My Top Ten Recommendations for Every Age Your financial life begins long before age 50, whether it's with your first savings account or your first job. So before we get into the questions that particularly concern finances after 50, I'd like to share some financial steps that I believe are essential at every age--whether you're 25, 50, or 75. Think of them as exercises you can do to make sure you're in the best financial shape for whatever the next phase of your life brings. I suggest you review them one by one, and keep them handy for future reference. And please share them with anyone--at any age--who wants to be financially fit. 1. Figure Out Your Net Worth This simply means writing down and adding up what you own (your assets) and then subtracting what you owe (your liabilities). Are you in the plus or the minus? Knowing your net worth will help you decide next steps for saving, debt reduction, and budgeting. It also gives you a way to measure future progress. If your net worth is in the plus, great. If it's in the minus, read on. Many of the questions in this book will help you take positive action. Set Up a Personal Net Worth Statement in Three Easy Steps Setting up a net worth statement is as easy as creating a simple checklist and doing some basic math. 1.List your assets (what you own), estimate the value of each, and add up the total. Include items such as: oMoney in your bank accounts oValue of your investment accounts oValue of your car oValue of your home oBusiness interests oPersonal property, such as jewelry, art, furniture oCash value of any insurance policies 2.List your liabilities (what you owe), and add up the outstanding balances. Include items such as: oMortgage oCar loan oCredit card balance oStudent loans 3.Subtract your liabilities from your assets to determine your personal net worth. 2. Track Your Spending and Make a Budget Now that you have the big picture, let's get into the details. Are you on top of monthly expenses? Write down your essential expenses such as your mortgage, food, transportation, utilities, and loan payments. (Include savings in this list!) Then write down nonessentials--restaurants, entertainment, even clothes. Be sure to factor in big-ticket items that come periodically, such as insurance premiums and real estate taxes. Does your income easily cover all this? If it doesn't, it's time to prioritize. Smart Move: Track your spending for thirty days. Does reality match your projections? If you need to cut back, Question 2 has some practical suggestions. 3. Reduce Your Debt Should you get out of all debt? Not necessarily. Some debt, like a mortgage, can actually work in your favor. But how much debt is too much? An industry rule of thumb is that no more than 28 percent of your pretax income should go toward home debt; no more than 36 percent should go toward all debt (home, car, credit cards, etc.). If possible, it's wise to stay well below those limits. For more on debt reduction, see Question 13. Smart Move: To efficiently pay down credit card debt, focus on the highest interest rate balances first. Good Debt vs. Bad Debt Not all debt is equal. Some types of debt can be used as a financial tool to provide opportunities; other types can derail your carefully laid plans. The key is to know the difference. *Debt that can work for you--To work for you, debt should ideally be low-cost and have potential tax advantages. For instance, with mortgages and home equity lines of credit, you're borrowing to own a potentially appreciating asset, and it may be tax-deductible. You can deduct the interest on mortgage debt of up to $1.1 million on your primary and/or secondary residence, whether the loan is to purchase the home or make major improvements. (Up to $100,000 of this can be home equity debt such as a home equity line of credit, which can be used for any purpose; be sure to check with your tax advisor.) Likewise student loans have comparatively low rates, and interest can be tax-deductible, depending on your income. The benefit is enhanced career opportunities and increased earning potential. *Debt that can work against you--Generally speaking, debt that's high-cost and isn't tax-deductible is bad for you. Think credit cards and auto loans. This type of debt usually carries the highest interest rates. It's the most costly over time. And it means you're borrowing to own something that depreciates, so you're immediately losing value--like when you drive a new car off the lot! 4. Create an Emergency Fund What if the unexpected happens--you lose your job or have a medical emergency? Will you have the cash you need? Best to build an emergency fund that covers at least three months of essential living expenses so you don't derail your financial plans. Keep these funds in a checking or savings account, or a money market fund where they're easily accessible. If you have enough equity in your home and have good credit, you might also consider opening a home equity line of credit (HELOC). You don't pay any interest until you use it, and if you do, interest payments may be tax-deductible. It's a smart way to cover yourself "just in case." 5. Determine If Your Retirement Savings Are on Track The earlier you start, the less you'll have to save each year. If you're 50 and haven't started