Tag Archives: money management

Retiring Soon? Plan for Market Downturns

My Comments: Are you nervous yet? If you have 20 years or so until you retire, you may not need to be nervous. But if retirement is just around the corner, then you need to start being defensive, if you’re not already.

There are a number of pressures building in the markets. This gives you a few steps to offset them. Personally, I think the average annual returns over the next decade are going to be significantly less that what they’ve been since 2009.

The author’s syntax is a little confusing but you’ll get the message.

By Anne Tergesen | Sept. 21, 2018

For every year by which a bull market persists, staff change into likelier to retire. However those that depart the workforce now—the ninth yr of the longest U.S. bull market—are probably setting themselves up for a tricky stretch that might check their portfolio’s long-term resilience.

Why? When the inventory market turns into traditionally costly, as some metrics recommend it’s at present, analysis reveals it’s typically a harbinger of below-average future returns. This may be particularly painful for retirees with lengthy life expectations as a result of withdrawals mixed with poor returns will depart much less in an account to compound over many years.

Take, as an illustration, a 65-year-old who retires when his or her portfolio is price $1 million. If the retiree withdraws 4%, or $40,000 within the first yr, and the portfolio loses 40% of its worth quickly after, she or he can have simply $576,000 left to fund a retirement that might final 30 or extra years. Any subsequent withdrawals will make it even tougher for the portfolio to get better.

Returns in “the primary 5 to 10 years of retirement matter most,” says Wade Pfau, a professor of retirement revenue on the American Faculty of Monetary Companies in Bryn Mawr, Pa. Early declines can “lock a portfolio right into a downward spiral.”

That doesn’t imply that individuals on the cusp of retiring ought to cancel their plans. For one factor, it’s notoriously tough to foretell the arrival, length and severity of bear markets. And if you’re prepared to go away your job, sticking round might undermine your well being and happiness.

The excellent news: There are steps you possibly can take to restrict withdrawals from shares when they’re down and partly shield your portfolio. Simply make sure to perceive the trade-offs.

1. Construct a money cushion

This technique sometimes includes setting apart one to 5 years of dwelling bills in money so that you received’t must promote shares at depressed costs.

Retirees with money buffers typically react extra calmly to market declines, decreasing the percentages that they are going to panic and bail out of the market fully, says Ross Levin, a monetary adviser in Edina, Minn.

The issue, Mr. Levin says, is that the low returns on money typically cut back a portfolio’s long-term returns. “If in case you have 80% in shares and 20% in bonds with a three-year money place, that’s a worse technique from a returns standpoint than having 70% in shares and 30% in bonds,” and nothing in money, he says. A money buffer “lets you handle a shopper’s psychology throughout dangerous instances, however it’s not an optimum technique.”

To unravel that drawback, some advisers as a substitute use bonds as a buffer. A $1 million portfolio with 60% in shares and 40% in bonds successfully holds eight years of dwelling bills in bonds, Mr. Pfau says.

But when shares sink and a retiree must liquidate bonds to cowl dwelling bills, the buffer is more likely to shrink.

To stop purchasers from promoting shares at depressed costs to replenish their bonds, many advisers advocate ready till the shares get better their losses to take action. However an investor who used such a method in 2008—when the monetary disaster slammed U.S. shares—would have had to attract down his or her bond buffer for about 5 years earlier than beginning to construct it again up, a nerve-racking expertise for all however the least risk-averse, Mr. Pfau says.

2. Rebalance

A greater technique, many say, is to spend money on a diversified portfolio—resembling 60% in shares and 40% in bonds—and rebalance it after main market strikes.

Retirees who accomplish that will use their winners to cowl at the very least a few of their bills. For instance, in 2008, when the S&P 500 misplaced about 37%, investment-grade bonds gained about 5.25%. Consequently, somebody who had 60%, or $600,000, in shares and 40%, or $400,000, in bonds earlier than the crash had 47%, or $378,000, in shares and 53%, or $421,000, in bonds afterward.

