Objective information about financial planning, investments, and retirement plans

Your 401(k) – A To Do List for the Rest of 2014

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In a recent post Eight Financial To Do Items for the Rest of 2014, I outlined several items for your financial to do list for the rest of 2014.  One of those items was to review your 401(k) plan.  Here are a few more steps to take with your 401(k) plan yet this year.

Review your salary deferral amount

The maximum dollar amount that you can defer from your salary is $17,500 or $23,000 if you are 50 or over at any point during 2014.  If you are not on track to max out your contributions now is a good time to see if you can increase your salary deferral percentage even by 1%.  In the long run this will put you that much farther ahead in your question to build a retirement nest egg.

Review and if needed rebalance your account

Both the S&P 500 and the Dow Jones Industrial Average have hit a number of new record highs during 2014 on the heels of a very solid 2013.  In fact the S&P 500 Index is up almost threefold since the market lows of March, 2009.  If you haven’t recently rebalanced the asset allocation of your account back to your target allocation this is an excellent time to do so.  Better still if your plan offers auto rebalancing this is a great time to sign up if you haven’t already.

Be aware of any changes to the plan

Fall is open enrollment time for employee benefits for many companies.  While changes to the level of your salary deferral contributions as well as to the investment choices you make can be done throughout the year, many companies choose this time frame to announce changes to their plan for the upcoming year.  This might include the level of the employer match, the addition of a Roth 401(k) feature, or changes to the menu of investment choices available to you.  You need to be aware of any and all changes to the plan and be ready to make any applicable adjustments based upon your situation.

Be cautious when it comes to company stock 

Perhaps as a sub-set of the rebalancing section mentioned earlier if your account includes an investment in your company’s stock this is a good time to review how much you have allocated there and if needed pare that amount down.  There are no hard and fast rules but many financial advisors suggest keeping your allocation to company stock to 10% or less.  The rational here is that you already depend upon your employer for your livelihood; if the company runs into problems you might find yourself unemployed and holding a lot of devalued company stock in your retirement plan.

Get a handle on any old 401(k) accounts 

It’s not uncommon for folks to have several old 401(k) accounts from former employers.  It’s also not uncommon for these accounts to be neglected and unwatched.  If this describes you make this the year to get your arms around these accounts and make some decisions.  Roll them over to an IRA or if eligible to your current 401(k) plan.  If leaving one or more of them with that former employer is a good decision make sure you monitor the account, rebalance when needed, etc.  The point is even if these accounts are relatively small they can add up and help as you save for retirement.  Take charge and take affirmative action here.

Understand your options should you leave your current employer 

Let’s face it the last part of the year is often when companies do layoffs.  If you suspect that you will be impacted in this way you should at least start thinking about what you will do with your 401(k) account.  The same holds true if you are looking for a new job or considering going out on your own.

As we head into football season, the kid’s activities at school, and the holidays please make some time to tend to these and perhaps other items in connection with your 401(k) plan.  For many of us our 401(k) is our primary retirement savings vehicle, make sure that it is working hard for you.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

The Plutus Awards – Finance Blogs to Read and Discover

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The finalists for the 2014 Plutus Awards which celebrates the best in personal finance blogging were recently announced.  Check out the official announcement here.  I was very honored and flattered to have this blog named as a finalist in the Best Financial Planner Blog category.

What is most gratifying is that the finalists were chosen by other finance bloggers.  I am humbled by and grateful for being selected as a finalist among all of these outstanding finance blogs.  I read many of them and plan to check out the ones that I am not familiar with.

