How do these investment approaches differ?
Ever heard the term “strategic investing”? How about “tactical investing”? At a glance, you might assume that both these phrases describe the same investment approach.
While both approaches involve the periodic adjustment of a portfolio and holding portfolio assets in varied investment classes, they differ in one key respect. Strategic investing is fundamentally passive; tactical investing is fundamentally active. An old saying expresses the opinion that strategic investing is about time in the market, while tactical investing is about timing the market. There is some truth to that.1
Strategic investing focuses on an investor’s long-range goals. This philosophy is sometimes characterized as “set it and forget it,” but that is inaccurate. The idea is to maintain the way the invested assets are held over time, so that through the years, they are assigned to investment classes in approximately the percentages established when the portfolio is created.1
Picture a hypothetical investor. Assume that she starts investing and saving for retirement with 60% of her invested assets held in equities and 40% in fixed-income vehicles. Now, assume that soon after she starts investing, a long bull market begins. The value of the equity investments within her portfolio increases. Years pass, and she checks up on the portfolio and learns that much more than 60% of the value of her portfolio is now held in equities. A greater percentage of her portfolio is now subject to the ups and downs of Wall Street.
As she is investing strategically, this is undesirable. Rebalancing is in order. By the tenets of strategic investing, the assets in the portfolio need to be shifted, so that they are held in that 60/40 mix again. If the assets are not rebalanced, her portfolio could expose her to more risk than she wants – and the older she gets, the less risk she may want to assume.1
Tactical investing responds to market conditions. It looks at the present and the near future. A tactical investor attempts to shift the composition of a portfolio to reduce risk exposure or to take advantage of hot sectors or new opportunities. This requires something of an educated guess – two guesses, actually. The challenge is to appropriately decide when to adjust the portfolio in light of change and when to readjust it back to the target investment mix. This is, necessarily, a hands-on style of investing.1
Is it better to buy and hold, or simply, to respond? This question has no easy answer, but it points out the divergence between strategic and tactical investing. A strategic investor may be inclined to “buy and hold” and ride out episodes of Wall Street turbulence. The danger is in holding too long – that is, not recognizing the onset of a prolonged downturn that could bring losses without much hope for a quick recovery. On the other hand, the tactical investor risks buying high and selling low, for figuring out just when to increase or decrease a portfolio position can be difficult.
Investors have debated which strategy is better for decades. One approach may be better suited than another at a particular point in time. Adherents of strategic investing point to the failure of active asset management to beat the equity benchmarks. A 2018 Dow Jones Indices SPIVA Report noted that across the five years ending June 30, 2018, more than 76% of U.S. large-cap funds failed to return better than the S&P 500. A proponent of tactical investing might counter that by arguing that this percentage might be much lower within a shorter timeframe. Ultimately, an investor has to consider their risk tolerance, objectives, and investing outlook in evaluating both approaches.2
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - money.usnews.com/investing/investing-101/articles/2018-07-25/whats-the-difference-between-strategic-and-tactical-asset-allocation [7/25/18]
2 - us.spindices.com/spiva/#/reports [2/5/19]
Being healthy not only makes you feel good, it may also help you financially.
We constantly hear how important it is to maintain a healthy lifestyle. That is not always easy, especially in the face of temptation or the easy option of procrastination. For some, the monetary benefits of maintaining a healthy lifestyle may provide an incentive.
Being healthy not only makes you feel good, it may also help you financially. For example, a recent Johns Hopkins Bloomberg School of Public Health study determined that a 40-year-old who simply moves from being obese to overweight could save an average of $18,262 in health care costs over the rest of his or her lifetime. If that person maintains a healthy weight, the average potential savings increase to $31,447.1
If you’re wondering how your health habits might be affecting your bottom line, consider the following:
Regular preventative care can help reduce potential health care costs. Even minor illnesses can lead to missed work, missed opportunities, and potentially lost wages. Serious illnesses often involve major costs like hospital stays, medical equipment, and doctor’s fees. Preventative dentistry may help you reduce dental costs as well.