If a retiree with such a portfolio wanted $40,000, he would begin by withdrawing the $21,000 of bond income. As a result of bonds comprise considerably greater than 40% of the post-crash portfolio, the investor would whittle them additional, by withdrawing the extra $19,000 in spending cash he wants. To re-establish the specified 60% stock-40% bond allocation, he would then switch $77,400 extra to shares from bonds.

In distinction to holding a “money buffer,” this method “systematically ensures” that an investor sells holdings which have appreciated most whereas additionally shopping for issues which have declined and are comparatively low cost, says Michael Kitces, director of wealth administration at Pinnacle Advisory Group Inc. in Columbia, Md. By shifting cash into belongings which are crushed down, rebalancing helps a portfolio get better quicker when a turnaround lastly arrives, he provides.

In keeping with latest analysis, which checked out 140 mixtures of funding methods, withdrawal charges, and buffer-zone sizes over successive 30-year durations from 1926 to 2009, traders got here out forward with cash-buffer methods in solely three cases. In distinction, with rebalanced portfolios, they got here out forward in 70 simulations, stated co-author David Nanigian, affiliate professor of finance within the Mihaylo Faculty of Enterprise and Economics at California State College, Fullerton. Within the remaining 67 mixtures, the methods carried out the identical, he stated.

How typically must you rebalance? Some traders accomplish that quarterly or yearly. Cameron Brady, an adviser in Westlake, Ohio, says he acts when his purchasers’ portfolios drift by 5 proportion factors from goal allocations.

3. Use one other kind of buffer

What in case you like the concept of a money buffer, however don’t wish to tie up a portion of your portfolio in an asset that’s certain to earn low returns?

To supply purchasers with a supply of money within the occasion of a market meltdown, some advisers advocate utilizing home-equity traces of credit score or reverse mortgages, which permit folks ages 62 and older to transform their house fairness into money.

Each cost upfront charges. For instance, the upfront “mortgage insurance coverage premium” many debtors pay on reverse mortgages is now 2% of the house’s worth, capped at $13,593.

With a home-equity line of credit score, Mr. Pfau says, debtors should make month-to-month repayments. (Reverse mortgages should be repaid when the borrower dies, strikes, or fails to pay property taxes or house owner’s insurance coverage.) Each cost curiosity.

Mr. Pfau recommends that individuals with everlasting life insurance coverage, together with entire life and common life insurance policies, take into account tapping the money worth in these insurance policies throughout market crises. You may withdraw premiums tax-free and in addition borrow from the money worth to get extra tax-free revenue, he says.

“You’ll cut back the loss of life profit,” he provides, “however by serving to to protect the portfolio, you’re in all probability higher off.”

[ Wall Street Journal ]

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Civility Has Its Limits

My Comments: Instant gratification, or the desire for it, is the norm in 21st Century America. It may be OK when you discover you’re hungry and have no need to go into the woods and shoot something, or instead of waiting days for the mail to arrive, you simply go to your phone and look for a text message. But…

As a society, we’re experiencing a massive shift in thinking and it’s going to take time, years even. But it is coming. Just as women in the early 20th Century were finally allowed to vote, and before that, years of agony for immigrants from Africa to shake off the shackles of slavery. And here we are 150 years later, still not fully responding to that seminal upheaval of what was then ‘normal’ arrangements in society.

The recent societal and political chaos involving the Supreme Court will be seen in years to come in the same light. This article by Peter Beinart helped me come to terms with what happened and will allow me, hopefully, to move on and resume my ‘normal’ life. I’ll continue to resist, but I now have a positive goal of eventual gratification.

by Peter Beinart on Monday, October 8, 2018

When it comes to Brett Kavanaugh, there are three camps. The first believes it’s a travesty that he was confirmed. The second believes it’s a travesty that he was smeared. The third believes it’s a travesty that the process was so divisive.