If you are looking for a list of finance blogs to read and learn from here is list of the finalists by category:

Best New Personal Finance Blog

FITnancials
Listen, Money Matters!
Rock Star Finance
Stapler Confessions
ValerieRind.com

Best-Kept Secret Personal Finance Blog

Debt Discipline
Free From Broke
L Bee and the Money Tree
The Frugal Exerciser
Wealthy Single Mommy

Best Designed Personal Finance Blog

Be Wealthy & Smart
Budget Blonde
Christian PF
Financially Blonde
Good Financial Cents

Most Humorous Personal Finance Blog

The Empowered Dollar
Financial Uproar
Frugalwoods
Len Penzo dot Com
Punch Debt in the Face

Best Microblog

@JimYih
@MMarquit
@MoneyCrashers
@rockstarfinance
@wisebread

Best Personal Finance Podcast

Cash Car Convert
Dough Roller
Listen Money Matters
Money Plan SOS
Stacking Benjamins

Best Retirement Blog

Escaping Dodge
Financial Mentor
Mr. Money Mustache
Retire by 40
Retire Happy

Best Entrepreneurship Blog

Beat the 9 to 5
Careful Cents
Create Hype
Microblogger
My Wife Quit Her Job

Best Blog for Teens/College Students/Young Adults

Broke Millennial
Making Sense of Cents
TeensGotCents
The Broke and Beautiful Life
Young Adult Money

Best International Personal Finance Blog

Monster Piggy Bank
Reach Financial Independence
The Skint Dad Blog
The Money Principle
Miss Thrifty

Best Canadian Personal Finance Blog

Blonde on a Budget
Boomer & Echo
Canadian Budget Binder
Canadian Finance Blog
Money after Graduation

Best Religious Personal Finance Blog

Bible Money Matters
Christian PF
Indebted and in Debt
Luke1428
Out of Your Rut

Best Tax Blog

The Blunt Bean Counter
Tax Girl
JoeTaxpayer
TaxProfBlog
The Wandering Tax Pro

Best Deals and Bargains Blog

$5 Dinners
Bargain Babe
Bargain Briana
CouponMom
Hip2Save

Best Frugality Blog

Club Thrifty
Frugal Rules
I Am That Lady
Pretty Frugal Living
Stapler Confessions

Best Debt Blog

Dear Debt
Debt Roundup
Enemy of Debt
Money Plan SOS
The Frugal Farmer

Best Investing Blog

Dividend Mantra
Financial Mentor
Investor Junkie
Personal Dividends
The College Investor

Best Contributor/Freelancer for Personal Finance

Cat Alford
Jason Steele
Michelle Schroeder
Miranda Marquit
Stefanie O’Connell

Best Green/Sustainability Blog

DIY Natural
Prairie Eco-Thrifter
Sustainable Life Blog
Sustainable Personal Finance
The Frugal Farmer

Best Financial Planner Blog

Financially Blonde
Good Financial Cents
Nerd’s Eye View
Mom and Dad Money
The Chicago Financial Planner

Lifetime Achievement

FMF (Free Money Finance )
FrugalTrader (Million Dollar Journey)
Jim Wang (Bargaineering)
Lazy Man (Lazy Man And Money)
Ramit Sethi (I Will Teach You To Be Rich)

BLOG OF THE YEAR

Afford Anything
Broke Millennial
Canadian Finance Blog
The Empowered Dollar
Making Sense of Cents
Mr. Money Mustache
PT Money
Stacking Benjamins
Wealthy Single Mommy
Wise Bread

Congratulations to all of the finalists.  Note I did leave off a couple of categories that were mostly internal blogging resources.

There is plenty of excellent personal finance information contained in the list above, time to get reading.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

Pension Payments – Annuity or Lump-Sum?

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I’m often asked by folks approaching retirement whether to take their pension as a lump-sum payment or as an annuity (a stream of monthly payments).  Investment News recently published this excellent piece on this topic which is worth reading.

As with much in the realm of financial planning the answer is that “it depends.”  Everybody’s situation is different.  Here are some factors to consider in deciding whether to take your pension payments as an annuity or as a lump-sum.