In a way, staying healthy helps our potential to save for retirement. If your health declines to the point where you cannot work, that hurts your income and your ability to contribute to retirement accounts. The threat is real: the Social Security Administration notes that a quarter of us will become disabled at some point during our working years.2
Overweight workers may be subjected to wage discrimination. A LinkedIn study of almost 4,000 full-time and part-time workers found that the workers whose weights were greater than normal earned an average of $2,512 less annually than the others.3
Higher weight seems to be a factor in overall health care costs for many. Ask the Centers for Disease Control and Prevention. The CDC notes that per-year health care expenses are about 41% higher ($4,870) for an obese individual than for a person of normal weight ($3,400). The biggest factor in this difference: prescription drug costs.4
Some habits that lead to poor health can be expensive in themselves. Smoking is the classic example. A pack of cigarettes costs anywhere from $5-14, which means ballpark expenses of $2,000-5,000 or more a year in expenses for a pack-a-day smoker. Smokers also pay higher premiums for health, disability, and life insurance.5
By focusing on your health, eliminating harmful habits, and employing preventative care, you may be able to improve your self-confidence and quality of life. You may also be able to reduce expenses, enjoy more of your money, and boost your overall financial health.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - https://www.bankrate.com/banking/savings/healthier-lifestyle-can-save-you-money/ [9/25/18] 2 - https://www.cnbc.com/2018/11/11/protect-yourself-from-a-career-derailment-that-trips-up-1-in-4-workers.html [11/11/18]
3 - https://www.foxbusiness.com/features/employers-pay-overweight-workers-less-new-study-reveals [11/5/18] 4 - https://abcnews.go.com/Health/Healthday/story?id=8184975&page=1 [7/28/18] 5 - https://money.usnews.com/money/personal-finance/family-finance/articles/the-real-cost-of-smoking [11/20/18]
What all new and prospective homeowners need to know.
If you arrange a mortgage, your lender will want you to have homeowners insurance. This coverage is critical for protecting your home and personal property against various potential liabilities.
A homeowners insurance policy is actually a package of coverages. These policies commonly offer the following forms of protection:
*Dwelling coverage insures your house and any attached structures, including fixtures such as plumbing and electrical and HVAC systems, against damages.1
*Other Structures coverage is included to compensate you for damage to structures unattached to the main dwelling on your property, such as a detached garage, tool shed, or fence.1
*Personal Property coverage addresses damage to your personal possessions, such as your appliances, furniture, electronics, and clothes.1
*Loss of Use coverage reimburses you for additional living expenses if you are unable to live in your home due to damages suffered.1
*Personal Liability coverage is designed to pay out claims if you are found liable for injuries or damages to another party. As an example, say someone attends a barbeque held in your backyard, then stumbles over a tree root and breaks a wrist or an ankle.1
*Medical Payments coverage pays the medical bills incurred by people who are hurt on your property, or hurt by your pets. This is no-fault coverage. If someone is hurt at your house, any resulting medical bills may be sent by that person to your insurer.1
These coverages pertain only to losses caused by a peril covered by your policy. For instance, if your policy doesn’t cover earthquake damage, then losses will not be reimbursed.1
The types of covered perils will depend on the type of policy you buy. Special Form policies are the most popular, since they insure against all perils, except those specifically named in the policy. Common exclusions include earthquakes and floods. Typically, flood insurance is obtained through the National Flood Insurance Program, while earthquake coverage may be obtained through an endorsement or a separate policy. Some homeowners are reluctant to buy flood or earthquake coverage; they think it is too expensive and may never be needed. The thing is, the future cannot always be guessed by looking at the past.2
Your policy will of course limit the amount of covered losses. If you have a valuable art collection or jewelry, you may want to secure additional insurance on those items.
When you scrutinize a policy, see if it insures your residence for replacement cost or actual cash value. Actual cash value is less preferable: it may not cover all your losses, as the value of your personal property can be affected by wear and tear, and your home’s value can be affected by housing market fluctuations. If your home is insured for replacement cost, then the insurance carrier will pay the expenses of using materials of similar kind and quality to rebuild or repair your home.3
As a last note, you may also want Umbrella Liability coverage. Do you consider yourself wealthy? You may find the liability limits on your current homeowners policy inadequate. For a greater degree of coverage, you might elect to complement it with an umbrella policy.4
1 - https://www.iii.org/article/what-covered-standard-homeowners-policy [12/3/18]
2 - https://www.valuepenguin.com/types-homeowners-insurance [9/25/18] 3 - https://www.thebalance.com/replacement-cost-insurance-vs-actual-cash-value-4154015 [11/18/18] 4 - https://www.kiplinger.com/article/insurance/T028-C000-S002-why-you-need-an-umbrella-insurance-policy.html [9/25/18]
That truth must always be recognized.