David Brooks is in camp number three. The Kavanaugh hearings, he wrote on Friday, constituted an “American nadir.” You often hear such phrases from people who think the biggest problem with the Kavanaugh battle is that the participants weren’t more courteous and open-minded. Jeff Flake said that in debating Kavanaugh, the Senate “hit bottom.” Susan Collins called it “rock bottom.” Think about that for a second. For most of American history, Supreme Court nominees—like virtually all powerful men—could sexually assault women with complete impunity. Now, because allegations of such behavior sparked a raucous, intemperate political fight, America has hit “rock bottom,” a “nadir.”  How much better things were in the good old days when sexual-assault allegations didn’t polarize the confirmation process because sexual-assault victims were politically invisible.

Implying, as Brooks, Flake, and Collins do, that America’s real problem is a lack of civility rather than a lack of justice requires assuming a moral equivalence between Brett Kavanaugh’s supporters and Christine Blasey Ford’s. “What we saw in these hearings,” writes Brooks, “was the unvarnished tribalization of national life.” The term “tribe” implies atavistic, amoral group loyalty: Huns vs. Franks, Yankees vs. Red Sox, Hatfields vs. McCoys. There are no larger principles at stake. “There was nothing particularly ideological about the narratives,” laid out by Kavanaugh and Blasey Ford, Brooks declares, “nothing that touched on capitalism, immigration or any of the other great disputes of national life.”

But gender is indeed one of the “great disputes of national life.” The Kavanaugh fight pitted people who worry that #MeToo hasn’t changed America enough, that it’s still too easy for men to get away with sexual assault, against people who fear that #MeToo has changed America too much, that it’s become too easy for women to ruin men’s lives by charging them with sexual assault. That’s not a tribal struggle; it’s an ideological one. It involves competing visions of the relationship between women and men.

Describing Democrats and Republicans as warring tribes has become a political cliché, but it’s wrong. If tribal implies unthinking or inherited group loyalty, then Democrats and Republicans were actually more tribal in the mid-20th century. Back then, when being a Democrat or a Republican signified less about your view of the world, party identity was more a function of regional or ancestral ties. Whether or not they supported civil rights or higher taxes or the Korean War, Irish Catholics from Boston were mostly Democrats; Presbyterians from Kansas were mostly Republicans. Today, party identity is more a function of what you believe. The parties are so bitterly polarized not because they’ve become more tribal but because they’ve become more ideological.

But for Brooks, depicting the supporters of Kavanaugh and Blasey Ford as tribes is useful because it doesn’t only suggest moral equivalence, it also implies an equivalence of power. The “tribalization” of American politics, Brooks argues, “leads to an epidemic of bigotry. Bigotry involves creating a stereotype about a disfavored group and then applying that stereotype to an individual you’ve never met. It was bigotry against Jews that got Alfred Dreyfus convicted in 1894. It was bigotry against young black males that got the Central Park Five convicted in 1990. It was bigotry against preppy lacrosse players that led to the bogus Duke lacrosse scandal.”

This is misleading. There is no equivalence between the “bigotry” faced by preppy lacrosse players and that faced by black males. There’s no equivalence because preppy lacrosse players, in general, enjoy far more privilege and power and thus, the stereotypes people hold of them don’t generally land them in jail or dead. Similarly, there is no equivalence between the “bigotry” faced by men accused of sexual assault and the “bigotry” faced by women who suffer it. There’s no equivalence because men wield far more power. If you don’t think that matters, try imagining Kavanaugh getting confirmed by a Senate comprised of 79 women.

The struggle over Kavanaugh was, at its core, a struggle between people who want gender relations to change and people who want them to remain the same. And throughout American history, whenever oppressed groups and their supporters have agitated for change, respectable moderates have warned that they were fomenting incivility and division. In April 1963, seven white Alabama ministers and one rabbi wrote a letter to Martin Luther King. The letter articulated no position on segregation and the right to vote. It assumed, instead, a moral equivalence between blacks that wanted race relations to change and whites who wanted them to remain the same. Both sides held “honest convictions in racial matters.” Both “our white and Negro citizenry” should “observe the principles of law and order and common sense.”