Factors to consider 

Among the factors to consider in determining whether to take your pension payments as an annuity or as a lump-sum are: 

  • What other retirement assets do you have?  These might include:
    • IRA accounts
    • 401(k) or 403(b) accounts
    • Taxable investments such as stocks, bonds, mutual funds, or others
    • Cash and CDs
  • Will you be eligible for Social Security?
  • Will the monthly pension payments be fixed or will they include cost of living increases?
  • Are you comfortable managing a lump-sum yourself and/or do you have a trusted financial advisor to help you?
  • What are your expectations for future inflation? 
  • What is your current tax situation and what are your expectations for the future?

Factors that favor taking payments as an annuity 

An annuity might be the right option for you if:

  • You have sufficient other retirement resources and are seeking to diversify your sources of income during retirement.
  • You are uncomfortable with managing a large lump sum distribution.
  • You are not eligible for Social Security.
  • Your pension payments have potential cost of living increases built-in (typical for public sector plans but not for private pensions).

Factors that favor taking payments as a lump-sum 

A lump-sum distribution might be the right option for you if:

  • You are comfortable managing your own investments and/or work with a financial advisor with whom you are comfortable.
  • You have doubts about the future solvency of the organization offering the pension.  This pertains to both a public entity (can you say Detroit?) and to a for-profit company.  In the latter case pension payments are guaranteed up to certain monthly limits set by the PBGC.  If you were a high-earner and your monthly payment exceeds this limit you could see your monthly payment reduced.
  • You are eligible for Social Security payments. 

The factors listed above favoring either the annuity or lump-sum options are not meant to be complete lists, but rather are intended to stimulate your thinking if you are fortunate enough to have a pension plan and the plan offers both payment options.  A full listing for each option would be much longer and might vary based upon your unique situation.

Moreover the decision as to how to take your pension payments should be made in the overall context of your retirement and financial planning efforts.  How does each payment method fit?

Lastly those evaluating these options should be aware of predatory financial advisors seeking to convince retirees from major corporations and other large organizations to roll their retirement plan distributions over to IRA accounts with their firm.  While this issue has seen a lot of recent press in terms of 401(k) plans it is also an issue for those eligible for a lump-sum pension distribution. If you are working with a trusted financial advisor an IRA rollover can be a viable option, but in some cases rollovers have been directed to questionable investment options putting many retirement investors at risk.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

3 Misunderstood Aspects of Social Security Benefits

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This post was written by Jim Blankenship, CFP®, EA, a fee-only financial advisor and owner of the excellent finance blog Getting Your Financial Ducks in a Row, where he covers IRAs, Social Security, Taxation, and most other aspects of financial planning.  I’ve known Jim for a long time and consider him an expert on Social Security and many other topics.  His blog is must-reading for me and should be for you as well.

The Social Security benefit landscape is a complicated and confusing place to navigate. It’s tough enough to figure out what is the best time to file for your own benefits, let alone trying to coordinate benefits for yourself and your spouse.  There are many confusing provisions of Social Security; below is a brief explanation of 3 misunderstood aspects of Social Security benefits.

Spousal benefits

When one spouse is eligible for retirement benefits, the other spouse is also eligible for a benefit based upon the first spouse’s record.  The largest Spousal Benefit is 50% of the other spouse’s Primary Insurance Amount (PIA).  The PIA is equal to that individual’s benefit available at Full Retirement Age (FRA). Full Retirement Age is 66 for folks born between 1946 and 1954, increasing to age 67 for those born in 1960 or after.

An individual may receive the Spousal Benefit as early as age 62, at a reduced rate. The other spouse must have filed for his or her own benefit – and could have suspended benefits (see File and Suspend below).

The confusing parts. The following areas always seem to trip up folks as they plan for the Spousal Benefit.

  1.  Only one of the spouses can receive Spousal Benefits at a time. The other spouse must have filed or filed and suspended for his or her own benefit.
  2.  At or after FRA, the individual can receive Spousal Benefits alone, separate from the retirement benefit on his or her own record (see Restricted Application below).  This allows the spouse receiving Spousal Benefits to delay receiving his or her own benefit, increasing that retirement benefit (via Delayed Retirement Credits).
  3.  Before FRA, filing for Spousal Benefits will result in a reduced Spousal Benefit. Plus, filing for Spousal Benefits before FRA will result in deemed filing for the individual’s own retirement benefit, with both benefits reduced. 

