How to Lose Money with Every Dollar You Invest

Recently I was helping my daughter with her bank account and noticed a $1 withdrawal labeled “Stash Fee”. It was a fee to robo-adviser, Stash. Normally I would be thrilled by the good news that my daughter was saving and investing. But in this case I wasn’t.

I had a couple of concerns, but the biggest one was that $1 fee which would be coming out of her account monthly as long as she maintained her account with Stash. It doesn’t seem like a lot, $12 per year, but she had only invested $50 so far. That’s an investment expense of two percent per month! It would be really hard for her investment to make money with that expense load.

I’m a fan of robo-advisers. They offer a great service for savers with both small balances and big ones. They generally use low cost exchange traded funds to build a well diversified portfolio, and their management fees are also low. For more details on robo-advisers, check out the post I did a little over a year ago.

The Stash service allows investors to invest as little as $5.00. You can set up an automatic regular transfer from your bank account. In fact, you are required to link your bank account to your Stash account, so they can automatically withdraw your fees every month.

Most robo-advisers subtract your fees from your investment account, and even with small balances, the fees are lower. Betterment, and Wealthfront two other robo-advisers, offer investment management for 0.25 percent per year. Betterment has no minimum balance, but Wealthfront does require an initial $500 investment.

Stash bills itself as a way for young investors to learn more about investments while building their portfolio. They offer lots of information on investing as well as help selecting investments. But they seem to leave out the bit about how high fees eat into your savings.

Stash’s fees do become more reasonable as a percent of your investments the more you invest. Once your balance hits $5,000, the fee converts to 0.25 percent per year, which is about $12.50 on that amount of money. That is in line with Betterment and Wealthfront, but both those advisers will build your portfolio for you, as opposed to offering to help you build your own.

This experience highlights the importance of understanding what you are getting into. Never hand over your money to any adviser without investigating how they work, what they offer and how they compare to other alternatives. There are many low cost ways to have your money invested for you.

Robo-advisers are a good way to go, particularly if you don’t have much to invest right away. However, Stash’s fee structure makes them a poor choice for balances less than a few thousand dollars. There are other options with much lower fees. If you like what Stash has to offer, wait until you’ve saved up the $5,000 to make the fees competitive before you invest with them. Whatever investment adviser you choose, make sure that you understand what they offer and what they charge before you hand over your money.

Five Rules to Get Your Spending Under Control

Does your money simply disappear without you fully knowing what happened to it? It can be really frustrating, when you’re trying to save money, if you never seem to have anything left over at the end of the month.

When you don’t have a recollection of how you spent your money, you are spending it mindlessly. Essentially you have a habit, and when you have a habit you can do something without thinking about it.

It’s like when you drive home from work, but you can’t recall any of the details of your trip. You make all the right turns, avoid obstacles and securely arrive in your driveway without having to engage the decision making part of your brain.

Mindless spending can be a big road block to saving money. It can keep you living paycheck to paycheck even if you have a decent income. You pay your bills, go about your life and at the end of the month there isn’t anything left. You don’t really have anything to show for it. You just don’t have any money.

If this sounds like your life, you can change your spending habits by imposing a few rules on yourself. Rules are low barriers to spending, but they can be very effective. After following your rules consistently, you can change your spending habits.

Only you can decide what rules will work for you. But here are five that have worked well for others.

  1. Set your savings aside first. Put your savings goal in savings before you pay any bills, buy any groceries, go out to eat or do anything else. Use automatic deposits to savings to take the decision making off your plate.
  2. Give yourself an allowance. Aside from the bills you must pay, in other words, those you’ve agreed to pay by contract, allow yourself a specific amount of money to pay for everything else. Your groceries, gas, entertainment, essentially everything else must be paid from the allowance. The amount you choose should leave room in your monthly income to meet your savings goals.
  3. Only carry cash. Studies have shown that you are more conscious of your spending when you physically experience the cash leaving your hand than when you swipe a card to pay for your purchases. If any cash you carry disappears, carry only enough for purchases you plan ahead of time. If you don’t plan to buy something on a given day, don’t carry any cash or your cards. If you need to put gas in your car, only carry enough cash to fill the tank.
  4. Only go out if it’s an event. Skip the $10 sandwiches scarfed at your desk. Not only will you not remember you spent your money on them, you won’t remember eating them. Save your restaurant trips for experiences you’ll remember, like a date night, a celebration or catching up with a friend.
  5. Give yourself a cooling off period. If you are tempted to buy something that wasn’t in your plan, give yourself 24 hours to think it over. Chances are it won’t be quite as appealing once you’ve turned your back on it. If the day goes by, and you really think the object of your desire is your priority, you’ll have had time to figure out how to rearrange your spending plan.

