cash. If the stock market were to take a dive of 30 percent in one year, you might lose $30,000 from the stock portion of the portfolio. That's $30,000 out of a total of $1 million saved, or just 3 percent of your total savings. You'd still have $970,000 left. Given that the market historically goes up more than it goes down, this is a reasonable risk to take. (See also: How the Risk Averse Can Get Into the Stock Market)

5. Returns from bonds and cash are lousy these days

For many years, it was common for Americans to get good returns on government and municipal bonds, as well as normal savings accounts and certificates of deposit. Thus, retirement accounts were constantly being replenished with new money.

Nowadays, interest rates are still at some of their lowest rates in history, so it's easy to see how your personal spending rate will outpace the returns from your retirement funds. In fact, there is some risk that your returns may not even outpace the rate of inflation. Only with stocks will you be able to see the types of gains once seen from bonds and cash in the past, and you'll never be at risk of seeing inflation eat away at your nest egg.

6. Transgenerational wealth is a powerful thing

Have you ever wondered how massively wealthy people got their money? It's often because they inherited it. In fact, many younger Americans say they are expecting a sizable inheritance. According to a recent survey from Natixis, 60 percent of millennials believe they will inherit some money from their parents.

If you want to ensure financial security for your children and even generations beyond, your own personal retirement time horizon is irrelevant. Only through stocks can you continue to accumulate returns that generate the kind of wealth that will transform the lives of your heirs.

7. Stocks are just more fun

Cash is safe. Bonds are safe. But they are boring as heck. And it's downright wrong to assume that older people can't have some excitement in their lives.

Placing money in the stock market and watching it grow is fun. Being a shareholder of a company is fun. And if you are retired, you actually now have time to pay attention to your investments. Of course, you never want to let a desire for fun force you into a silly investment decision. Stocks should comprise a relatively small section of retirement funds for older people. But I'm not about to tell our seniors they can't let loose a little bit. (See also: 7 Reasons to Invest in Stocks Past Age 50)

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

9 Ways to Reverse Lifestyle Creep

Tim Lemke — Wed, 07 Mar 2018 10:01:05 +0000

As time goes on, you may find that you are earning more money than you were previously. Congratulations! That's a good thing. Unfortunately, new income often means new spending. You use higher paychecks to boost your standard of living with a bigger house, pricier cars, more costly meals, and luxury items. This is called lifestyle creep.

The problem with lifestyle creep is that things can crash down on you if your income drops. And it's not particularly easy to dial back your cost of living quickly.

If you find that you are spending more than you have in the past, it may be time to evaluate whether you are the victim of lifestyle creep. Here are some tips on getting that "creep" headed in the other direction. (See also: 9 Signs You're Suffering From Lifestyle Inflation)

1. Track your spending

Sometimes we just don't realize how much we are spending. We spend unconsciously, assuming that we're not doing anything different from what we've done in the past. We pay our credit card bills without reviewing them, barely glancing at the record of what we purchased in the previous month. This lack of attention can gradually lead to lifestyle creep.

If you begin a practice of tracking every dollar and reviewing that record on a regular basis, you'll recognize where you're making careless spending choices, and you can do something about it.

Reviewing credit card bills and bank statements is a good way to start. There are also online tools such as Mint.com and Personal Capital that allow you to aggregate accounts and see all your income and spending in one view.

2. Practice mindful spending

This goes hand-in-hand with tracking your spending. It's important to be aware of how you are spending your money. Try to get in the habit of making purchases deliberately rather than impulsively. When you intend to buy an item, ask yourself questions like, "Do I really need this?" and, "Can I get this for a better price?" Do extensive research before buying any large items. In this day and age, there's plenty of information available online about any product.

Mindful spending may even involve switching from credit cards to cash, so that when you buy something, you actually feel money going out of your hands. That sting alone can make you less likely to spend. (See also: How One Nice Thing Can Ruin Your Whole Budget)

3. Identify wants and needs

Lifestyle creep happens when you start spending money on things you want rather than things you truly can't live without. You need food and shelter. You need school books for the kids. You don't need cable television, designer clothes, or vacations in Bali. You don't need Netflix, no matter how much you've convinced yourself that you do.

If you focus on spending money on things you need and ridding yourself of things you don't, you'll find your lifestyle creeping back down. (See also: How to Resist Lifestyle Creep and Still Have Everything You Want)

4. Seek value over luxury

Reducing lifestyle creep is not about bringing spending down to zero, or even purchasing the cheapest version of any item you buy. It's about spending money in the most efficient way possible. When you seek to make purchases that are a good "value," it means you are trying to find the perfect balance between quality and price.

Let's say you need a new refrigerator. You found one at the store with the lowest price, but the reviews suggest it has poor reliability and uses too much energy. Meanwhile, you may have found a fridge that's highly-rated in terms of quality, but its price is three times higher and has features and components you don't need. The best value fridge for you is somewhere in the middle.

Finding value can come into play with any purchase, from homes, to cars, and even college educations.

5. Focus on maxing out retirement contributions

If you have a 401(k) plan, you are allowed to contribute up to $18,500 each year to help you save for retirement. If you have an IRA, you can contribute up to $5,500 annually. In both cases, you can contribute even more if you are over 50. It should be your goal to hit these maximum contributions.

It's hard to hit these limits when you are young and perhaps not making a lot of money. But as you earn more, it becomes possible. If you set a goal of maxing out these contributions, you are more likely to put any new money you get into retirement accounts than spend it.

Bottom line: Don't expand your lifestyle until you've put as much into retirement accounts as you can. If you are not maximizing the potential of your retirement accounts, you should not be upgrading your car, buying a bigger house, or doing other things that make your life more expensive. (See also: 6 Ways Meeting the 2018 401(k) Contribution Limits Will Brighten Your Future)

6. Don't go after more credit than you need

One of the ironic things about being financially responsible is that companies will make it easier for you to spend more. Credit card companies will keep your interest rate low, thus making it easier for you to borrow. They will raise your credit limits so you can more easily buy big-ticket items. If this happens, you must avoid the temptation to spend more just because you can.

It's also just as important to avoid any special efforts to expand your purchasing power, unless you have a dire need to do so. If you have a couple of credit cards with reasonable credit limits, be content with what you have. If you have a $5,000 credit limit on one card, there's no need to request a $10,000 limit just because you can. That extra $5,000 will simply serve as a temptation to spend money on items you don't need.

7. Ignore everyone else

You've heard the term keeping up with the Joneses. You may have a neighbor or friend who always seems to be getting the newest thing: a new house, a new car, expensive camps, and top-of-the-line sporting equipment for the kids. It is common for people to expand their lifestyle to keep up with friends and neighbors, and they may not even realize they are doing it.