File and Suspend

When the individual who is eligible for a retirement Social Security benefit reaches Full Retirement Age (FRA), the individual may voluntarily suspend receiving benefits.  By suspending benefits, the individual has accomplished two things:

  1.  The individual has established a filing date for benefits. This means that the Social Security Administration has a record that the individual has filed for benefits. Since that record exists, other benefits become available based upon the individual’s Social Security record. Also, at some point in the future, the individual could change his or her mind and collect retroactive benefits from the established filing date to the present, continuing to receive monthly benefits as if the filing was never suspended.
  2. The individual will not receive benefits while the suspension is in place. If the individual does not collect retroactive benefits at a later date (see #1 above), Delayed Retirement Credits will add to his or her future benefit. This amounts to an 8% increase in benefits per year of delay.

Restricted Application 

As mentioned above, when an individual reaches Full Retirement Age (FRA) and is eligible for a Spousal Benefit, the individual may choose to file a Restricted Application for Spousal Benefits only.  This type of application provides for the individual to receive *only* the Spousal Benefit, based upon his or her spouse’s record. By doing so, he or she can delay filing for his or her own benefit to a later date.  With the delay, the individual’s own benefit will gain Delayed Retirement Credits; maximizing the benefit by age 70.

Jim Blankenship, CFP®, EA, is a fee-only financial advisor.  Check out his blog Getting Your Financial Ducks in a Row, follow him on Google+ and Facebook as well.  

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

Buying Life Insurance – 5 Questions to Ask

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This is post was written by Ike Devji, a Phoenix, AZ-based asset protection attorney and one of my oldest online friends.  I have spoken with Ike many times for advice on client-related issues and had the pleasure of meeting him in person a couple of years ago when he spoke to my financial advisor study group during a meeting we held in Phoenix.  Here Ike offers some practical advice to anyone who is considering buying life insurance.

Knowing the right questions to ask before buying life insurance is a key issue for consumers, especially considering the significant investment often involved and the exit costs involved in buying the wrong policy.

Covering all the options and nuances available in the life insurance marketplace in anything less than book form is nearly impossible. Here are 5 questions to ask before buying life insurance.

What is my annual premium and can it change?

This is the amount the insurance will cost you every year. In some cases the premium is fixed and in other cases it can change based on variety of factors such as the performance of the stock market and other indices. Make sure you understand your obligations before buying life insurance.   What you will lose or be left with if you don’t make what the policy expected and what was actually illustrated?

What does the policy illustration tell me?

I see lots of bold promises and spit-ball estimations of future performance made by insurance agents. The policy illustration is all that matters, so any conversation about what could happen if the policy exceeds the expectation that the illustration creates is moot; don’t engage in it and instead ask about the “minimum guarantees” if one exists at all. That’s the minimum you’ll earn in the policy if the worst happens. Remember, the column on the far right in most illustrations is the “perfect world” scenario, so look at and have the others explained as well.  Be sure to challenge all assumptions made in the policy illustration, as the saying goes if it sounds too good to be true it just might be.

Does this policy have a cash value?

The cash value is the amount of premium that builds up inside the policy and that may be available to the policy owner in the future. Some policies, like term insurance, have no cash value, while others have it immediately and some build it up over time. Be clear if yours does and exactly when it will be available if you need it and under what terms.

Roger’s comment:  Note that term insurance may be the appropriate vehicle for your needs.  Every situation is different; make sure that you are clear as to your reasons for buying the policy.  Life insurance is often a poor performing, high cost investment or retirement savings vehicle.  It may behoove you to pay only for the death benefit that you need and use more traditional investment vehicles for your investing and retirement savings needs.

Is my policy protected from creditors?