Find something that works for you. If you are ready to prioritize saving over spending, giving yourself some rules can help you change your spending patterns. Once you get the hang of it, you won’t be able to stop being conscientious with your money. You will know too much.

 

 

Double Your Salary in Savings by Age 35 or Double Your Savings from Salary

This last Monday (May 21st, 2018), Buzzfeed highlighted the Twitter responses to a recent Marketwatch article that said by the time you are 35 you should have saved twice your salary. Some of the Twitter comments were very funny. Here are a few from the Buzzfeed article.

By the time you’re 35 you should have saved at least half your sandwich for lunchtime instead of noming it at 10am.

By age 35 you should have approximately 10 times the existential dread you had when you graduated high school.

By age 35 you should stop paying attention to condescending life advice from strangers writing think pieces.

While accomplishing such a feat seems incredible, there are reasons why it is a good benchmark. First, it is a reasonable savings rate for anyone leaving college. The math follows. Second, it’s necessary unless you want to give up much more of your income later.

To have twice your salary in savings in ten years, with a reasonable rate of return, you would  need to save 15.0 percent of it. That is common advice for those beginning to save in their twenties. If your employer matches your contribution to your retirement account, you could save less.

Say your starting salary when you left college was $45,000. With annual increases, you now make about $54,000. Your employer would contribute 5.0 percent to your company 401(k) if you contributed at least that much. You only have to contribute 10.0 percent of your salary to save 15.0 percent. You would contribute $375 each month to start, and your employer would contribute $187.50. Your and your employer’s dollar contribution would grow with your salary.

Your share of the contribution would be less if you contribute pretax dollars in a traditional 401(k). With a combined state and federal tax rate of 24 percent, your paycheck would only have been reduced by $285 per month to start. For $285, you would be saving $563 every month with your employer match.

At the end of ten years, assuming a 7.0 percent rate of return, your balance would have grown to over $105,000, which is almost double your current salary. Your contributions would have totaled $48,781 before tax and $37,073 after tax. With the employer match and market returns, doubling your money in ten years is very possible.

If you haven’t been saving a total of 15.0 percent of your income, between you and your employer, prior to reaching age 35, you’ll need to save much more after to be able to maintain your current lifestyle when you eventually do retire.

If you begin saving in your 36th year, to accumulate the same amount of money by age 65 as you would have if you started saving at age 25, you would need to save a total of 28.0 percent of your salary, using the 7.0 percent return assumption. If your employer matches 5.0 percent, you still have to contribute 23.0 percent of your salary. You would need to give up more than twice as much of your take home pay to arrive at the same balance.

On the surface, to have saved twice your salary by the time you’re 35 seems outlandish. Who could save that much? But if you take into account market returns, it’s not as crazy as you first thought. Add in typical employer matching contributions, and it is down right doable. If you didn’t manage it, you can still get to where you need to be. You’ll simply need to save more.

When to Take Social Security

My husband, Jeff, recently turned 60. It’s an interesting age. It’s as if you’ve crested some hill, and can now see retirement laid out before you. Jeff has been retired for five years, but his friends who are still working are starting to think seriously about what’s next. Conversations on the topic inevitably turn to Social Security claiming strategies.

Should I take it early, at age 62, is the usual question. A few have done some math to arrive at a dubious conclusion. If you assume you live to a certain age, say 80, you will get the same amount, in total, from Social Security whether you claim it at 62 or the normal retirement age of 67, despite the larger benefit. If you wait until you are 70, you’ll actually get less money. Here is an example of the calculation.

SS Claim Strat

The first problem is you’re not likely to die at age 80. In the absence of some known health issue, at the age of 62, men can expect to live to be 84, and women can expect to live to be 87, according to the Social Security Life Expectancy Calculator. That change alone makes a significant difference in the total benefit you can expect to receive, and claiming at 62 no longer makes sense, if your goal is to maximize your life time total benefits.

SS at Life

If you live to be 80, it turns out you are likely to live to be 89 if you are a man and 90 if you are a woman. At those ages, the difference in life time benefits between claiming early and claiming at the full retirement age grows to $52,000 and $58,000 respectively.