The real danger, the authors claimed, was “friction and unrest.” Averting it required “forbearance” and “restraint” on both sides. King, whose Birmingham campaign was titled “Project C”—for confrontation—was purposefully fomenting such friction and unrest through marches, sit-ins, and boycotts. While “technically peaceful,” the ministers and rabbi warned, the “extreme measures” adopted by King and his supporters “incite to hatred and violence.”

In his response, written from jail, King argued that the white clergymen were mistaking symptom for disease. The problem wasn’t “friction and unrest” between Birmingham’s two tribes. It was centuries of oppression, which there was no frictionless way to overcome. “I am not afraid of the word ‘tension,’” King explained. “We must see the need of having nonviolent gadflies to create the kind of tension in society that will help men to rise from the dark depths of prejudice and racism to the majestic heights of understanding and brotherhood.”

Even as Bull Connor’s men savagely beat black protesters in the streets, King recognized that Birmingham was not hitting “rock bottom.” It was rising from an almost century-long nadir in which white supremacy—no matter how murderous—was barely even a subject of political controversy, in which black powerlessness was the foundation on which comity between two America’s white-dominated political parties rested.

The problem that the Kavanaugh struggle laid bare is not “unvarnished tribalism.” The problem is that women who allege abuse by men still often face male-dominated institutions that do not thoroughly and honestly investigate their claims. That problem is not new; it is very old. What is new is that this injustice now sparks bitter partisan conflict and upends long-standing courtesies. Rape survivors yell at politicians in the Senate halls. The varnish—the attractive, glossy coating that protected male oppression of women—is coming off. Brooks, Collins, and Flake may decry the “tension” this exposes. But, as King understood, the “dark depths of prejudice” can’t be overcome any other way.

Source: https://www.theatlantic.com/ideas/archive/2018/10/has-american-politics-hit-rock-bottom/572452/

4 Financial Life Stages and How to Plan for Them

My Comments: As a financial planner, I’ve described the three primary phases most of us travel through in life: childhood, adulthood, and retirement. As a child, we’re dependent on others to maintain our lives; as adults we’re dependent on our ability to fend for ourselves and typically work for money; in retirement we’re dependent largely on our earlier ability to set aside resources and have money work for us.

These words from Sunita Abraham break down ‘adulthood’ into four financial stages and they are worth noting. Even if you’ve already retired, you may find it interesting for yourself and others in your family.

by Sunita Abraham \ October 10, 2018

Having a different financial planning strategy for different stages of one’s life cycle can help simplify the task of investing for various tenures

If the laundry list of “things to do” puts you off financial planning, then here is a way to make it easier. The elements that form part of the financial planning exercise include budgeting to generate savings, investing for goals, securing , protecting income through life and general insurance, managing debt and planning for the transfer of wealth.

While each element plays an important part in securing your finances, not all of them are equally significant at every stage in the life-cycle. Categorize the activities as critical, important, urgent and optional in each phase of your life. Focus your resources on those activities that are identified as critical and important that need immediate attention. Consider activities that are labelled as urgent only if they are also seen as essential. For example, while you may consider holding off increasing contribution to the retirement corpus in favor of paying life insurance premium, you should not consider doing it to fund a holiday even if it is urgent.

We tell you the four critical stages in a life cycle and how different financial planning approaches and tools can fit into each to make it a smooth ride for you.

The first income stage

When you first begin earning an income, budgeting is the critical financial skill that you need to master. Develop a suitable budget and build the discipline to live within your income so that you don’t fall into a debt trap. Once you learn to contain your expenses to available income, start building savings into your budget. The emergency fund will have the first claim on your savings and this is an urgent and important task.

Initiating some investments for retirement is an important task at this stage even though the goal may seem too much in the future to be relevant now. Investments for other goals are optional at this stage and can commence once your income and savings stabilize.

Unless you have dependents on your income, life insurance is optional at this stage and you need not assign scarce funds for life cover. However, a basic health insurance is important, particularly if you don’t have a health cover from your employee. Other products such as auto insurance and personal accident insurance should also be included as required. Servicing debt that you may have, such as student loan, is an important element, as is controlling debt use and building your credit history. A misstep can have long-term consequences on your borrowing ability in the future.