Know what the laws in your state of residence are and if your policy and both the cash value and “death benefit” (dollar amount paid upon your death) is protected by law or not. Asset protection of liquid assets is always a key focus of my concern. If the law is not in your favor, some simple trust planning can often protect your policy from both estate taxes and more active threats.

How long will my policies last, what is my exit strategy?

Again, this goes back to the illustration and specifies how long the coverage will be in place at a specific cost and what the death benefit will be through the term of the illustration. In some cases, keeping the policy alive may have significant increased costs while in others you may be able to reduce the death benefit to keep the premiums level or to stretch the policy for a longer period of years. Find out how flexible your policy will be in the future and weigh that as part of your risk-and-liquidity analysis.

Find out what happens if you can’t or don’t want to continue to make premium payments. With term insurance you usually lose what you paid; that’s OK, think of it the way you might car insurance. Other policies that were structured to have a future cash value or that have a current cash value early on however may have significant “surrender penalties.” Know what happens if you walk away and what options the policy may provide, including the specific surrender penalties that may be imposed in the policy. Do you have a need for life insurance in retirement for example?  The carrier could, for instance, keep all the cash value you built up if you don’t keep it for a minimum number of years.

This list just scratches the surface and is deceptively simple. Our goal here was to introduce some of the key concepts and questions you must be familiar with, so you can do your own due diligence when buying life insurance, whether a simple term policy or a complex premium-financed strategy with a triple-reverse galactic split dollar that includes a trip to the Bahamas to read the policy.

Roger’s comment:  Life insurance is a versatile and often complex financial tool that can have uses in estate planning, asset protection, as a business succession tool, and it can provide a death benefit to your family.  Make sure you fully understand why you are buying life insurance, don’t just succumb to a slick sales pitch.

Attorney Ike Devji has a decade of practice devoted exclusively to Asset Protection and Wealth Preservation planning. He works with a national client base including 1000’s of physicians and business owners often through their local attorney, CPA or financial advisor. Together, he and his associates protect billions of dollars in personal assets for these clients. Ike also regularly writes, teaches and speaks on these issues to executives, physicians and other professionals nationally. See his work in WORTH, Advisor Today, Physician’s Practice and at www.ProAssetProtection.Com. 

As always, the information presented here is general and educational and can never replace the advice of experienced counsel specific to your assets or situation.  

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

Money Conversations – Caring for Aging Parents

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Thanks to Cheryl J. Sherrard, CFP®, NAPFA Registered Advisor and Director of Planning for Clearview Wealth Management in Charlotte, NC for contributing this post.  

This post is a follow-up to my recent post Family Financial Conversations and to the post previously contributed by Cheryl’s colleague Megan Rindskopf Meaningful Family Conversations for the Holidays.

We all know that when we get married, we marry the entire family.  What we may not realize is that each of us comes into a marriage with expectations about how we will interact with and assist our families.  Most couples talk about and come to consensus on topics such as when to visit which set of parents and can usually resolve that by rotating holidays with their respective families.

However, the discussions you may not have had revolve around each of your expectations surrounding caring for aging parents and in-laws.  You may be fortunate if the prior generation has already dealt with planning for any needs that will arise in their later lives, but you and your spouse should consider what you know about their current situation, their preparedness for unexpected issues and your ability and willingness to help and supplement their care if needed. While we can’t control the specific course of events nor the time frame of how our parents age, married couples can and should proactively discuss what their expectations are and how they want to approach caring for aging parents should a need arise.

Stuck in the middle

Consider the following;   a married couple are in their fifties and are busy saving and preparing for their eventual retirement.  They both work outside the home in fulfilling careers and can finally see the end in sight for college tuition payments for their children.  Because they fully paid for their children’s educations, they believe that if they save aggressively over the next ten years, they can reach their retirement goals.   Suddenly, the husband’s mother experiences a stroke and needs extensive rehabilitation, which the husband automatically assumes they will assist with.  He doesn’t want his mom rehabbing in a facility; he wants to move her into their house and care for her there.  