When financial markets have a bad day, week, or month, discomforting headlines and data can swiftly communicate a message to retirees and retirement savers alike: equity investments are risky things, and Wall Street is a risky place.
All true. If you want to accumulate significant retirement savings or try and grow your wealth through the opportunities in the markets, this is a reality you cannot avoid.
Regularly, your investments contend with assorted market risks. They never go away. At times, they may seem dangerous to your net worth or your retirement savings, so much so that you think about getting out of equities entirely.
If you are having such thoughts, think about this: in the big picture, the real danger to your retirement could be being too risk averse.
Is it possible to hold too much in cash? Yes. Some pre-retirees do. (Even some retirees, in fact.) They have six-figure savings accounts, built up since the Great Recession and the last bear market. It is a prudent move. A dollar will always be worth a dollar in America, and that money is out of the market and backed by deposit insurance.
This is all well and good, but the problem is what that money is earning. Even with interest rates rising, many high-balance savings accounts are currently yielding less than 0.5% a year. The latest inflation data shows consumer prices advancing 2.3% a year. That money in the bank is not outrunning inflation, not even close. It will lose purchasing power over time.1,2
Consider some of the recent yearly advances of the S&P 500. In 2016, it gained 9.54%; in 2017, it gained 19.42%. Those were the price returns; the 2016 and 2017 total returns (with dividends reinvested) were a respective 11.96% and 21.83%.3,4
Yes, the broad benchmark for U.S. equities has bad years as well. Historically, it has had about one negative year for every three positive years. Looking through relatively recent historical windows, the positives have mostly outweighed the negatives for investors. From 1973-2016, for example, the S&P gained an average of 11.69% per year. (The last 3-year losing streak the S&P had was in 2000-02.)5
Your portfolio may not return as well as the S&P does in a given year, but when equities rally, your household may see its invested assets grow noticeably. When you bring in equity investment account factors like compounding and tax deferral, the growth of those invested assets over decades may dwarf the growth that could result from mere checking or savings account interest.
At some point, putting too little into investments and too much in the bank may become a risk – a risk to your retirement savings potential. At today’s interest rates, the money you are saving may end up growing faster if it is invested in some vehicle offering potentially greater reward and comparatively greater degrees of risk to tolerate.
Having a big emergency fund is good. You can dip into that liquid pool of cash to address sudden financial issues that pose risks to your financial equilibrium in the present.
Having a big retirement fund is even better. When you have one of those, you may confidently address the biggest financial risk you will ever face: the risk of outliving your money in the future.
1 - valuepenguin.com/average-savings-account-interest-rates [10/4/18]
2 - investing.com/economic-calendar/ [10/11/18]
3 - money.cnn.com/data/markets/sandp/ [10/11/18]
4 - ycharts.com/indicators/sandp_500_total_return_annual [10/11/18]
5 - thebalance.com/stock-market-returns-by-year-2388543 [6/23/18]
There is really no reason to wait.