Estate planning is optional at this stage and you can consider it in the future when wealth has been created.

The dependents stage
This is the phase that is the most demanding since many of the elements of financial planning need to be serviced. You are likely to have dependants on your income and, therefore, life insurance is a critical element for security. Consider term insurance which gives you the required protection at the most efficient cost. Expand health insurance to cover your family too.

Your income and expenses would have both expanded and you should be better at budgeting and saving by this stage. Living by the budget is critical to be able to find the savings for the many short-, medium- and long-term goals you are likely to have at this stage. Revise and fine-tune your budget periodically to reflect your income and need for savings. Invest the savings to construct a portfolio that is aligned to growth, income or liquidity needs of goals.

Use a professional to help you do this efficiently if you find yourself procrastinating. Build basic estate planning into your finances by making clear nominations on your investments and insurance.

Debt management is a critical function at this stage given that your needs are likely to be more than availability of funds. Keep your ability to repay in mind while adding debt and ensure you do not harm your credit score or credit history. You should not have to meet debt repayment obligations at the cost of your retirement savings, insurance protection and essential goals like housing. Borrow primarily for appreciating assets where it will help grow your net worth over time.

The growth stage
If you have managed your personal finances prudently so far, then this will be the golden stage for your finances. Your income would be high and seeing an upward growth trend, while your expenses would have stabilized resulting in growing savings. Being mindful of expenses is important even at this stage and the focus of budgeting would be to maximize savings.

Managing investments is critical in this period. Many of your goals would be close to being funded and the investments have to be rebalanced to reflect this. This is also the time to catch up on important goals like retirement with the excess savings being assigned to this. Where the goals are well in the future, the investments should reflect the ability to take risk to earn higher returns.

Life and health insurance should be updated and aligned to your situation.

Now that you have accumulated wealth, take time to plan how you would like to distribute your estate and formalize a Will. Make sure that the assets and investments do not have nominations that are contrary to what you have decided in your Will.

Servicing debt should not be difficult at this stage given the high income. But consider the funding needs of your other goals before you add to your debt burden.

The retirement stage
Budgeting becomes the focus of finances once again during retirement. The object now is to control expenses to stay within the available income. Managing the investments to generate income and protect the corpus from inflation becomes the primary investment activity at this stage.

Adequate health insurance is critical since health costs can throw your income off rails. Life insurance may be relevant only if it is required to protect retirement income for the spouse and debt should not be a big part of your finances at this juncture.

An important activity at the beginning of retirement is to simplify finances. This would include cutting down on multiple accounts and investments, organizing documents, updating details and consolidating investments to a few relevant ones. Make sure all your financial documents are updated and accessible.

Make optimum use of limited time, funds and energy by concentrating on the activities that are important and critical at each stage in your life. Over time you will find that you have knit together all the elements without finding the whole exercise too intimidating.

Source: https://www.livemint.com/Money/r946kZa4ZiqNghWh6GUP1H/4-financial-life-stages-and-how-to-plan-for-them.html

Listen to the IMF’s new warning, economist says, and cut your exposure to US stocks

My Comments: The International Monetary Fund (IMF) is an international organization headquartered in Washington, D.C., consisting of “189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

They recognize that market crashes happen from time to time, and that influences the amount of money they have in reserve to deploy around the world.

I see a parallel between their need to preserve their ability to deploy money under their mandate, with your ability to pay your bills in retirement. I encourage you to pay attention and position your money with this in mind.

by Holly Ellyatt @ CNBC

U.S. markets are “going it alone” and investors are underestimating the amount of risk in the economy, the chief investment officer at Danish investment bank Saxo Bank, told CNBC on Wednesday.

“What we’re saying (to investors) at a bare minimum, is do acknowledge the fact that the U.S. is expensive by reducing (exposure to) the U.S.,” Steen Jakobsen told CNBC Europe’s ‘Squawk Box.’