Never forget that your money is yours alone. You must make financial decisions that make sense for you and your family. Paying attention to the spending habits of others accomplishes very little. Keep in mind, too, that while other people may appear to be living the high life, they may actually be deeply in debt with no focus on saving for retirement or other goals. (See also: 4 Money Lessons You Can Learn From the Joneses)

8. Become more aware of marketing

Whether we realize it or not, there are billions of dollars being spent every day in an effort to get you to part with your money. Commercials on television and radio, ads on the internet, and even social media posts are all working to get us to buy products and services. Granted, this is part of how capitalism and free markets work. But we don't need to fall victim to it.

It's possible to avoid making unneeded purchases simply by become more cognizant of when companies are advertising. Your buying decisions should be based on your needs, and timed according to when you are most comfortable. It's important to be stoic, even cynical, in the face of marketing efforts.

9. Change your thinking when it comes to trade-offs

As our life circumstances change, we are often forced to accept trade-offs. But we often make the wrong trade-off from a financial standpoint. We purchase a larger, more expensive house and are willing to forgo retirement savings to make it work. We accept high monthly payments and credit card debt as a trade-off for driving two brand-new cars.

Life is about trade-offs, but financial freedom is about making trade-offs that benefit your wallet rather than your ego. You desire to maximize your retirement accounts, so you are willing to avoid the $5 daily coffees to help make it happen. You don't want your children saddled with student loans, so you're happy driving the Honda Civic with 200,000 miles on it. You don't want to increase your mortgage payment, so you invest in bunk beds instead of a new house when your second kid is born. These kinds of trade-offs prevent lifestyle inflation from creeping in and taking control.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Ways Longevity Is Changing Retirement Planning (And What to Do About It)

Aja McClanahan — Mon, 22 Jan 2018 09:30:09 +0000

There's no doubt about it: People are living longer and need more money to support their extended life spans. In the U.S. alone, the average life expectancy has reached the mid-80s for people turning 65 today, though it's not unusual for someone to live well into their 100s.

Longer life spans should be a reason to rejoice — after all, it means additional memories and experiences that come with having more time on earth. However, living longer also brings legitimate concerns about saving enough money to support such a long stay.

If you're uncertain that you'll have enough money to enjoy a retirement of 30 or 40 years, you should start planning now. Take a look at how living longer could affect your retirement income and what you can do to prepare for it.

1. You need to save more money

Much of the financial advice for retirement hasn't considered a retirement period that could last 30 or 40 years. If people aren't advised to save enough during their career, they'll likely have a smaller nest egg that will be depleted much faster. In the case of a long life span, saving the typical 10 to 15 percent of income traditionally recommended for retirement probably won't be enough.

You should consider working with a financial planner to discuss the prospects of a longer retirement. Get solid numbers on your potential cost of living to cover various scenarios. Calculate what you could need 20, 30, and even 40 years after you leave the working world, and figure out the amount of money you should be saving to cover those scenarios. (See also: How to Face These 7 Scary Facts About Retirement Saving)

2. Your investments may need longer exposure to risk

There are a couple of ways your investing strategy may change with a longer life span. For one, you may find yourself using catch-up contributions and may opt to max out every retirement vehicle you can as early as your 40s and 50s.

Then, there's the idea of allocation and risk. Morgan Ranstrom, CFA of Trailhead Planners, says that moving away from equities into bonds may no longer be a good strategy. "It may be necessary to maintain more stock and/or risk exposure in a retiree's investment portfolio to reduce the risk of outliving their money," he says.

An investment adviser can help you create a reasonable asset allocation plan that considers a longer retirement period. Make sure you have a rebalancing plan for each stage of your life, from pre-retirement through 20 or 30 years post-retirement. Seeing these scenarios, with possible outcomes, will give you an idea of how to adjust your investment strategy both now and later on in life. (See also: 7 Reasons to Invest in Stocks Past Age 50)

3. You'll need more insurance

Michael Dinich, professional estate and tax planner, points out that, "Many universal life policies were funded at a level that would only guarantee coverage until mid-80s." Extending policies for older retirees can be extremely costly, leaving people without coverage when they need it most.

In addition to life insurance, longer life spans could increase the need for long term care insurance. This type of insurance can help cover nursing home costs. Getting this insurance in your 50s or 60s can be expensive, but it will be significantly cheaper than if you wait until you're older. (See also: The Best Age to Buy Long-Term Care Insurance)

Check your existing insurance policies to find additional products that may cover your needs. For example, some policies can be converted partially or completely once the term expires so they last longer. There may also be hybrid products that cover a combination of life, burial, and long term care. The key is to check into these options early to prevent being ineligible at an older age.

4. You may need to work longer

Living longer means you may need to keep working longer to continue growing your retirement savings. Kevin Langman, financial planner at Finovo, says he sees clients with a more fluid concept of their working careers. "Instead of working to a set date and stopping," he explains, "we see careers going through stages, with a few decades of full-time work followed by a shift to more part-time and passion-fueled work."

Just because you may need to work later in life doesn't mean it has to be stressful or you have to languish in a job you dislike. Investigate ways to extend your career in a way you don't dread — maybe turn a passion or hobby into a side gig. Langman encourages his entrepreneurial clients to explore residual income options like, "products and services that can continue to generate income even once they are not working on them full-time anymore." (See also: 6 Great Retirement Jobs)

5. You'll need to account for inflation

Brian Saranovitz, of Your Retirement Advisor, says that planning for inflation can be tricky such a long way out. He says, "In some cases, retirees will need to create an inflation-adjusted retirement income for 25, 35, or possibly more years." With such a far-out horizon, it can be hard to pinpoint exactly how much inflation will affect an asset base.

Work closely with your retirement planner or investment adviser to control the effects of not only inflation, but other forces that can erode assets quickly like taxes and market volatility. Some options include exploring alternative investments and insurance products to increase the effectiveness of your portfolio. (See also: 4 Ways to Protect Your Retirement From Inflation)

Roger Whitney has been a financial adviser for 27 years. He sums up the idea of a longer retirement in this way: "Traditional retirement planning worked for our parents. They lived retirement on the park bench of life. The modern retiree will likely live longer, be more active, and spend more in retirement. They'll still be on the playground."

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This article is from Aja McClanahan of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 False Assumptions That Could Threaten Your Retirement Years

Matt Bell — Wed, 10 Jan 2018 09:00:08 +0000

I'm sure it isn't news to you that many people are not saving enough for retirement. For some, there just doesn't seem to be enough money to pay the bills and save. However, for others, faulty assumptions may be to blame.

Consider the statements below. Have you ever thought or said such things? If so, they might be keeping you from saving as much as you should for your later years.

1. "I'll be able to earn income as long as I'd like to."

A growing number of today's workers are planning to keep working past the typical retirement age. However, their plans don't square with the experiences of today's actual retirees.