to save for retirement, you're going to have to sock away a large percentage of your income every year for many years. But if you're 30 or 40, you can save a smaller percentage. Even if you've been saving regularly, you might be surprised by just how much you'll need--especially when you factor in health-care costs. To see if you're on track, see Question 1. If you're confused about which retirement account is best for you, see Question 4. At a Glance: How Much Should You Be Saving? Age you start saving% salary you need to save 20s10-15% 30s15-25% 40s25-40% 50s40% or more The benefit of these guidelines is that once you start to save, the percentage won't change as you get older. The person who starts to put away 12% for retirement when she's 25 will never have to save more than 12% of her income. And unfortunately, if you wait too long to start saving, you're just setting yourself up for failure. You may not be in a position to save enough, so you'll have to adjust your expectations. Starting early is a huge advantage. saving fundamentals: What Should You Save for First? One of the hardest things about saving is figuring out where your money should go first. The Schwab Center for Financial Research has developed these eight Savings Fundamentals to help you prioritize and make the most of your savings dollars. 1.Contribute enough to your company retirement plan to take full advantage of your employer match 2.Pay down high-interest consumer debt 3.Build an emergency fund 4.Maximize retirement savings 5.Save for a child's education 6.Save for a home 7.Pay down other debt 8.Keep investing To make it easier on yourself, follow the first four fundamentals in order. Complete the final four according to your personal priorities and situation. But above all, save, save, save! 6. Automate Your Finances Do you have your monthly bills on auto-pay? How about your savings? Don't stop with the automatic contributions to your 401(k). Set up automatic monthly payments to your IRA and savings or brokerage accounts as well. You can even take it a step further by directing your savings automatically into a mutual fund or exchange-traded fund. 7. Check In with Your Portfolio When was the last time you took a close look at your portfolio? Market ups and downs can have a real effect on the percentage of stocks and bonds you own--even when you don't do a thing. Without overdoing it, it's smart to pay attention. If your investments don't reflect your current goals and feelings about risk, it's time to rejigger (in investment language, this is known as changing your asset allocation, or rebalancing). For ideas on how to invest, see Question 5, page 45. Talk to an Expert. Think of a financial advisor like a personal trainer. If you know you'll need someone to help you get your finances in shape, an organization such as the National Association of Personal Financial Advisors (napfa.org) can help you find a reputable advisor in your area. Also, see Question 6, page 76, for tips on choosing a financial advisor. 8. Review Your Insurance We all need health insurance, and many of us also need car insurance as well as either homeowner's or renter's insurance. For some of us, a supplemental umbrella policy, disability insurance, life insurance, and professional liability coverage provide necessary and important coverage. Long-term care insurance? Possibly. After that, tread very carefully. Mortgage insurance, life insurance for a child, pet insurance, travel insurance, wedding insurance, and a host of other specialized policies are often a waste of money. See Questions 7, 16, 17, and 27 for more. Decide If You Need Long-Term Care Insurance (LTCI) Whether you'll need long-term care--and therefore LTCI--depends a lot on your own health and family history. But according to the U.S. Department of Health and Human Services, 70 percent of people turning 65 can expect to use some form of long-term care during their lives. About 20 percent will need it for longer than five years. What if you're one of the 20 percent? What would you do? If you have family to care for you, that might minimize your need for LTCI. If you have considerable assets, you might be able to pay for care out of pocket. Someone with a low net worth might qualify for long-term care provided under Medicaid. However, if none of the above fits you, see Question 7, page 83 for more help. Smart Move: Don't wait too long to explore long-term care insurance. It's generally most cost-effective to purchase a policy between the ages of 50 and 65, provided that you're in good health. 9. Create or Update Your Estate Plan If you don't have a will, make this a priority, especially if you have children who would need a guardian. Also check that the beneficiaries on your retirement accounts and insurance policies are up-to-date. Make sure you have an advance health-care directive and assign powers of attorney for both finances and health care. Consider a revocable living trust as a way of avoiding probate. To get started, see Question 38, page 299. Note: Estate planning is not a do-it-yourself activity. Even if your situation is pretty straightforward, it's best to consult with an estate planning attorney. 