“And if you don’t want to reduce overall equity exposure go to the MSCI World (a global equity index that represents just over 1,600 large and mid-cap companies across 23 developed markets countries) or take a little bit of risk in emerging markets.”

“For now, we’re pretty much saying to customers, be aware that the market is underestimating risk,” he added.

Jakobsen’s comments were made of the same day the International Monetary Fund (IMF) warned that “a further escalation of trade tensions, as well as rising geopolitical risks and policy uncertainty in major economies, could lead to a sudden deterioration in risk sentiment.”

If that happened, the fund said in its latest ‘Global Financial Stability Report,’ it could trigger “a broad-based correction in global capital markets and a sharp tightening of global financial conditions.”

U.S. markets are fretting but concerns are centered on rising U.S. interest rates, particularly this week after a strong set of economic data last week that could prompt the U.S. Federal Reserve to hike rates further and faster.

Volatility is ‘artificially low’

Jakobsen, who’s known for his bearish view on the U.S. economy, said it was “very prudent and right of the IMF to do this warning.” “It’s very rare that I (hold) sway with any policy institute globally but I absolutely think they’re (the IMF) right,” he said.

“We have three drivers of tighter monetary conditions, one being the price of energy, of course with this bi-product of inflation risk, but we also see the price of money…and the quantity of money, globally, is collapsing. So, in other words, the credit keg is lower so it’s absolutely prudent of the IMF to do this.”

Jakobsen believed that U.S. markets were buoyant because of tax changes introduced by President Donald Trump which lowered corporate taxes and incentivized companies to repatriate overseas profits, with a one-time repatriation tax. The changes were also criticized for increasing the U.S. budget deficit, however.

Saxo Bank’s economist said the tax reforms had enabled U.S. companies to initiate share buyback programs, in which a company purchases its own stock from the marketplace, reducing the number of available shares and thus increasing its share price. Goldman Sachs said in August that U.S. companies are expected to buy back $1 trillion worth of shares in 2018.

Jakobsen said this scenario meant the U.S. market was diverging from the rest of the world, “going it alone.”

“I think they’re (the IMF) pointing to, especially in the Stability Report that just came out, the fact that the U.S. market is on its own, and the reasons it’s on its own is because the tax plan in the U.S. has meant a massive amount of repatriation into the U.S. economy,” Jakobsen said.

“The buyback program in the U.S. this year is $1 trillion and that is basically $1 trillion used to reduce the amount of floating stocks in the world. Why is that relevant? Because it makes the volatility artificially low in the U.S. stock market. It’s (the U.S. market) is almost going it alone,” he said, adding;
“So what the IMF is really doing is just pointing out that, if you exclude the U.S., the world is already moving to the brink. Whether we go beyond the brink I think is more an issue of how fast the Fed, and how insistent the Fed is, on having this projectory of higher rates,” he said.

He believed the Fed was ignoring the inflows as a result of tax reforms and could be hiking rates too quickly. “For my part, I think the Fed is doing a mistake by ignoring this massive inflow on the back of the tax plan in the U.S. and doing so, they do a policy mistake.”

Source: https://www.cnbc.com/2018/10/10/listen-to-the-imfs-new-warning-economist-says-and-cut-your-exposure-to-us-stocks.html

4 Signs You’re Thinking About Social Security Benefits the Wrong Way

My Comments: For millions of us, Social Security has become a critical source of income if we expect to continue our current standard of living into the future. For those of you not yet claiming benefits, these four items are critical to your future retirement success.

Christy Bieber \ Oct 7, 2018

Social Security benefits are a major source of income for retirees, but far too many seniors have no clear idea how these benefits work. Even worse, many seniors have major misconceptions about Social Security benefits that could affect their plans for retirement in adverse ways.

To make sure you’re not one of the millions confused about how Social Security will provide for you as a senior, consider these four signs you’re thinking about Social Security benefits the wrong way.