October is here – the ideal time for college students to apply for financial aid. October 1, in fact, marks the first day a current or future college student can submit a Free Application for Federal Student Aid, or FAFSA, for the 2019-20 academic year. Since some states offer aid on a first-come, first-serve basis, submitting a FAFSA as soon as possible is wise.1,2
You can even apply using your phone. Install the new myStudentAid app created by the Department of Education, available for iOS and Android operating systems. While filling out the FAFSA takes time whether you use a PC, tablet, phone, or pen, it may feel easier to start on a phone. In fact, Mark Kantrowitz, publisher of SavingForCollege.com, just remarked to CNBC that the mobile app was “much easier to use, even fun.” The FAFSA asks students and parents more than 100 questions, so any degree of “fun” is good. (Thanks to the new app, you can start filling out a FAFSA on a computer and finish it on a phone, and vice versa.)1,2
Due to the new phone app, more FAFSAs might be filed this year. Slightly more than 20 million FAFSAs were submitted for the 2014-15 award cycle; in contrast, just over 10 million were filed for 2018-19. This decline might reflect an improved economy and a boost in household wealth, but it may be temporary.2
What should your student have handy while filling out the form? After creating an FSA ID (a username, a password), your student will need to reference all kinds of personal information, some of which will be yours. The FAFSA asks for birth dates, Social Security numbers, and driver’s license numbers. It asks for financial information: savings account balances, home values, investment account values. (It does not require you to report balances of workplace retirement plan accounts, pension plans, or IRAs.) Untaxed income must be figured; interest income and child support fall into that category.1
All FAFSAs now require federal tax information from the year that is two years prior to the current award cycle. In other words, on this year’s FAFSA, you need to include federal tax information from 2017. This may not be as arduous as it sounds because you can use the Internal Revenue Service Data Retrieval Tool (irsdataretrievaltool.com). This online tool lets you import your 2017 federal tax information straight into the FAFSA; it is accessed through a “Link to I.R.S.” button. (Information input into the Data Retrieval Tool must match what appeared in the federal tax return.)2,3
A FAFSA must list at least one college or university that the student currently attends or wants to attend. When multiple schools are listed, grant awards are made to the school listed first. (Colleges and universities can also be removed from a list of multiple schools.)1
Anyone who provides data for a FAFSA (a student, a parent, a college access advisor) must also sign that FAFSA. Without the appropriate signatures, the application is invalid. When it comes to these signatures, here is a tip all parents should remember: never hit the “Start Over” button when you log in to add your signature. If you accidentally click on that, all the information that your student has spent hours entering will be erased.1,2
Financial questions should not be left blank on the FAFSA. If the answer to a question is “none,” put a zero instead of nothing at all. Every monetary amount that includes cents should be rounded to the nearest dollar.1
Unsurprisingly, some families want help when filling out the FAFSA. Recognizing this, the Department of Education offers a 66-page guide to completing the form; you will find it at studentaid.ed.gov. It also provides a FAFSA hotline: (800) 433-3243. You may want to chat with a financial professional who focuses on college planning or a university financial aid officer for additional insight.1
The FAFSA is often a pathway to considerable financial assistance: grants, work study programs, federal student loans. The average FAFSA applicant for the 2015-16 school year received roughly $8,500. A FAFSA costs nothing to fill out or send around, and there is absolutely nothing to lose in submitting one.2
1 - tinyurl.com/yd7l9u9z [9/12/18]
2 - cnbc.com/2018/09/18/you-can-now-apply-for-financial-aid-on-your-phone.html [9/18/18]
3 - studentaid.ed.gov/sa/resources/irs-drt-text [9/27/18]
Riding all of the stock market’s ups – and none of its downs – is a popular fantasy. Who wouldn’t want to skip rough patches such as early 2018, late 2015 or all of 2008?
Alas, it’s impossible. Even the greatest investors are wrong maybe a third of the time.
But here’s some good news: You don’t need perfect timing to achieve marvelous returns. Time in the market beats timing the market – almost always.
Why? Consider three make-believe siblings, each with $10,000 to invest in U.S. stocks each year from 1977 to 2018 – a stretch that includes five bear markets.
Pretend they bought the Standard & Poor's 500 stock index (broader than the Dow).
Janette, with perfect timing, invests at each year’s monthly market low, earning each year’s full upside. Jebediah, a terrible timer, invests at each year’s monthly market high, missing more gains and capturing more downside. Jackpot, the clever youngest brother, knows he has no timing ability. He invests the first day of each year.
Fast-forward to June 2018. Janette’s 41 years of perfect timing earned an average annual return of 11.4 percent for a cool $8.2 million. No-timing Jackpot was close behind, with an 11.1 percent return and $7.8 million – still great. Even terrible-timing Jebediah got a 10.8 percent return – turning his $410,000 in contributions into $6.7 million. Sure, it's rewarding enough, but lagging little brother, no-timing Jackpot by $1.1 million is a high price to pay for bad timing.
Being Janette is impossible. Even trying to be Janette runs the risk of becoming Jebediah – or worse. Fancy timing increases the likelihood of errors.People want to buy after stocks rise, not after they drop. Were you eagerly buying this March, when the early-year correction avalanched? Or in February 2016 as headlines hyped election risks at the bottom of an eight-month slide? Or in March 2009 at the depths of the financial crisis? As I said last week, the best time to buy is surely when people least want to.
But time overwhelmingly swamps timing, good or bad. How so?