According to the latest Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI), 38 percent of today's workers expect to retire at age 70 or later, or never retire. How does that compare with today's retirees? Just 4 percent actually left the workforce that late.

Among retirees who left the workforce earlier than planned, EBRI says many did so "because of a hardship, such as a health problem or disability." Others retired early because of "changes at their company."

This same expectation/reality gap can be seen in the number of workers who plan to work for pay after they retire. Some 79 percent say that's their intention whereas just 29 percent of current retirees have actually worked for pay.

What should you do? Instead of counting on paid work in your later years, plan financially to retire at the typical retirement age. At the same time, keep your vocational skills current so you could keep working if you'd like to and are able to.

2. "Inflation will always be low."

If you want to do a checkup on your retirement savings, you may be tempted to take your total nest egg and divide it by the number of years you think you might live. This will give you an idea of how much money you'll have each year to cover your annual costs. When you have enough to get by, you might assume you're "set."

There's just one problem with that approach, which people often forget about: inflation. While the cost of living has only been increasing at a relatively moderate rate in recent years, even a 2 percent rise means $500 worth of groceries today will cost about $600 in 10 years. And who knows how long inflation will stay low?

That's why keeping your entire nest egg in an account that today pays a fraction of 1 percent is ill advised. Given our longer life spans, it's generally best to invest a portion of your nest egg in stocks. (See also: 10 Signs You Aren't Saving Enough for Retirement)

3. "I'll always be healthy."

When you're in good health, it's hard to imagine ever becoming seriously ill. Heart attacks, strokes, cancer, and dementia only happen to other people, right?

That assumption may explain why so many people are ignoring resources that could be used to help pay health care expenses later in life. EBRI found that only 13 percent of account holders contributed the full allowable annual amount to their health savings account in 2016. Meanwhile, according to The LTC Financing Strategy Group, only 16 percent of eligible people over age 65 have a long-term care insurance (LTCI) policy. Cost certainly is a factor in these decisions, but an assumption of continued good health may play a role as well.

What to do? Face the facts. You probably won't always be as healthy as you are today. According to the National Association of Insurance Commissioners, over half the people turning 65 are expected to need long-term care at some point in their remaining years.

If you are using a health savings account in conjunction with a high-deductible health insurance policy, consider boosting your contributions with the intent to carry a large balance into retirement. (See also: How an HSA Could Help Your Retirement)

Also, think about your family history. Did your parents or grandparents have any significant health issues at a relatively young age? If you experience a similar problem, how would you handle the cost? Especially if there's a history of dementia in your family, consider picking up some long-term care insurance. (See also: Is Long Term Care Insurance Worth It?)

4. "If I ever do become seriously ill, my kids will be there for me."

What if you do experience a debilitating illness — one that leaves you needing help with some of the activities of daily living? If you're like most people, you'll probably prefer to avoid living in a nursing home, but what other options would you have?

Think about your children. How old will they be when you are 80 or 90? Will they be available, or will they be busy building their careers, raising their own kids, or both? Are they likely to live near you?

Counting on your adult kids to help care for you may be counting on too much. Here again, a long-term care policy may be in order. Most of today's LTCI policies will help cover the cost of a nursing home and in-home care.

Among the many threats to a financially secure retirement, the difficulty many of us have envisioning the circumstances we'll face in the future is one of the most significant. It can lead to faulty assumptions that, in turn, can leave us unprepared for our later years. The good news is, if we realize early enough that we hold these false assumptions, we can change them and correct course so that we are financially secure in our later years.

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Why Saving Money Is Harder Today

Dr Penny Pincher — Thu, 28 Dec 2017 09:00:07 +0000

With a low overall inflation rate, and declining inflation-adjusted prices on goods such as technology and groceries, you might think that saving money today should be easier than ever. But sadly, that isn't the case. Prices of some of the biggest items in most household budgets have actually gone up faster than income has grown. Skyrocketing costs for key expenses, along with slow income growth, are making it much harder for people to save money now compared to past decades.

According to data from the Bureau of Labor Statistics, the U. S. Census Bureau, and the College Board, here are some of the biggest budget-wrecking expenses that are growing faster than your income.

Education

For many families, saving for college is a huge financial challenge — especially with the rapidly increasing price tag. Building a college savings fund to cover all of the costs is more and more difficult. As a result, more students and families are turning to student loans to make college possible. The average cost for tuition, fees, room, and board at a public four-year university grew 80 percent from 1997–2016, jumping from $11,390 to $20,500.

Health care

The cost of health care and health insurance has shot up in recent years. In some cases, a big medical expense can spell financial trouble: If an illness or injury keeps you out of work, the loss in income can make it even harder to bounce back from a large medical bill. Health care costs spiked 123 percent between 2000 and 2016, growing from an average $2,066 per year to $4,612.

Housing

Purchasing a place to live has gotten much more expensive, with median new home prices growing from $169,000 in 2000, to $307,800 in 2016 — an increase of 82 percent. Expensive housing can result in a budget crunch in several ways. It requires a bigger down payment, which takes a lot of money away from savings at the time of purchase. Monthly mortgage payments are higher, and higher home values also result in higher property tax and homeowners insurance premiums. Higher house prices may drive people to consider renting instead of buying, but the price of renting has also gone up rapidly.

Food

The inflation-adjusted price for food has stayed flat or even gone down over the past 16 years. On average, income growth has kept up with food costs. Yet, spending on food has gone up in many households in recent years. People may be electing for more convenient — and more expensive — food choices as a consequence of working more hours to boost their income. Average food expenditures grew around 40 percent from 2000 to 2016, rising from $5,158 per year to $7,203.

Child care

This cost varies significantly based on location and the type of care, but many families with young children are struggling to find affordable child care. According to a 2016 Care.com and New America report, the average cost of a full-time child care center for a child up to age four is $9,589 per year, which is more than the average cost of in-state college tuition ($9,410). Even in a dual-income household, child care can be an overwhelming expense.

Debt payments

As budgets continue to get squeezed by growing expenses, debt levels have also increased. This can set up a vicious cycle where you have even less money available, which leads to more borrowing to make ends meet.

For example, car prices have been relatively stable when adjusted for inflation, but the amount consumers are borrowing to buy cars has gone up. According to Experian, the average car loan as of 2016 stood at $30,032 with an average monthly payment of $503. Credit card balances and student loan balances are also trending upward, which means bigger payments are due every month, resulting in less money that could go toward savings or other bills.

The overall economic trend is that some of the biggest expenses in many household budgets are growing much faster than income is growing, creating a squeeze that is making it harder and harder to save money.

How to save money anyway

There are two basic approaches to dealing with the financial squeeze of higher expenses and limited income growth: reduce expenses or boost income (or both).