1. You’re expecting Social Security to provide all the retirement income you need
Social Security benefits are designed to replace about 40% of your pre-retirement income, while most financial advisors suggest you’ll need at least 70% of the money you were earning prior to retiring.

If you aren’t saving money to supplement Social Security, you’re putting yourself into a position where your Social Security benefits may be your only source of funds as a senior. This is a recipe for financial disaster, as living on Social Security alone will leave you close to the poverty level.

Don’t count on Social Security to provide you with all you need. Instead, invest in a 401(k) or an IRA so you’ll have supplementary savings. Ideally, try to invest at least 15% of your income. If you can’t start there, at least set up small automated contributions to make sure you’re saving something. You can increase contributions over time as you get used to living on slightly less or when your income increases.

2. You’re counting on taking Social Security at age 65 or later
As many as 70% of workers think they’ll take Social Security benefits at age 65 or later according to Employee Benefit Research Institute. Almost 20% plan to wait until age 70, which is the last age at which you can earn delayed retirement credits to increase monthly Social Security income.

The reality, however, is that 62 is the most common age to claim Social Security, while age 63 is the median age at which retirees claim benefits. If you anticipate waiting to claim so you can increase your monthly income from Social Security, you could find yourself short of cash if illness or unemployment forces you to leave the workforce early.

To make certain you don’t end up with a shortfall, assume you’ll receive the monthly benefit amount you’d get at 62, and plan accordingly when deciding how much additional income you need from savings. If you’re lucky enough to be able to work longer and put off claiming benefits, you’ll simply have extra income — which is far better than having too little.

3. You aren’t considering your spouse when you make your plan for Social Security benefits
If you’re planning on simply claiming Social Security benefits under your own work record, you could potentially be missing out on a higher payment if you’re eligible for widow or spousal benefits. If your spouse earned more, you should carefully consider whether claiming under his or her work record could provide you with more funds than claiming on your own work history.

You can claim spousal benefits even after divorce as long as you were married for at least 10 years, so don’t assume claiming under your own work record is your only option, even if you’re currently single.

If you’re the higher earner, you also need to think about your spouse when making a decision on claiming benefits. When one spouse dies, the surviving spouse could opt to earn either widow’s benefits or their own benefits– whichever is higher. If you’ve claimed your benefits early instead of waiting to earn delayed retirement credits, you’ve reduce the widow’s benefits your surviving spouse would otherwise have received. This could leave your spouse with insufficient funds once you’re gone.

4. You think taking Social Security at 62 won’t impact your benefits over the long-term
Many people who retire at 62 have a major misconception about what claiming benefits before full retirement age does. In fact, 39% of pre-retirees think if they claim reduced benefits early their benefits will increase to a standard benefit at full retirement age.

This isn’t the case, and the reduction in benefits that occurs when you claim before full retirement age affects your annual Social Security income throughout your retirement. Your future cost of living adjustments are based on your lower starting benefit amount, and your monthly income will never be as high as it would’ve been had you waited.

Make sure you aren’t thinking about Social Security the wrong way

Since Social Security benefits are such an important source of retirement income, it’s worth doing your research to ensure you don’t make big mistakes when it comes to your benefits. Check out this guide to Social Security benefits, and ensure you know the answers to five key questions about Social Security before you claim your Social Security benefits as a senior.

Source: https://www.fool.com/retirement/2018/10/07/4-signs-youre-thinking-about-social-security-benef.aspx

Most Americans Fail at Financial Literacy. Here Are 3 Concepts You Absolutely Need to Know

My Comments: A dilemma for many people is they find the language used by those of us in the world of finance and economics very hard to understand. It goes in one ear and comes out the other.

I’m about to launch an internet course that will help solve this problem. I call it Successful Retirement Secrets. Look for a blog post in the coming days and an opportunity for everyone to see a free preview.

In the meantime, here are three concepts to get you started.

Maurie Backman Mar 31, 2018

While Americans might have no problem spending money, managing it is a different story. In fact, nearly two-thirds of U.S. adults can’t pass a basic financial literacy test, according to the FINRA Foundation. Specifically, Americans have a hard time calculating interest payments, answering questions about financial risk, and understanding the relationship between bond prices and interest rates (the former falls when the latter rises, and vice versa). With that in mind, here are a few basic financial concepts everyone should know.