Consider Jill and Joaquin. Jill invests $10,000 in U.S. stocks each year, starting in 1977. Like Jebediah, Jill has terrible timing, buying at each year’s monthly market high. Then, Jill stops contributing after 10 years, stops trading and just lets her S&P 500 stocks ride. Meanwhile, procrastinating Joaquin waits till 1987 to start investing his $10,000 annually. Yet Joaquin has perfect timing and, unlike Jill, keeps adding $10,000 every year through 2018. Surely this deck must be stacked against Jill.
No. Even with poor timing, Jill turned her $100,000 in contributions to $216,576 in stocks by the time Joaquin invests his first $10,000. Her head start more than offsets Joaquin’s perfect timing and greater total contributions. In June 2018, she has just over $5 million. Joaquin has less than half that, around $2.1 million. Jill’s compound time-in-the-market growth trounced Joaquin’s perfect timing.
Think you’d never be Joaquin? As I wrote last month, many investors left stocks after the financial crisis and stayed away for years. Many still haven’t returned. Yet since the March 9, 2009, low, U.S. stocks are up 419 percent with dividends. Since the precrisis peak? Up 132 percent. You didn’t need marvelous timing to come out ahead.
Remember these examples the next time markets sag and you want to bail – or the next time you have cash you’re waiting to invest. Is your desire to avoid bad times worth the risk of being Jebediah or Joaquin?
Author: Keneth Fisher
Save and invest, year after year, to put the full power of compounding on your side.
Have you been saving for retirement for a decade or more? In the foreseeable future, something terrific is likely to happen with your IRA or your workplace retirement plan account. At some point, its yearly earnings should begin to exceed your yearly contributions.
Just when could this happen? The timing depends on several factors, and the biggest factor may simply be consistency – your ability to keep steadily investing and saving. The potential for this phenomenon is apparent for savers who start early and savers who start late. Here are two mock scenarios.
Christina starts saving for retirement at age 23. After college, she takes a job paying $45,000 a year. Each month, she directs 10% of her salary ($375) into a workplace retirement plan account. The investments in that account earn 6% per year. Thirteen years later, Christina is still happily working at the same firm and still regularly putting 10% of her pay into the retirement plan each month. She now earns $58,200 a year, so her monthly 10% contribution has risen over the years from $375 to $485.1
The ratio of account contributions to account earnings has tilted during this time. After eight years of saving and investing, the ratio is about 2:1 – for every two dollars going into the account, a dollar is being earned by its investments. During year 13, the ratio hits 1:1 – the account starts to return more than $500 per month, with a big assist from compound interest. In years thereafter, the 6% return the investments realize each year tops her year’s worth of contributions to the principal. (Her monthly contributions have grown by more than 20% during these 13 years, and that also has had an influence.)1
Fast forward to 35 years later. Christina is now 58 and nearing retirement age, and she earns $86,400 annually, meaning her 10% monthly salary deferral has nearly doubled over the years from the initial $375 to $720. This has helped her build savings, but not as much as the compounding on her side. At 58, her account earns about $2,900 per month at a 6% rate of return – more than four times her monthly account contribution.1
Lori needs to start saving for retirement at age 49. Pragmatic, she begins putting $1,000 a month into a workplace retirement plan. Her account returns 7% a year. (For this example, we will assume Lori maintains her sizable monthly contribution rate for the duration of the account.) By age 54, thanks to compound interest, she has $73,839 in her account. After a decade of contributing $12,000 per year, she has $177,403. She manages to work until age 69, and after 20 years, the account holds $526,382.2
These examples omit some possible negatives – and some possible positives. They do not factor in a prolonged absence from the workforce or bad years for the market. Then again, the 6% and 7% consistent returns used above also disregard the chance of the market having great years.
Repeatedly, investors are cautioned that past performance is no guarantee or indicator of future success. This is true. It is also true that the yearly total return of the S&P 500 (that is, dividends included) averaged 10.2% from 1917-2017. Just stop and consider that 10.2% average total return in view of all the market cycles Wall Street went through in those 100 years.2
Keep in mind, when the yearly earnings of your IRA or employer-sponsored retirement plan account do start to exceed your yearly contributions, that is not a time to scale back your contributions. Your retirement account will not do all your retirement saving work for you at that point; you still need to keep the momentum of your saving effort going – and maintaining it will assist the compounding.