10. Organize Your Records A simple financial organization system will help you keep everything else on track. First, take a look at your record keeping. Do you know where all of your important documents and statements are? Could you streamline by keeping some records electronically? Next, make a list of all your accounts and where they're located. Consider consolidating to make things simpler. Also make a list of your advisors, with names and contact information. Finally, put important dates on your calendar, that is, estimated taxes, property taxes, and any required minimum distributions from retirement accounts. For more, see Question 11, page 114. Smart Move: Keep My Top Ten Financial Recommendations as a handy checklist and refer to them periodically to stay on track and measure your progress. Important Disclosure Rebalancing and asset allocation cannot ensure a profit, do not protect against losses, and do not guarantee that an investor's goal will be met. Part I When Retirement Is at Least Ten Years Out As we start to contemplate retirement, partial retirement, intermittent retirement, or whatever arrangement we choose, perhaps the biggest challenge is being able to picture our future selves. It's hard to look into the future and imagine how we will feel and how we will want to live our lives. And some of the answers are unknowable. How long will we live? Will we be healthy? Will we want or be able to work? Will we want to live in the same house and will we have the same interests? Answering these types of questions with complete accuracy isn't possible. And some people may think that it's a waste of time. But the more we think about these issues, the more likely we are to prepare financially. And that gives us more choices down the road. As you go through this process, it's essential to keep the lines of communication open--with your spouse or partner and other family members, with your closest friends, and perhaps with financial and other professional advisors. Talking about things makes it real. It is also the best way I know of to evaluate your choices from different angles and make smart decisions. This section identifies the core financial issues that you should consider as you plan for retirement that is approximately a decade out: How much should I be saving? Which retirement accounts make the most sense? How should I invest? What should I expect from a financial advisor? By understanding your choices and doing some calculations now, you are laying the foundation for a rewarding and secure future. Q1. I'm saving for retirement--but how much is enough? When you hear various projections about how much money it takes to retire comfortably--$1 million, $2 million, maybe more--it can take your breath away. And it can be downright discouraging. But before you throw your hands up in despair, realize that, like so much in financial planning, how much is enough for you depends on a lot of personal factors. For instance, will you live a quiet life in a small town or do you plan to travel the world? Will you really call it quits and retire completely or will you keep your hand in with a little part-time work? Fact: According to the Employee Benefit Research Institute, in 2013 the percentage of workers confident of having enough money for a comfortable retirement was at a record low. While more than half expressed some level of confidence, 28 percent were not at all confident, and 21 percent were not too confident. And only 46 percent reported they and/or their spouse had tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement. While you may not have precise answers now, with a little imagination and a bit of forward thinking you can get a good sense of how much you'll need. You'll want to determine three things: *What you expect to spend each year *How much money you'll need in your portfolio to support that spending *How much more you have to save to get there Start by Projecting What You're Likely to Spend Will you spend less in retirement? The same? Opinions differ. Many people believe that their expenses will decline dramatically once they're retired, and in previous generations that may have been true. But today, people are living longer, they're healthy, and they want to continue to lead busy, active lives. That takes money. When we look at national statistics, retired households spend about 80 percent of what working households spend. Most of that goes to home-related and health costs. Statistics also show that spending tends to decline with age, especially as we get into our eighties or nineties. That makes sense and, in general, would seem to imply that you'll need less money in retirement than you live on today. Of course, this may also be because you simply don't have the money to spend more. Regardless, when you contemplate your own retirement, it's best to get specific. Do a sample budget. List projected nondiscretionary expenses--the must-haves--such as housing, everyday living, health care, insurance, and taxes. Then add in projected discretionary expenses-- the nice-to-haves--such as travel and nights on the town. How does it add up compared to your current expenses? Excerpted from The Charles Schwab Guide to Finances after Fifty: Answers to Your Most Important Money Questions by Carrie Schwab-Pomerantz, Joanne Cuthbertson All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.