1. Compounding
If you’re not familiar with compounding, you’re not alone — but you’ll also need a quick lesson, because this is a concept that can work both for you and against you. First, the positive. Compounding is the concept of earning interest on interest. Imagine you put $2,000 in a savings account paying 1% interest per year. Let’s also assume that interest compounds once a year. At the end of the first year, your account balance will be $2,020. But if you leave that money where it is and your interest rate stays the same, then during the second year, you’ll be earning 1% interest on $2,020, as opposed to just the $2,000 you initially put in.

Now here’s where compounding really gets interesting. Imagine you’re saving for retirement by socking away $300 a month in an IRA or 401(k). Over a 40-year period, that’s $144,000 in out-of-pocket contributions. But if your investments deliver a 7% average yearly return, then you’ll actually wind up with roughly $719,000 after 40 years, because your earnings will have compounded over time.

Sounds pretty great, right? Don’t get too excited, though, because compounding can also work against you. Any time you fail to pay off your credit card, for example, the balance you owe will accrue interest. But over time, you’ll be charged interest on top of that interest, and you’ll end up paying well more than the initial outstanding amount.

Imagine you rack up $2,000 of debt on a credit card charging 20% interest. If it takes you three years to pay off that sum, it’ll cost you a total of $2,675. But if you manage to pay it off in just six months, you’ll only spend $2,118. Why? Because you’ll be giving that interest less time to compound against you.

2. Inflation
In 1940, a loaf of bread cost just $0.10 on average. In 2013, it averaged $1.98. Why is this significant? Because it illustrates the point that a dollar today will have less buying power in the future. It’s a concept known as inflation, and it basically refers to the tendency of expenses to rise over time. This affects everything from housing to consumer goods to healthcare.

Why do you need to worry about inflation? It’s simple: If you’re eager to live comfortably in retirement (which you probably are), you’ll need to start setting money aside today. But the money you contribute to your IRA or 401(k) today won’t have the same buying power in 40 years as it does now. That’s why it’s crucial to grow your savings through smart investments — to take advantage of compounding and keep up with or outpace inflation.

In the above example, we saw that investing $3,600 a year at an average annual 7% return would result in $719,000. If you were to take those same $300 monthly contributions and house them in a savings account paying just 1% interest, then in 40 years, you’d have $176,000 — more than the $144,000 you originally put away, but still hardly any growth to keep up with inflation. As a result, that ending balance likely wouldn’t be enough to pay for your living expenses when you’re older, whereas $719,000 will more likely enable you to retain the buying power you had when you first set that money aside.

3. Diversification
We just saw how a 7% average annual return could turn a series of smaller contributions into a much larger sum. But why 7% and not another number? The truth is, it’s hard to say exactly what average return your investments might generate, but that 7% is a reasonable assumption for a stock-heavy portfolio based on the market’s historical performance. In fact, it’s for this reason that younger investors are typically advised to load up on stocks.

That said, you don’t want to put all of your money in stocks. Rather, it’s wise to spread your assets out over a variety of options, from stocks to bonds to cash to real estate. This way, if the stock market has a major downturn, you’ll have other assets to tap that won’t necessarily lose value the same way. It’s a concept known as diversification, and it basically means putting your eggs in different baskets to protect yourself from severe market conditions.

There’s even the potential to diversify within an asset type. For example, among your stock investments, you shouldn’t have 90% in, say, biotech. Rather, you should invest in different industries so that if a particular sector goes down, you’re not totally out of luck. Index funds are another great way to get some instant diversification in your stock portfolio, especially if you’re new to investing and don’t quite know how to choose individual stocks.

While you don’t need to be a financial wizard to successfully manage your money, it’s critical that you grasp these basic concepts and learn how to work them into your investment strategy. A little extra reading today could set the stage for a wealthier future.