However, because of the demands of his career, care and coordination for his mom would likely fall to his wife and would require her to work part-time or not at all.  The wife never considered moving parents into their home in the event of a need and although she loves her mother-in-law, she isn’t sure it would be good for their marriage or her relationship with her MIL to bring her into their home.  She is happy to coordinate care and assist on occasion, but she isn’t sure how their family can aggressively save for their own retirement if she has to scale back on work in order to provide care to her MIL.

Caring for aging parents takes planning

The example above illustrates a case where an in-depth discussion between husband and wife well in advance of any parental issues may have eliminated some misunderstandings and potential disagreements down the road.  Caring for aging parents can be stressful enough simply because it is difficult to see them struggling.  Combine that with the stressors of parents vs. in-laws, the demands of careers, teen or young adult children, saving for retirement and you have a recipe for stress and strain in a marriage.

What should you be talking about with your significant other, prior to the onset of any parental aging issues?

  • What are the expectations each of you have for how you want to care for your parents if they need your help?
  • Are the relationships (spouse, children, parents, in-laws) strong enough to withstand one of the parents being assisted by you?
  • What are your parent’s expectations for how they would want to handle a long-term care need if it occurred?
  • Do your parents have adequate resources, either assets or appropriate insurance, to cover the cost of paid caregivers?
  • Does your home have adequate space to accommodate the additional person, as well as provide some level of privacy for them and you?
  • Will daily care of a parent further inhibit your ability to adequately save for your own retirement?
  • If you decided to assist, which of you would be the likely caregiver and why? 

These are just a few of the questions that spouses/partners need to discuss, well in advance of any need on the part of a parent.  It is important to know that there is no right answer, as it will vary by the circumstances of each family and extent of the parent’s care needs.  Recognize that even if you do plan, things may change and you will have to be flexible to deal with whatever the situation presents.  However, having the discussion in advance will help to eliminate some of the stress on your relationship by bringing expectations out into the open and working to find common ground for the two of you.

Cheryl J. Sherrard, CFP®, NAPFA Registered Advisor is Director of Planning for Clearview Wealth Management in Charlotte, NC.  Cheryl can be reached at csherrard@cvwmgmt.com and via Twitter.  

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

Family Financial Conversations

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Family financial conversations dealing with retirement, estate planning, elder care issues and other important financial matters between parents and adult children can be difficult at best.  A recent article by Fidelity highlighted some of the key issues involved.

According to Fidelity:

“In life and money, timing is often everything. And that’s particularly true when it comes to sensitive family discussions about retirement security, eldercare, and estate planning.

According to Fidelity’s latest Intra-Family Generational Finance study,1 three-fourths of parents and their adult children agree it’s important to have frank conversations on such topics, but almost two-thirds (64%) can’t agree on when. While parents would prefer to wait until after retirement, their children want the conversations to take place well before their parents retire or experience health issues.” 

“These discussions aren’t always easy, but there can be real emotional and financial consequences when they don’t happen or lack sufficient depth,” says John Sweeney, executive vice president of retirement and investing strategies at Fidelity. “It’s absolutely critical that families come together to sort through important matters related to such things as retirement preparedness, caregiving responsibilities, estate planning, and the tax implications of an inheritance.”

Suggestions for successful family financial conversations

 

How to have key family discussions

While these steps suggested in the Fidelity piece are no guarantee of a successful dialog, I think you will agree these steps offer a solid framework for these often difficult conversations.

PREP for family financial conversations

 The Fidelity piece offered this outline (their PREP plan) to break the ice and get these family meetings going: 

Make family meetings on retirement issues easier

While every family and every family’s situation is different, this is a good framework from which to start.

What’s at stake?

These conversations can be difficult because there is a lot at stake.