But all of these calculations miss an important purpose of Social Security. It is a guaranteed income that supplements your retirement savings. If you wait to claim Social Security until your full retirement age, or later, the larger benefit will allow you to take less from your savings, and therefore your savings will last longer. Since you really don’t know how long you will live, you need your savings to last as long as possible.

Say that you have $1 million saved for retirement and you need $60,000 per year to maintain your current lifestyle. Also assume your savings will earn 5.0 percent per year. If you claim Social Security at age 62, your savings will only last until you are 92, whereas if you wait until age 67 to retire and claim Social Security, the higher benefit means you are not likely to run out of money ever.

If you consider that things may not work out as planned, that extra buffer is even more important. About two thirds of people over the age of 65 are expected to need long term care sometime in their life, according to a paper by the Society of Actuaries. Long term care will sap your savings quickly. The higher social security benefit you receive at the full retirement age will leave you with more savings to deal with these higher expenses.

A higher benefit will also provide you a buffer against the vagaries of the market. Your savings won’t earn 5.0 percent every year. Some years it will earn more and some less. The larger your Social Security benefit the better you will be able to maintain your lifestyle in the event returns aren’t as high as expected.

Maximizing your lifetime Social Security benefit shouldn’t be your primary goal. Making sure you have enough money to last your lifetime should be. You are more likely to realize the latter goal if you wait to take Social Security until your benefit is higher.

 

 

 

The New Withholding Calculator is Here!

The 2018 Tax Reform bill will have a significant impact on families’ income taxes for 2018. The bill went into affect as of January 1st, and employers received guidance on how much to deduct from employee pay in February. The guidance was designed to line up the new tax rates with the prior withholding tables, so employees didn’t need to file a new form W-4 with their employer.

But you still may want to review your payroll deductions to make sure you are not having too much or too little withheld from your pay.  I’ve been waiting to do this post until the IRS withholding calculator was available, and now it is!

According to the IRS, the average tax refund, before tax reform, was over $3,000. That is a lot of money that could be going to build your emergency fund, your retirement savings or to reduce debt if you weren’t paying it to the government. Now, with lower tax rates and a higher standard deduction, your current deductions might exacerbate the over withholding, or in some cases leave you under withheld.

The new tax law increases the standard deduction for everyone, but eliminates the personal exemption. So for many, you will have a lower taxable income due to the increase in the standard deduction, but if you have more than one kid, the loss of the personal exemption will increase your taxable income, unless you have more than the standard deduction in itemizable expenses. The following table provides a comparison.

Standard Deductions

In addition to the changes in the standard deduction, one of the most common itemizable expenses has been capped. The maximum deduction for state and local taxes is now $10,000. That is high for most people, but if you live in an expensive area, it could raise your taxable income.

Several other common deductions are no longer allowed.

  • Casualty and theft losses (unless due to a federally declared disaster)
  • Unreimbursed employee expenses
  • Tax preparation expenses
  • Alimony payments
  • Moving expenses
  • Employer subsidized parking and transportation reimbursement

The deduction for charitable giving is still available, and the amount you can deduct has been increased from 50 percent of your income to 60 percent. The medical expense deduction is also still available, and the deductible amount is now anything over 7.5 percent of your income, down from 10 percent. The mortgage interest deduction is still allowed as well.

Aside from the changes in the tax laws, you should review your withholding regularly anyway. Things change, and it’s important to have the right taxes taken out of your pay. Not too little and not too much. Too little and you’ll have a tax bill that you didn’t plan at the end of the year, and too much will cost you the opportunity of doing other things with your money.

The IRS withholding calculator will walk you through all the things that should be considered when determining how much taxes to have withheld from your pay. It will estimate the taxes you will owe for the year and the taxes that will be withheld if you don’t make any changes. Then it will recommend the correct allowances to enter on a new Form W-4. To get started, have your most recent pay stub and your 2017 tax return available.

If you have your information handy, the calculator only takes a few minutes to complete. Take a moment and make sure you’re having the right taxes taken out of your pay. If you are like most people, you’re likely having too much taken out and could have more money to put toward your goals if you change your allowances. On the other hand, you can avoid a nasty surprise if the tax law changes worked against you.

Image courtesy of manopphimsit at FreeDigitalPhotos.net

 

America Saves Week 2018

It is America Saves Week once again. During this week, each year, the Consumer Federation of America encourages people to save for their financial security by pledging to save money, reduce debt and build wealth over time. It’s a great opportunity for you to put your action plan in place.

What action plan you say? If you’re struggling with where to start, here are a few ideas.