Housing expenses can be reduced by choosing a smaller, less expensive home. Renting a place to live can also be a less expensive option to owning a house. If you are not looking to move, consider refinancing your mortgage to a lower interest rate to reduce your monthly payment. If you rent, you may be able to offer to do some maintenance and upkeep on the property in exchange for a rent reduction. (See also: Watch Out for These 5 Last Minute Home Buying Costs)

One way to reduce health care expenses is to stay as healthy as possible. But you can’t avoid medical expenses forever, so consider using a high deductible health insurance policy with a tax-advantaged health savings account (HSA) to minimize your out-of-pocket health care costs. (See also: 10 Reasons an HSA Is Actually Worth Having)

Meal prep at home is key to keeping your food expenses low. Plan out meals ahead of time so you'll have groceries on hand to cook dinner with instead of going out to eat or ordering takeout. Get in the habit of packing your own lunch instead of going out to eat during the workweek. (See also: 31 Foolproof Ways to Lower Your Grocery Bill)

Minimize debt payments by using balance transfers or debt consolidation loans to reduce your interest payments, allowing more of your payment to be applied to the principal. This will allow you to pay off debts faster for less money. (See also: The Best 0% Balance Transfer Credit Cards)

Finally, cutting expenses may not be enough to tune up your budget to the point where you can save as much money as you would like. Consider boosting your income with a side hustle to bring in some extra money to help keep up with growing expenses. (See also: 14 Best Side Jobs For Fast Cash)

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Why Playing It Safe With Your Money Is Actually Risky

Tim Lemke — Fri, 22 Dec 2017 10:00:06 +0000

The stock market has had a good run lately, but all good things come to an end eventually. And many of us remember a time not too long ago when a big crash wiped out billions of dollars in investment gains.

Fear of a downturn, however, should not be an excuse to get too conservative in your investment approach. While it may be tempting to avoid stocks and keep all your money in cash and bonds, there is a real risk that you may find yourself without enough saved for retirement.

While many of us may view stocks as “risky” investments, the more risky move is to play it too safe. Here’s why.

1. You may live a long time

It was once common for someone to work into their 60s and pass away in their 70s. It wasn’t necessary to prepare for a retirement of more than 15 years or so. But now, there are many cases of people living into their 90s and beyond. In fact, it’s not unheard of to have a retirement that lasts longer than your work life. Are you on track to save enough to last 30 or 40 years?

Accumulating enough for this length of time requires the investor to expand their risk tolerance and invest largely in stocks, especially earlier in life. It’s OK to shift to some cash and bonds later, but going too conservative will leave your nest egg short of what you need. (See also: 7 Reasons to Invest in Stocks Past Age 50)

2. Interest rates are low

You may be tempted to put money in a savings account or in certificates of deposit due to their safety. But bank interest rates and bond yields are still very low by historical standards. Consider that you’ll be lucky to get a 1.5 percent annual yield from a savings account, while bond yields are between 1 and 3 percent. With rates this low, your money may barely grow faster than the rate of inflation if you don’t invest in something more aggressive. It’s fine to keep a sizable fund in cash in the event of an emergency, but keeping the bulk of your retirement fund in low-interest accounts is not the ticket to a comfortable retirement.

3. There’s no pension to help you

We’ve all heard stories of our parents and grandparents walking into retirement with a hefty pension that took care of them for however long they had left on Earth. Those days are gone. While many employers still contribute to retirement through 401(k) plans, their overall contribution is less than in the past, or at least partially dependent on you setting aside some of your own money. It’s now up to the individual to set aside enough money for a comfortable retirement, and this may require taking some risk and investing in stocks with a potential for growth. Play it too safe, and you may find yourself short on cash later in life. (See also: If You're Lucky Enough to Receive a Pension, Here Are 6 Things You Need to Do)

4. You may end up helping your kids

You may envision your retirement as a time spent traveling with your spouse, lounging on beaches, and doing crossword puzzles. In truth, it may be all that, plus a hefty dose of financial and child care support for your kids. A survey from TD Ameritrade revealed that millennial parents receive an average $11,000 annually from their own parents in the form of financial assistance or free child care. While these older citizens are eager to help their kids, 47 percent of them do admit that they have to make sacrifices in their own life to offer this assistance.

In planning for your retirement, are you taking into account the possible expense of helping out your own kids? This assistance can add tens of thousands of dollars to your retirement costs, so it’s important to have an investment strategy that is aggressive enough to take these costs into account. (See also: Are You Ruining Your Retirement by Spoiling Your Kids?)

5. Future benefits aren’t guaranteed

You may be banking on Social Security and other government programs to help support you when you get older. We all hope they’ll be in place when we retire, but the stability and future of those benefits is subject to the whims of our lawmakers. Social Security and Medicare both are facing long-term budget shortfalls, and many lawmakers have advocated for adjustments to benefits in order to ensure these programs remain solvent.

It’s impossible to predict what government benefits will exist for retirees decades into the future, but no one should assume they will remain as-is forever. Moreover, these benefits were never designed to support a robust, active retirement. By taking a more aggressive approach with your own saving and investing, you can accumulate enough to enjoy a good retirement regardless of what government benefits look like in the future. (See also: 5 Sobering Facts About Social Security You Shouldn't Panic Over)

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How Longevity Insurance Can Keep You From Outliving Your Money

Dan Rafter — Thu, 14 Dec 2017 09:31:09 +0000

You want a long and happy life. But what if that life goes on too long? Have you considered the possibility that you haven't stashed enough savings away to support yourself if you live to be 90, or even 100?

Longevity insurance might help ease your worries. But this product, also known as an advanced life-deferred annuity, does come with risk: You can purchase it, but, if you don't live as long as you expect, you may never benefit from it.

We're living longer

A study by the World Health Organization and Imperial College London found that by 2030, the average life expectancy for women will be 83.3 years and 79.5 for men. Currently, according to the study, the average life expectancy is 81.2 years for women and 76.5 for men. As people continue to live longer, it's only logical that they'll need more money to support themselves during those years. If you retire at age 67 and live to be 87, you'll need enough money to live for 20 years in retirement. But what if you live to be 100? That's 33 years spent without a regular paycheck. And that's where longevity insurance comes in. (See also: Is Long Term Care Insurance Worth It?)

Longevity insurance basics

Longevity insurance is designed to help retirees cover their expenses if they happen to live for a very long time. The product provides policyholders guaranteed income for life once they reach a certain age, usually 80 or 85. It's designed to provide extra income to supplement retirement savings that might be dwindling.

Of course, this protection doesn't come free. You'll have to pay a lump sum to open a policy, something you'll usually do right before you hit retirement age. How much the policy pays out once you hit the trigger age depends on how much you pay for your policy and how old you are at the time you purchase it.