  • How will your parents provide for their retirement?
  • Where will the money come from in the event of a Long-Term Care situation?
  • Who will take over your parent’s financial affairs in the event they become unable to do so?
  • What are your parent’s wishes in terms of a myriad of issues including disposition of their assets upon their death, burial, staying in their home, etc.? 

Besides these issues a lack of communication and planning can be costly to the family in terms of taxes and other issues in terms of transferring your parent’s wealth to the next generation.  While this might sound like it only pertains to the very wealthy this is not the case.

At the end of the day what is really at stake is the opportunity for parents to communicate their financial wishes to their adult children and for the children to help their parents make these desires come true.

There is nothing easy about discussing these issues and having these family financial conversations.  But any difficulties that might exist will be dwarfed by the potential guilt and regret felt by both parents and children later on if this dialog does not occur.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

401(k) Loans by the Numbers

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The topic of borrowing from one’s 401(k) account is always a bit controversial.  Regardless of your view, the folks at TIAA-CREF have compiled some interesting data on 401(k) loans.

Key findings about 401(k) loans 

In their study of 401(k) loans TIAA-CREF found:

  • Getting Out of Debt – Paying off debt was cited as the top reason for taking out a loan from retirement plan savings (46 percent), yet only 26 percent of respondents said it was a good reason to take out a loan.
  • Paying for the Unexpected – The No. 2 reason overall for taking a loan was to pay for an emergency expenditure (35 percent).
  • Borrowing Against Their Savings – Nearly half (47 percent) of those who have taken out a loan from their retirement plan savings borrowed more than 20 percent of their savings, with 9 percent of respondents borrowing more than 50 percent. 

Moreover, they found that nearly One-Third of Americans Have Taken Out A Loan From Their Retirement Plan Savings and that 43 percent of those who have taken loans have taken two or more. 

401(k) loans – some statistics 

The TIAA-CREF study offered some interesting numbers regarding 401(k) loans:

201921_440001_June_Survey_Info_Graphic_v7

 “Women were more likely than men (52 percent vs. 41 percent) to take out a loan to pay off debt; however, men were more likely (40 percent vs. 29 percent) to take out a loan to pay for an emergency expenditure. 

Nearly half (47 percent) of those who have taken out a loan from their retirement plan savings borrowed more than 20 percent of their savings, with 9 percent of respondents borrowing more than 50 percent. 

In addition to borrowing funds from retirement savings plans, many Americans are also contributing less to their plans while they are paying back the loan. More than half of respondents (57 percent) who took out loans decreased their contribution rate during the payback period. Those age 18-34 were the most likely to decrease their contribution amount (81 percent). Forty-eight percent of women kept the same contribution rate while paying back the loan, compared to only 39 percent of men.”

Questions to ask before taking a 401(k) loan 

Morningstar’s director of personal finance Christine Benz recently wrote an excellent piece 4 Key Questions to Ask When Considering a 401(k) Loan.  Christine suggested answering these four questions before deciding to take a loan from your 401(k) account:

  • Does my intended use of funds promise a higher rate of return than leaving the money be?
  • Is my job secure?
  • Can I realistically pay this back?
  • Is my retirement plan on track? 

Is a 401(k) loan right for you?

I’m generally not a fan of using your 401(k) as a piggy bank but the reality is that there can be situations where the money is needed.  Things like a medical situation, a job loss, or other dire situations might necessitate a 401(k) loan. 

In the words of TIAA-CREF Executive Vice President Teresa Hassara: 

“Too many people have struggled since the 2008 financial crisis and have looked at loans from their retirement plans as a way to ease financial stress. However, individuals should weigh all of their options carefully before borrowing from their plan savings or reducing their contributions. Loans can undermine retirement savings and cause investors to miss out on earnings from rising markets. It’s important to evaluate the benefits of taking a loan now against the need for those earnings to build long-term retirement security. Working with a financial advisor can help people make the best decision for their life stage and retirement goals.”

I couldn’t agree more.  Make sure you consider all factors in your financial situation before going the 401(k) loan route.

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