1 - time.com/money/5204859/retirement-investments-savings-compounding/ [3/21/18]
2 - fool.com/investing/2018/05/16/how-to-invest-1000-a-month.aspx [5/16/18]
It might seem like retirement is a time to take it easy and devote yourself to gardening, golfing, and napping. But don't take it too easy, say Harvard experts. For optimal well-being, you need to stay engaged — with your own interests as well as with other people.
Making the change
Newly retired men face some typical difficulties. One is creating a new routine after leaving behind the nine-to-five grind. "During that phase of going from a lot of structure to almost no structure, men can exhibit the same signs as someone who is overworked," explains Dr. Randall Paulsen, a psychiatrist at Harvard-affiliated Brigham and Women's Hospital.
Retirement can also come with changes in a man's relationship with a spouse or partner. "If you have a partner at home who is not used to you being around all the time, there has to be a recalibration," says Dr. Michael Craig Miller, assistant professor of psychiatry at Harvard Medical School.
Partners in retirement may need time to adjust to the new circumstances. "Older couples have to, in a sense, learn how to enjoy having lunch together," Dr. Paulsen says.
In retirement, you expect to have more time — but to do what? Doing either too little or too much can lead to the same symptoms, such as anxiety, depression, appetite loss, memory impairment, and insomnia.
The solution can be just about anything — from volunteering once a week, to taking a class, to launching a new career — as long as it means something to you personally and keeps you coming back for more. It's a plus if you choose a social activity, because research suggests that social engagement is as important to your health as exercise and a healthy diet.
Dr. Miller cites the example of men who take their interest in a sport or hobby to a new level in retirement. They eagerly read or study to improve their knowledge or skill. They interact with peers who have similar interests. They work with teachers or trainers regularly and stick to a rigorous schedule of practice.
The trick is to find a balance of activities that draw you in and stretch you out. "We grow and keep our brains alive by being engaged with things that challenge us," Dr. Miller says.
Whatever you choose, don't make it too easy — or too hard. A moderate amount of stress lights up our brain circuits and focuses our attention; an overload can do harm. "The sweet spot is the stuff that's just outside your reach, where you have to work and concentrate," Dr. Miller says. "Those are the kinds of challenges that help us feel alive and engaged."
Retrieved from: https://www.health.harvard.edu/mens-health/retirement-stress-taking-it-too-easy-can-be-bad-for-you
To consolidate or not: that is the question.
Some couples elect to consolidate their personal finances, while others largely keep their financial lives separate. What choice might suit your household?
The first question is: how do you and your partner view money matters? If you feel it will be best to handle your bills and plan for your goals as a team, then combining your finances may naturally follow.
A team approach has its merits. A joint checking account is one potential first step: a decision representing a commitment to a unified financial life. When you go “all in” on this team approach, most of your incomes go into this joint account, and the money within the account pays all (or nearly all) of your shared or individual bills. This is a simple and clear approach to adopt, especially if your salaries are similar.
You need not merge your finances entirely. That individual checking or savings account you have had all these years? You can retain it – you will want to, for there are some things you will want to spend money on that your spouse or partner will not. Sustaining these accounts is relatively easy: month after month, a set amount can be transferred from the joint account to the older, individual accounts.
A financial plan may focus the two of you on the goal of building wealth. Investment and retirement plan accounts are individual by design, but a plan can serve as a framework to unite your individual efforts.
You may want separate financial accounts. Some couples want to pay household bills 50/50 per partner or spouse, and some partners and spouses agree to pay bills in proportion to their individual earnings. That can also work.
This may have to change over time. Eventually, one spouse or partner may begin to earn much more than the other. Or, maybe only one spouse or partner works for a while. In such circumstances, splitting expenses pro rata may feel unfair to one party. It may also impact decision making – one spouse or partner might think they have more “clout” in a financial decision than the other.
Even if you staunchly maintain separate finances throughout your relationship, you may still want to have some type of joint account to address basic monthly household costs.
What else might you consider doing financially? Well, one good move might be to consult and retain a qualified financial professional to provide insight and guidance as you invest and save toward your goals.