MetLife provides a good example of how this works. According to a brochure advertising the company's Longevity Income Guarantee annuity, a man who makes a lump-sum payment of $50,000 at age 55 would receive an annual payout of $17,334 beginning when he turns 80. That same man would receive an annual payout of $30,619 if he waited until 85 to begin receiving his monthly payments.

A man who invests $50,000 at age 60 will receive $8,017 a year if he elects to start receiving payouts at age 75, and $21,741 a year if he instead waits until he turns 85.

The payouts for women are a bit lower, since women have longer life expectancies. In the example above, a woman who invests $50,000 at age 60 will receive annual payouts of $20,515 if she decides to start taking payments at the age of 85.

The drawbacks

While longevity insurance can provide you with additional protection throughout your retirement, it does come with some drawbacks. First, there's the price. In the MetLife examples, for instance, consumers are investing $50,000 into the product. That's a lot of money. And depending on where that money comes from, it could make a serious dent in what you are saving for retirement.

That's why the best candidate for longevity insurance is someone who not only expects to live a long life, but someone who can comfortably afford to part with that large lump-sum payment. You shouldn't spend more than 10 to 20 percent of your nest egg on a longevity insurance payment.

There's also inflation. Coverage that you purchase today won't be worth the same amount in, say, 20 years. Some longevity insurance programs offer inflation protection, adding the expected costs of inflation to your future payouts. Investing in inflation protection can be a smart move, but it won't be free. You'll have to pay extra.

Then there's an even bigger problem: How do you really predict how long you'll live? Say you elect to start receiving longevity insurance payments at age 85. What if you die at age 80? With basic policies, you'll lose that lump sum you invested 20 or 30 years ago. That's because basic longevity insurance products don't include a death benefit. The money you invested will be lost if you die before your payouts begin.

Some insurers offer the option of a death benefit so that your heirs can collect at least a portion of your payout if you die too early. Again, though, you'll have to pay extra for this flexibility. And your annual payout might also be lower as a way for insurers to recoup some of the extra risk they take on by providing you with a death benefit.

One last drawback is the lack of flexibility. If you plan to collect payments at age 85, but find you really need the money starting at age 82, you may be out of luck. Some insurers do offer an option allowing policyholders to access their money early, but these policies cost more and typically provide a lower annual payout.

Should you invest in longevity insurance? It depends on how much financial peace of mind is worth to you. Because this type of insurance does come with unusual risks, you'll have to determine if the fear of outliving your income is worth the chance of investing in an insurance policy that might never pay out for you.

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How to Plan for a Forced Early Retirement

Denise Hill — Mon, 11 Dec 2017 09:30:10 +0000

Every working adult dreams of the day they can retire and take it easy. But for some, retirement is forced upon them sooner than expected. When this happens, a world of financial stress can follow.

LIMRA Secure Retirement Institute found that 51 percent of workers retire between ages 61 and 65, while 18 percent retire even earlier than that. It may not have been in your plans to retire so soon, but life doesn't always go accordingly — things like declining health or caregiving for a loved one can force people to leave the workforce earlier than they anticipated.

Retirement experts advise that in the face of this new trend, your retirement plan should include early retirement options and safeguards. Below are six things you can begin doing now to prepare for an unexpected early retirement.

1. Start planning early

Retiring just five years early — at age 60 versus 65 — can significantly impact the amount of income you may need to retire comfortably. One common retirement rule of thumb that can help you roughly determine how much you should save is the four percent rule.

Financial experts believe you can safely withdraw about $4,000 a year per $100,000 of savings during retirement, and that would last you approximately 33 years. So, if your living expenses are $40,000 a year, you'd need to save $1 million. This simple rule does not account for inflation or other sources of income such as Social Security benefits, but experts believe it’s a good baseline for gauging your retirement needs. (See also: 4 Retirement "Rules of Thumb" That Actually Work)

Bumping up what you contribute to your retirement fund, even by just a few dollars a month, along with lowering your cost of living is a great way to prepare yourself and your family in case you have to retire prematurely.

2. Plan for inflation

While the four percent rule is a great place to start, if you know that early retirement is highly likely for you, you need to be more aggressive. Fidelity advises that your goal should be to save at least six times your current annual salary by the time you are 50, and 10 times your income by the time you are 67. If you are not near these targets, it’s time to rearrange some things, rein in your spending, and begin aggressively saving.

Another pitfall of retirement many people forget to plan for is inflation. Retirement investments have failed to keep pace with our aging population, Social Security cuts, and hedge against the investment risks brought on by the shift from traditional pensions to individual savings.

When you retire, the world will be a more expensive place than it was while you were saving. You must understand and plan for the fact that $10 today will not buy the same thing in 2035. (See also: 4 Ways to Protect Your Retirement From Inflation)

3. Don’t take Social Security early

In 2014, LIMRA found that 57 percent of men and 64 percent of women took their Social Security benefits early. But since monthly benefits rise five to eight percent annually between ages 62 and 70, the longer you can wait, the better off you'll be. For example, if your full retirement age is 66, but you begin collecting benefits early at 62, your benefit will be reduced by about 30 percent.

In years past, once you hit 65, you were eligible for full Social Security benefits and could retire and receive a monthly check from the government. However, that is no longer the case — especially for younger workers who must put in more years to reach their full retirement age. Experts agree that you should only take your benefits early if you absolutely need to. Proper planning can prevent this from being your only option. (See also: 5 Questions to Ask Before You Start Claiming Your Social Security Benefits)

4. Consider a partial retirement option

"Partial retirement" simply means keeping a job on a part-time basis as a means to help stretch your retirement savings. By remaining in the workforce for a little while longer, you can defer retirement funds — such as Social Security, pensions, and even savings — until you decide to fully retire.

Some places, such as government agencies, offer phased retirement plans. These plans allow you to supplement your income by working part time while still contributing to your retirement fund and allowing you to keep a portion of your benefit package. It’s important to begin researching these things and understanding your options while you are able bodied. (See also: 4 Reasons You Might Have a "Phased" Retirement)

5. Find a side gig

If your company does not offer a partial or phased retirement option, side gigs are a great way to supplement your income and help tide you over until you reach full retirement age. And while most side gigs don’t come with benefits, you do get to set your own hours and work as you are able.

Now is the time to look into different side or part time jobs that fit your ability, skill set, and situation. What interests and hobbies do you have that could become profitable? Write them down and research ways you can make money doing those things. You may also want to research jobs you could do from home that are not too physically demanding.

Side gigs and part time jobs can also be good for your health. A 2016 Oregon State University study found that those who retire early die sooner than those who work beyond age 65. (See also: 9 Easy Ways Retirees Can Earn Extra Income)

6. Stick to a budget and pay off debt early

Surviving in retirement is not only dependent on how much you save, but also how much you spend. Most people have to scale back a bit during retirement due to a reduction in income. Scaling back after you retire is a tough thing to do. You have more free time to travel, indulge in hobbies, and spoil the grandkids rotten — all of which can quickly shrink your nest egg.