  • Pick one thing to work on. Maybe you’ll decide this is the week you sign up for your 401(k) through work or increase your contributions. Or maybe you’ll commit to paying down that credit card debt or begin working on an emergency fund. Any of these are good.
  • Put it on your calendar. Whatever action you decide to take, put it on your calendar. If you are working on your 401(k), put a visit to the web site or your human resources department on the calendar. Or put “open a new savings account” for your emergency fund on there. Studies have shown that people are more likely to do something if they commit to it in writing.
  • Decide on an amount. Decide on a realistic savings goal. You want your savings to grow, or your debt to shrink, but you also want your savings to stay saved. Your savings goal needs to be realistic. Don’t worry if it’s small to start with. Even small amounts help and you can increase your savings over time.
  • Decide what behavior you will change. For some, just taking the money off the table through an automatic savings plan is all that is needed for your savings to grow. For others, you may need to figure out how to free up some money so you can save it. How will your behavior change to make the money available? Whatever you decide make it something you can stick with.

Saving money is the only path to financial security, and far too many people don’t save enough. America Saves Week is as good a reason as any to get started, and the Consumer Federation of America will give you a little incentive to do it.

This year, if you formalize your pledge by entering it on the America Saves web site, you will be eligible for a raffle to win $500 toward your savings goal. You can boost your prize by another $250 if you share your goals and story on social media.

When you sign up you will also receive information, advice, tips and reminders by email or text message to help you be successful in meeting your goal. The web site has great tools and resources, including checklists, videos, calculators and more that are free for you to use even if you don’t enter the drawing.

So, go forth this week and save. The future you will thank you.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Four Things Retirement Savings and Going to the Olympics Have in Common

I love the Olympics. Amazing people from all over the world converge to do amazing things. Things that most of us haven’t even dreamed of. But those athletes did. And that is the main reason they are in Pyeongchang.

Their dreams were so important that they set aside hours a day to train. They gave up everyday comforts. In an interview, Adam Rippon, from the men’s figure skating team, talked about living on apples he snuck from the gym, because he didn’t have enough money for groceries. Yet their dreams were so important the sacrifice was worth it.

You may not have your eyes on an Olympic medal, but some of your goals can be just as daunting. Having the financial security to one day leave your job and not worry about money is likely one of them. That goal requires many of the same disciplines as an Olympic dream.

First you must define your goal. Olympic athletes don’t get to there by wanting to be Olympians. They get there by wanting to be the best at short track speed skating, or half pipe snowboarding or cross country skiing. You must define your retirement goal in terms of how you want to live when you stop working for pay.

That can be a tall order. Who knows how you’ll want to live decades in the future. Some may have a vision of it, but if you don’t, how you live today may be a good starting place. From that you can get an estimate of how much money you need to fund your lifestyle. Fortunately there are many free resources on-line to help you do the math. The following are a few you can try.

Bankrate Retirement Calculator

Nerdwallet Retirement Calculator

CalcXML Retirement Calculator

Next you need a strategy. Athletes have training and diet regimens. Similarly, you need to decide what you will do so you can save for the future. Where is the money for savings going to come from?

For some, simply taking the money out of the picture, through an automated savings program like your company retirement savings plan, is all that’s needed. Others may have to figure out how to free up some money first so it can be saved. Creating a spending plan, otherwise known as a budget, will help you sort out what you value and what you don’t in your current spending. Goals have a way of shining a light on your trade offs.

Then you need to practice and monitor your progress. Olympic athletes only get where they are through practicing their skills. They enter competitions to see how they are progressing toward their goals. They compare their performance to other athletes in the same field to learn what they need to improve to be better than them.

You also need to practice and measure your progress. Decisions you make every day will help you stay on your spending plan. Checking your actual spending relative to your plan and regularly reviewing your balance against shorter term savings goals will allow you to make adjustments so you can improve your progress.

You don’t have to do it alone. Olympic athletes usually have a family that supports their dreams and a good coach. Get help with achieving your goal. Make sure your family is on board with saving for your future, and enlist the help of a financial planner if you are not making the progress you want. To find a Certified Financial Planner in your area search letsmakeaplan.org.

Big goals are daunting. Your future financial security is no less of an endeavor than pursuing an Olympic medal, and the path to success is the same. You have to know what you want, develop a strategy for achieving it, practice your skills, monitor your progress and get help when you need it. It takes a long time, so the earlier you begin the better off you are. Decide today to begin pursuing your own dream.

Image courtesy of franky242 at FreeDigitalPhotos.net