Think about how your tax situation might change if you marry. Some people marry and correspondingly change their withholding designation from single to married on their W-4 form. In return, they are shocked to find their income taxes are much more than they ever expected – or they discover they have an enormous refund coming their way. Adjusting your withholding earlier in a calendar year makes more of a difference than if you do so later.1
If marriage means a name change, be sure to update bank account, investment account, Social Security account, and insurance policy data with time to spare. Marrying couples will probably want to redo beneficiary forms on accounts and policies and make various accounts joint tenants with right of survivorship (JTWROS) accounts or Totten trusts (also known as payable-on-death accounts). A JTWROS or POD account allows the assets involved to pass to a surviving spouse without probate.2,3
Take a look at the auto and health insurance coverage each of you have. You might notice some overlap, and you may want to address that.
The Knot, the wedding planning website, says that the number one priority for 55% of marrying couples is uniting personal finances. Agreeing how to handle your household finances can be a goal whether you marry or not.4
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - turbotax.intuit.com/tax-tips/tax-refund/top-5-reasons-to-adjust-your-w-4-withholding/L8Gqrgm0V [5/31/18]
2 - legalzoom.com/knowledge/last-will/topic/totten-trust [5/31/18]
3 - legalzoom.com/knowledge/last-will/topic/joint-tenancy [5/31/18]
4 - forbes.com/sites/investor/2018/05/08/the-most-important-conversation-newlyweds-need-to-have/ [5/8/18]
Why striving to stay in the workforce a little longer may make financial sense.
The median retirement age for an American woman is 62. The Federal Reserve says so in its most recent Survey of Household Economics and Decisionmaking (2017). Sixty-two, of course, is the age when seniors first become eligible for Social Security retirement benefits. This factoid seems to convey a message: a fair amount of American women are retiring and claiming Social Security as soon as they can.1
What if more women worked into their mid-sixties? Could that benefit them, financially? While health issues and caregiving demands sometimes force women to retire early, it appears many women are willing to stay on the job longer. Fifty-three percent of the women surveyed in a new Transamerica Center for Retirement Studies poll on retirement said that they planned to work past age 65.2
Staying in the workforce longer may improve a woman’s retirement prospects. If that seems paradoxical, consider the following positives that could result from working past 65.
More years at work leaves fewer years of retirement to fund. Many women are worried about whether they have saved enough for the future. Two or three more years of income from work means two or three years of not having to draw down retirement savings.
Retirement accounts have additional time to grow and compound. Tax-deferred compounding is one of the greatest components of wealth building. The longer a tax-deferred retirement account has existed, the more compounding counts.
Suppose a woman directs $500 a month into such a tax-favored account for decades, with the investments returning 7% a year. For simplicity’s sake, we will say that she starts with an initial contribution of $1,000 at age 25. Thirty-seven years later, she is 62 years old, and that retirement account contains $974,278.3
If she lets it grow and compound for just one more year, she is looking at $1,048,445. Two more years? $1,127,837. If she retires at age 65 after 40 years of contributions and compounded annual growth, the account will contain $1,212,785. By waiting just three years longer, she leaves work with a retirement account that is 24.4% larger than it was when she was 62.3
A longer career also offers a chance to improve Social Security benefit calculations. Social Security figures retirement benefits according to a formula. The prime factor in that formula is a worker’s average indexed monthly earnings, or AIME. AIME is calculated based on that worker’s 35 highest-earning years. But what if a woman stays in the workforce for less than 35 years?4
Some women interrupt their careers to raise children or care for family members or relatives. This is certainly work, but it does not factor into the AIME calculation. If a woman’s work record shows fewer than 35 years of taxable income, years without taxable income are counted as zeros. So, if a woman has only earned taxable income in 29 years of her life, six zero-income years are included in the AIME calculation, thereby dragging down the AIME. By staying at the office longer, a woman can replace one or more of those zeros with one or more years of taxable income.4
In addition, waiting to claim Social Security benefits after age 62 also results in larger monthly Social Security payments. A woman’s monthly Social Security benefit will grow by approximately 8% for each year she delays filing for her own retirement benefits. This applies until age 70.4
Working longer might help a woman address major retirement concerns. It is an option worth considering, and its potential financial benefits are worth exploring.
1 - dqydj.com/average-retirement-age-in-the-united-states/ [6/11/18]
2 - thestreet.com/retirement/18-facts-about-womens-retirement-14558073 [4/17/18]
3 - investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator [6/14/18]
4 - fool.com/retirement/social-securitys-aime-what-is-it.aspx [6/9/18]