Start now by creating and sticking to a conservative budget. The extra money you save should go into your retirement fund or toward paying down debt. Scale back on expenses where you can and consider downsizing before it's time to retire for good. Establishing disciplined spending habits now will carry over and benefit you later — when it really counts.

A great way to reduce your overhead and free up some cash is to pay down your debt as quickly as possible and to get rid of your mortgage before you retire. The less debt you have, the more spending money you have. (See also: 6 Ways You Can Cut Costs Right Before You Retire)

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5 Retirement Struggles Nobody Talks About — And How to Beat Them

Carrie Kirby — Mon, 04 Dec 2017 09:00:07 +0000

If you have ever sat down with a financial planner, you know that one of the main questions that comes up is, "How much income do you think you'll need when you retire?"

When I was asked this question, the first answer that popped into my head was, "Hardly any!" In the retirement scenario in my mind, my kids were independent and my home was paid off, leaving few financial obligations. When pressed, I acknowledged that I might need some money for taking fun vacations with all that free time I'll have, and for buying gifts for my grandchildren.

While it's true that a lot of the big expenses of our working lives have ideally been paid off by retirement, retirees still face a lot of financial obligations. Retirement is not all learning to paint or strolling on the beach — despite what prescription drug ads may lead you to believe. A 2016 study by the U.S. General Accounting Office found that retirees on average spend 77 percent of what they spent while they were working, with spending declining decade by decade as retirees age. (See also: 9 Unexpected Expenses for Retirees — And How to Manage Them)

Let's go through some of the retirement expenses you may not have accounted for, and how to deal with them.

1. Health care

While other expenses shrink after retirement, medical care spending increases. In the present day, the increase is modest. The same U.S. General Accounting Office report found that retirees ages 65 to 79 spend an average $5,000 a year on health care, compared to $3,900 for workers aged 50 to 64. But predictions for future health care expenses in retirement are dire.

HealthView Services' 2017 Retirement Health Care Costs Data Report predicts that medical costs will rise 5.47 percent per year for the foreseeable future — meaning that today's 65-year-old may be spending $10,000 or more per year on health care by age 75, on top of Medicare coverage.

"Health care will be one of the most significant retirement expenditures; however, the savings required to cover this expense may be modest — especially if one has been utilizing an income replacement ratio (IRR) of 75% to 85%," warns the report.

HealthView recommends talking to your planner not just about income replacement, but also about what you expect medical expenses to be based on your current health. Look at optimizing your retirement portfolio to address those needs. For example, some advisers recommend saving for retirement medical expenses using a health savings account — although these are only available to workers who have high-deductible health plans. (See also: How an HSA Could Help Your Retirement)

Managing health conditions proactively can also make a big difference in expenses over a lifetime.

"A 50-year-old male with type II diabetes can save (an average of) $5,000 per year in pre-retirement health expenses by shifting from Poorly Managed to Well Managed care," the report says.

2. Taxes

You might expect your income tax to disappear or decline steeply when you retire, but remember that withdrawals from 401(k) plans and traditional individual retirement accounts are taxable, as are most pensions and some Social Security benefits. If your retirement plan involves collecting rent on properties you own, well, that's taxable too. And if you have paid off your mortgage before retiring, remember that you just lost a big tax deduction in the form of mortgage interest payments.

The problem of taxes during retirement is the reason many workers also invest in a Roth IRA or Roth 401(k) plan. Unlike a regular retirement account, which you fill with untaxed income, only paying taxes on withdrawals, a Roth takes income you already paid taxes on, and withdrawals are tax free. Since no one knows how tax rates when you retire will compare to tax rates today, many advisers recommend spreading investments across both kinds of accounts to hedge your bets. (See also: Here's How Your Taxes Will Change When You Retire)

Another thing to consider when retired is whether you plan to make charitable donations part of your estate plan. If you were going to give away thousands of dollars to charities in your will, for example, discuss with an accountant setting up a schedule of giving while you're alive, instead, so that you could take annual tax deductions that could reduce or eliminate taxes you owe.

3. Inflation

In recent years, inflation has been low, but the long term average annual rate of price increases is 3.22 percent. That means that if you retire with benefits and savings designed to cover 80 percent of your current income, those same benefits will cover a smaller portion of your current spending each year, if not invested to grow at a rate faster than inflation. This is why financial planners never advise keeping your life savings in cash, stuffed in a mattress.

Of course in retirement you don't want to take on big risks with investments, since you can't earn more money to replace what you lose. But you also can't be too conservative or you risk having inflation shrink your savings each year. With interest rates as low as they are, you can't count on earnings from certificates of deposit to surpass inflation. For most retirees, that means you must have some money in stocks, bonds, or other investments. And you must stick to your investment plan, even if the market gets rocky. (See also: 7 Reasons to Invest in Stocks Past Age 50)

4. End of life

When you plan your retirement, you're likely thinking more about all the golf you want to play or the traveling you want to do, not so much about spending your final years in a nursing home or planning your funeral. Unfortunately, those less fun expenses must also be planned for.

Take a realistic look at how much assisted living and nursing homes cost. If you are still young enough to get it, look into long-term care insurance. Discuss with your family whether they expect you to move in with them if you need more care later in life, or if they would prefer you plan for nursing home care or assisted living. If long-term care needs seem imminent, meet with an attorney who specializes in making Title XIX plans; they can help you learn what assets can be shielded from being liquidated to pay for care. (See also: Is Long Term Care Insurance Worth It?)

Medical expenses tend to jump in the final years, costing about $7,000 to $8,000 more per year in the last two years of life, according to HealthView Services.

Consider prepaying funeral expenses so that it's not a cost hanging over your head as you enjoy retirement. And certainly meet with an estate planner as part of your retirement planning to make provisions for the distribution of wealth after you are gone. (See also: 9 End-of-Life Cost Savings Your Survivors Will Thank You For)

5. Mandatory withdrawals

The moment you turn age 70 and a half, you are required to take minimum distributions from your IRA, 401(k), and other retirement accounts on a schedule set by the IRS. This doesn't sound like a problem — after all, this is what you saved all that money for. But what if you don't need to spend the required distribution this year? Unfortunately, you still have to withdraw it, and pay taxes on it, or the IRS will confiscate 50 percent of the money you were supposed to withdraw in the form of a tax penalty.

While you can't change the IRS's schedule for required withdrawals, and you can't roll the distribution into a different tax-deferred account, you can plan for this requirement and schedule income and spending around it. For instance, you can avoid selling real estate or other investments, or scale back work hours if you are still working, and allow the income you are getting from your retirement account to replace other income. And of course, you can always invest your distribution outside of retirement accounts, if you don't need to spend it.

Another way to conquer the mandatory distribution is to plan for it while saving for retirement, for example by putting some income into a Roth IRA, which doesn't have required distributions. As you approach retirement, if your IRA distributions look like they will be too large for you to use, you may also talk to a planner about converting a traditional account into a Roth.

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This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Ways to Protect Your Retirement From Inflation

Dan Rafter — Fri, 03 Nov 2017 09:00:06 +0000

When you're saving for retirement, it's easy to forget that the goods you'll be buying years or decades from now will probably cost more, all thanks to inflation. It's important to keep this in mind when planning the amount of money you'll need during your after-work years.

Here are five ways you can inflation-proof your retirement savings:

Don't be too conservative

It can be tempting to stow a greater percentage of your retirement income in low-risk bonds, especially as you get nearer to your retirement date. And bonds certainly should be part of your retirement portfolio. But too many people focus too much on bonds. They don't look at the real return on these investment vehicles with the effects of inflation factored in. Because bonds are less risky, they also offer lower rates of return.

Say a bond has rate of return of 6 percent. If inflation is at 3 percent, that rate of return is really only 3 percent — a fairly low payoff.

That's why it's important to include some riskier investments, such as stocks, in your retirement savings plan. Yes, there is more risk that stocks will lose value. But stocks also have the potential of providing a far higher rate of return; one that will help overcome the rising costs that come with inflation. (See also: 7 Reasons to Invest in Stocks Past Age 50)

Do your research

Investing in just any group of stocks won't help you overcome inflation. Certain companies and financial sectors thrive when inflation rises, while others tend to struggle. For instance, investing in retail stocks might not help you overcome inflation. That's because retailers tend to struggle when high inflation makes the products they are selling unattractive to consumers. However, companies in the agricultural sector tend to do better when inflation is higher. Their stocks, then, are a better hedge against a rising inflation rate.

Invest in treasury inflation-protected securities

Treasury inflation-protected securities, better known as TIPS, are designed to protect investors from inflation. That's because the return is tied to the Consumer Price Index. This is an especially useful tool for investors living on a fixed income, like retirees.

Say you invest $100,000 in TIPS. If inflation is 4 percent, your principal balance will now be worth $104,000 after a year. When TIPS reach their maturity date, investors get back either their original principal amount — what they originally invested — or one that's been adjusted for inflation, whichever is greater. TIPS also provide a bit of interest income, paying this out every six months. Investors don't have to pay state and local taxes on this interest or on the growth in principal, but they do have to pay federal taxes on that money earned.

Investors can purchase TIPS at no cost from the U.S. Treasury in $100 values. You might also be able to invest in TIPS when you invest in a mutual fund that includes them as part of their investment mix.

Invest in commercial real estate

The value of commercial real estate can continue to rise even if the stock market is struggling. By including investments in commercial real estate along with stocks in your retirement savings portfolio, you can build a diverse investment mix that you can then use as a hedge against inflation.

The easiest way to invest in commercial real estate is to put your money in a real estate investment trust, or REIT. With a REIT, you'll be pooling your money alongside other investors in commercial real estate buildings such as offices and apartment properties. You can also invest in a mutual fund that includes commercial real estate assets among its investment mix. (See also: The Only 5 Rules You Need to Know About Investing in Real Estate)

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Cash Might Make You Happier, But Investments Will Make You Richer

Annie Mueller — Tue, 18 Jul 2017 08:30:17 +0000

Having a stash of cash feels great. Liquid wealth makes you feel more secure, because you can predict how you will handle whatever life throws your way. The feeling of satisfaction is real, but ultimately, the rewards of keeping your wealth in your checking or savings account are much less satisfying. If it's long-term wealth you're after, you need to start investing.

You're losing money

In the battle between interest and inflation, inflation wins when you keep your cash in a typical savings or checking account. You'll get very little in interest from a bank account intended for day-to-day use: typically, 0.01 percent to 0.03 percent for a checking account, and up to 1 percent for a savings account. Meanwhile, the average annual inflation rate is 3 percent. So your stash is losing value every year, as inflation climbs faster than interest grows your money.

The numbers work out pretty grimly in that scenario. Imagine you put $100,000 in a savings account with a 1 percent interest rate, and add $500 every month. Every year, you'll gain that 1 percent interest but lose 3 percent of the value, due to inflation — meaning you come out 2 percent behind annually. In 10 years, you'll have $173,522 but it will only be worth $129,117.17.

On the other hand, the return on stock and real estate investments is staying stable at 7 percent. That's the real rate of return, meaning it's adjusted for inflation. After 10 years, your $100,000 investment, with the monthly $500 addition, will have an actual value of $267,357.54.

Why wouldn't you immediately put your money into a higher-yield investment? For most people, the hesitation comes from fear of taking a big risk with money.

What's the big risk?

Humans tend to be risk averse. This risk aversion has done a lot for us, in an evolutionary sense.

Risk aversion is also helpful in finances in many instances. When it comes to getting high-interest return on your savings, however, risk aversion can hinder you. To maximize your savings, you need a high return that will outrun inflation and exponentially add financial value to your nest egg.

High-return investments, unfortunately, are also higher risk investments. If you're unfamiliar with the stock market, investment portfolios, and the like, these types of high-return investments can feel terrifying. But you can overcome that fear.

First, start a relationship with a financial investment professional. Ask for recommendations from people you know and trust, who are not struggling financially. Second, don't invest all your money in one high-yield investment. Diversify; if one investment doesn't grow as predicted, it won't topple your entire savings plan. Third, you don't have to invest all your money in what feels riskiest. You can set up a CD, invest in bonds, or invest in real estate. All require some investigation to understand the risk and potential return.

Get professional insight on the options that appeal to you and make a well-informed decision. It's never about eliminating risk; that's not quite possible. It is about minimizing risk and maximizing return. You do both by investigating, seeking expert insight, and diversifying the way you save your money.

Save yourself from hasty decisions

Keeping your wealth in a less-liquid state helps you financially by delaying your financial decisions. If your main funds are tied up, for example, you can't immediately invest in Cousin Jimmy's startup. Even if you really, really want to.

Maybe Cousin Jimmy is a genius, and you do want to invest; still, it's good to have to think and compare numbers. Can an investment in a family business give the same high-interest return on investment? What's the risk, compared with the risk you're already taking? How long before you'll see a return?

Having time to think will help you avoid hasty decisions you might regret. Whether it's investing in a family member's venture or purchasing that dilapidated house in an up-and-coming area, time is on your side.

But I still want to feel happy

A recent National Center for Biotechnology Information study shows that higher levels of happiness are linked to keeping cash on hand. Happiness is great! We all want more of it. But you can get the happiness that cash brings while also setting yourself up for long-term financial rewards.

Having money at the ready contributes to feeling secure. You can get that financial security by reducing high-interest debt and setting up automated savings so that you can keep a reasonable amount of cash at the ready. Experts recommend having three to six months' worth of living expenses; but you can be smart about how you save that cash reserve, as well, by keeping it in an interest-bearing savings account or a short-term CD. When your reserve grows over your emergency-fund amount, invest it rather than hoard it.

Remember, you'll want to feel financially secure later in life, too. Smart financial moves now contribute to your happiness in the present and the future.

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This article is from Annie Mueller of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Critical Money Mistakes People Make in Their 40s

Alaina Tweddale — Thu, 15 Jun 2017 09:00:10 +0000

The younger you are, the more time you have to bounce back from a financial mistake. As you inch closer to those retirement years, however, and as financial obligations expand, it's increasingly important to safeguard the assets you have — and to prepare for costly expenses that inevitably crop up as youth glides into middle age.

The experts agree: Even 40-somethings who feel confident about their finances are likely to make a few money mistakes. Which are the most common? Here, the financial pros tell all.

1. An expensive home remodel

The average cost to remodel a few rooms is upward of $37,000, according to data compiled by Home Advisor. It could cost even more — as much as $125,000 — depending on the size and location of the home.

Michael Frick, president of Promenade Advisors LLC, thinks that money could be much better spent by paying down an existing mortgage. "Forty-somethings need to realize that retirement is only 20 to 30 years away in most cases," he said. "Do they still want to have that large mortgage payment while they are retired on a fixed income? Will they even have enough retirement income to continue making those payments?"

Even worse, he added, is that many homeowners finance those pricey home renovations by borrowing from their existing home equity or — even worse — by raiding their 401(k) funds. The added monthly payments from a 401(k) loan can crimp the amount of money available to boost retirement savings during critical, high income-earning years.

2. Prioritizing kids' college over retirement savings

Most kids today expect their folks to pony up for the full cost of college, no matter which institution they choose. So says a 2016 Parents, Kids & Money survey released by investment firm T. Rowe Price. Most parents want to comply.

Still, midlife is "a period in which you should assess whether you're on track to fund the subsequent stages of your own adulthood," said Anthony M. Montenegro of Blackmont Advisors. As children age, "it's not uncommon for parents to continue putting kids ahead of themselves — even at the expense of their own needs."

"One way to look at this trade-off is to ask yourself, 'Am I willing to delay retirement and keep working another five to 10 years to fund my children's college?'" said Alex Whitehouse, president and CEO of Whitehouse Wealth Management. Plus, he added, a student who works to help pay for school will have "skin in the game," which can create a greater appreciation for the value of the education.

If there's an additional need for tuition funds, "money can be borrowed through student loans," Whitehouse added. "You can't borrow money for retirement." (See also: Why Saving Too Much Money for a College Fund Is a Bad Idea)

3. Skipping the estate plan

"The term 'estate planning' sounds like something old, rich people need to transfer their mansion and paintings," said Whitehouse. Still, anyone with basic assets they want to share with a loved one (or even with a chosen charity) should have, at minimum, a basic will.

No one wants to consider their own eventual demise but, even so, "lack of planning can lead to painful consequences for heirs, including a lengthy probate process, loss of control, and potentially even disinheritance," added Whitehouse.

For a straightforward will, there are inexpensive online DIY options available like Quicken WillMaker and LegalZoom. An attorney can help create a more comprehensive estate plan or set up a trust.

4. Not saving enough

"Lifestyle creep can be a major problem for those in their 40s. As they earn more, many families increase their spending on luxury items or dinner at expensive restaurants, rather than save the extra income," said Andrew Rafal, founder and president of Bayntree Wealth Advisors.

Small spending increases can be detrimental because they tend to happen slowly over time, and tend to mirror pay raises, so it's easy to not take notice.

Instead of spending those pay raises, Joshua P. Brein, president of Brein Wealth Management, suggests splitting the difference. "I always say it's a good idea to give your savings a raise if you get a raise yourself," he said. "If your savings habits don't match your increased income and instead stay small — even though your income grows — you could be underfunding retirement and falling behind inflation. When you retire, things will undoubtedly cost more than they do today, so save like it!"

Still, Brein still gives income earners carte blanche to spend half their raises. That means you can save more while also increasing your standard of living over time. (See also: 8 Money Moves to Make the Moment You Get a Promotion)

5. Being underinsured

Many 40-somethings have children or other family members who are financially dependent upon them. Even so, "many people in their 40s are underinsured," said Rafal. That means an unexpected injury, disability, or even death has the potential to torpedo even the most seemingly stable situation.

Rafal recommends taking advantage of any group life and disability plans offered by an employer, but also maintaining personal policies that are opened outside of the workplace. "That way you have the peace of mind that your family is properly insured even if you switch employers," he said. (See also: 4 Things You Need to Know About Disability Insurance)

6. A skimpy emergency fund

That three to six months' worth of expenses you set aside in your 20s may not be enough to replace your income today, if you were to need it. "Pretty much everything you own today is more valuable than it was 10 or 15 or 20 years ago," said Charles C. Scott, co-creator of FinancialChoicesMatter.com and founder of Pelleton Capital Management. "Your house is worth more. Your car is worth more. It costs more to take care of your health at this age than years ago, both because you're older, but also because health care costs are a lot higher."

Many midlife workers fail to adjust their emergency safety cushion to account for those increased expenses and earnings. If an unexpected emergency were to arise, and you haven't recalculated in a while, a meager account balance may not stretch as far as expected.

7. Paying too much for investment advice

Lower investment fees and higher performance returns go together like peanut butter and jelly. That's according to the recent research paper Predictive Power of Fees, released by investment researcher Morningstar. Still, many investors, even the most intelligent ones, don't fully understand the investment fees they're paying.

"What you don't know could be greatly hurting you," said Matthew Jackson, president of Solid Wealth Advisors. Fee information is often hidden deep within a mutual fund's prospectus or annual shareholder report. If you don't know what you're looking for, the information can be difficult to find.

Then there are the fees you're paying your financial adviser or broker. "Take the time to learn exactly how much you are paying for advice. Often, commissions and fees are obscure and not easily understandable."

The good news is that even "the worst money mistakes people make in their 40s can be fixed rather easily," said Jackson. First, he suggested, get engaged with your money. "Take the time to learn the basics. In the information age, it's never been easier to learn about asset allocation, maximum portfolio drawdowns, and portfolio volatility." In short, a little knowledge can go a long way. By learning a little, "people in their 40s can avoid a lot of pain in their portfolios," Jackson added. (See also: The Surprising Truth of Investing: Mediocre Advice Is Best)

This article is from Alaina Tweddale of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: