Retirement

Retirement strategies you can’t afford to ignore

Years have passed since Benjamin Franklin wisely counselled people that if they wanted to be wealthy, they had to think as much about saving as about getting. Since then, other retirement strategies have been devised, ridden the wave of trendiness, and then been abandoned to changing economic and cultural circumstances.

But still there is a truth to starting every retirement strategy with a solid savings plan. In fact, if you want the ultimate success strategy to having as much money as you need when you retire, from the very first moment you receive a paycheck in your 20s, you would put 15 percent of it away in savings.

David Chilton, the Canadian storyteller who 20 years ago took the investment world by storm with his bestselling The Wealthy Barber built around the benefits of saving and achieving compound interest, three years ago took up the cause again with his sequel, The Wealthy Barber Returns.

He explains how saving and living within your means as a retirement strategy is a mindset that if cultivated, will prepare you for many golden years ahead. It’s not that he doesn’t think you can try to do some of the things your friends do, or make the occasional renovation on your house, but if you neglect the rule that “spending begets spending,” then you will be doomed to a life of playing slave to the cruel master of debt.

Chilton reminds us that the four most expensive words in the English language are “while you're at it” and the four most expensive letters are HGTV (Home and Garden Television) that spur people to spend more than they have in their budget.

There’s truth to the validity of saving as a key foundation of any retirement strategy. Consider if from the age of 25 onward, you put away $3,000. You could secure it in a tax-deferred retirement account.

If you did that every year for 10 years, and then, at 35 and perhaps with a growing family that made it impossible to save for a few years, you had to stop, do you realize that the $30,000 you had saved in that one decade would turn into $472,000 when you wanted to retire at age 65, thanks to be benefits of compound interest. These figures were calculated assuming there would be an eight percent annual return, which is reasonable to assume.

What do these tax-deferred savings vehicles look like in the United States?

The two most common ones are Individual Retirement Accounts (IRAs) and 401 (k)s. For many employed individuals with good benefits, the latter is a great vehicle because often the employer will match whatever you put into it. Your $3,000 a year, for example, can become $6,000 and look then how fast that adds up.

By tax deferred, this account means that you do not have to pay taxes on the money you invest or the interest you are earning on it until you start withdrawing this money when you retire. At that point your income is substantially reduced, so you will end up paying a lot less in taxes.

But if tax deferred savings accounts build the foundation of your financial retirement home, where do the walls come from?

You need other tools to build from your foundation and those primary tools are stocks and bonds. Let’s say you keep another savings account just for investment purposes. You raise $100,000 over another decade and decide to invest it in those building tools.

The rule then is that the younger you are, the more of that investment you should put into stocks, and correspondingly, the older you are, the more you should invest into bonds. That is because stocks are more volatile and they will go through periods of ups and downs and you must have time to ride them out before you have to cash them in. Bonds are far less volatile, so they are considered a safer investment.

But you pay a price for safety. In the years between 1926 and 2009, for example, the average rate of return on stocks was 9.8 percent, but the average rate of return on bonds was 5.4 percent.

As a general rule, financial advisers will counsel their clients to decrease the stock percentage of their portfolio as they get older. For example, it might be 50 percent when they are 60, 40 percent in their 30s and only 30 percent in their 80s, or even less if the person is extremely risk-adverse.

What other tools will build your retirement security?

You may have private pension plans from your work place, and social security payments as well. You can also buy into other investment mixtures, including the popular mutual funds. These are open-ended funds operated by investment firms who take money from their shareholders and invest it into a group of assets. Their popularity as a retirement financial plan strategy remains high, although they too can be subject to the volatility of the financial market.

The number one question people have about their retirement strategy, figuratively the roof of their financial retirement home, is “how much money do I need?” The traditional answer to that question used to be 60 to 70 per cent of your working stage income.That is proving not to be the case anymore as baby boomers begin to retire in record numbers. With significant assets and energy, instead of slowing down the pace of their lives, they want to travel, buy their dream homes, renovate their current homes and live life to the fullest.

Many baby boomers will need closer to 90 to 100 percent of their current income. If they have not been prudent with their savings over the years, they will have to achieve that by working longer, taking part time jobs to augment their retirement income, or disposing of some of their hard assets like homes and cottages.

This challenge of having “enough” in retirement will continue to grow in importance. Consider that according to the latest figures from the US Census Bureau, there are currently just over 40 million Americans aged 65 and older and they comprise 13 percent of the population. By 2030, people over 65 will make up 20 percent of the population.

Without solid financial strategies, the having-it-all generation of baby boomers may find their quality of life seriously compromised.

How the rich and poor think differently about money

As far back as the roaring 20s, writer F. Scott Fitzgerald noted that the rich are “different from you and me.”

Many a person has quipped since then that it’s because the rich have money, but recent research suggests it is more than that. The rich have a different philosophy about money and a different attitude towards it as well.

Understanding these differences is becoming increasingly important as the wealth gap between the rich and the poor widens. Estimates are that by next year, if current trends hold, the richest one per cent of the world population will own more wealth than the remaining 99 percent.

We need look no further than the borders of the United States to see the impact of this trend, since of the top 10 billionaires listed on Forbes’ annual list, eight are Americans.

What can be learn from the attitudes of the really rich?

Playing to win

Rich people buy and sell stocks and make financial investments with a philosophy that this is a game to win. They think big. They don’t think about just breaking even or not losing money as a good end result.

Poor people do. They make their investments cautiously and carefully, always telling their financial planners that at best, they don’t want to lose their money. If they make money, that’s a bonus.

That impacts the level of risk and thus, the level of payback. The poor person has very little money, and they are terrified that they will lose it. The rich person has enough that they can afford to lose some, so their creativity is ignited and they have more courage in the investment game.

Interestingly enough, both economic groups know and accept that reality about the other. A 2012 nationwide study by Pew Research Center found that many Americans believe the rich do think differently than other people.

Besides their creativity in handling their money, the rich were deemed to be more intelligent and hardworking. On the downside, they were seen as greedier and less honest.

Questions of virtue and value

In fact, wealth and value of character were deemed to be another divide between rich and poor, but upon further analysis, it all comes down to perception.

The poor person has a perception that the rich person is greedy because they think big. They interpret their efforts to increase their already considerable wealth as a sign of greed.

The wealthy person, however, believes that they owe it to everyone around them to make their money work for them and create the best of all possible lives. If they don’t help themselves first by making their money multiply, they won’t be in any position to help other people.

Poorer people are advised to pay themselves first and create savings, but they are more inclined to give up that money to a needy friend or family member in the short term, rather than earn interest on it so they can offer more help in the long term.

A question of commitment

Rich people are totally committed to staying rich and will reasonably do whatever it takes to protect their wealth and generate its growth. This contrasts to the attitude of poor people who want to be rich, but are not as dedicated to doing something about it.

The poor person is more apt to buy a lottery ticket and hope that someone else will send them a windfall, as opposed to concentrating every waking moment on building up their wealth.

It’s also has to do with relationships

As Steve Siebold, author of How Rich People Think (http://www.amazon.com/Rich-People-Think-Steve-Siebold/dp/1608102793) suggests, poor people have an emotional relationship with money, but rich people have a logical relationship with it. They see it merely as a tool that represents options and opportunities. To that end, they are more inclined to use other people’s money (such as banks).

Siebold suggests that rich people also find ways to get paid for doing what they love, whereas poor people end up doing jobs they hate to make money, which they then must spend on pursuing the pastimes and hobbies that they love.

But attitude isn’t everything

What is contentious is whether or not the rich person is actually more intelligent in their quest for wealth, or whether the poor person is mentally shortchanged by their circumstances.

A study conducted by researchers at Princeton, Harvard and the University of Warwick and published in the journal Science (http://www.citylab.com/work/2013/08/how-poverty-taxes-brain/6716/), found that poverty in itself can deter our ability to make decisions about finances and life. Living in a constant state of scarcity amounted to a mental burden equivalent to losing 13 IQ points.

The researchers described the attitude of poverty as bleak, noting that it cuts off your long-term brain. While the rich person makes unlimited long-term plans, confident of achieving them, the person with little or no money doesn’t plan long term because they don’t want to be disappointed when their dreams don’t happen.

Eldar Shafir, author of the study, points out that this attitude about money and decision making is not determined solely by the person, but rather by the context they are inhabiting.

In other words, in discussing the philosophy both the rich and the poor have about money, the poor cannot be glibly chastised for making bad decisions because their context is completely different.

As sociologist Tressie McMillan Cottom notes in her blog, you have no idea what you would do if you were poor until you are poor.”

Financial planning helps at all levels

Nonetheless, experts agree that regardless of how much or how little money you have, acquiring some financial planning education on how to manage it gives you the best chance to grow your wealth and regain some semblance of control.

The biggest issues that keep the average person from growing their wealth are not keeping or maintaining a budget, not tracking their spending, buying everything brand new, spending more than they make, not setting aside any money for retirement, and not saving for emergencies.

In essence, whether we are rich or poor, our prosperity will either increase or decrease largely because of how we use our money, not by how much we have.

Business Minds: Six simple ways to save money

Business Minds: Six simple ways to save money: In the average household, money is tight and getting tighter. Living paycheck to paycheck is the norm for most people and once the es...

Six simple ways to save money

In the average household, money is tight and getting tighter.

Living paycheck to paycheck is the norm for most people and once the essentials are handled, there is nothing left to bank for emergencies.

According to the Bureau of Economic Analysis, Americans are saving only 4.5 percent of their annual income, down from 5.6 percent a year ago.


How can you save more money? Here are six simple ways to get started:


1.     Eliminate your debt.

Despite how much you have been told to start saving and pay yourself first, it makes a lot more sense to pay your creditors first. Ideally you accomplish this by putting chunks of cash on your credit cards or other debt sources regularly.

If that is not feasible, the American Institute of Certified Professional Accountants (CPAs) suggest you should examine the pros and cons of refinancing. To do that, check your interest rates on your debt load. If you are paying a higher-than-average amount, then consider refinancing. Consolidate your debt into one loan with a lower interest rate and continue to pay it off as quickly as possible.

However, keep in mind that when you do this and you extend the life of your loan to make the payments more realistic, you can sometimes end up paying a lot more instead of less.

Other options are taking out a home equity loan, but if you are inclined to spend to the max when credit is available, this may not work for you.

If you have decided to pay yourself first and invest your money into savings vehicles without paying off your rent, do the math to see if you are doing the right thing. Does the money you are placing in a savings account with perhaps three percent interest actually generate more money for you than a credit card that is charging you 19 percent interest? It does not. Pay off the debt first.

2.     Keep aware of government financial options to ease your burden

Tax credits rise and fall, government incentives come and go, and programs are introduced and cancelled, and if you don’t stay aware of all of these three things, you will miss some great opportunities to save your own money.

As an example, if you have a child of college age, make sure they are aware of income-based repayment (IBR) for federal student loans.

According to the U.S. Department of Education, already two million borrowers have applied for IBR which allows qualified borrowers to tie their monthly federal student loan payments to their discretionary income.
Phased in on Dec. 21, 2012, this program benefits college borrowers tremendously.

This is just one example of how knowing what options are open to you can help you save money.

3.     Spend like a millionaire
The world is full of frugal millionaires who worked hard for their money and see no need to waste what they have. Trying to keep up with the rich and famous is a fool’s game. Instead, take a tip from the really rich and live in a situation that makes you comfortable and yet promotes a frugal lifestyle.

Of course the best known example of this is Warren Buffett who has become legendary for continuing to live in the modest house he bought for $31,500 in Omaha, Nebraska in 1958.

Mark Zuckerberg, Facebook’s billionaire founder, has been photographed driving his Acura TSX with its approximately $30,000 price tag instead of a much fancier set of wheels.

The message from these rich tycoons is pretty basic. You do not have to define your status by your luxurious goods. You are who you are and that speaks for you, not what you buy or drive around in.

If you want to save money, handle it as frugally as many of those who made a lot of it. Some of them clip and use coupons, some buy things at yard sales, some frequently check Craigslist and eBay.

4.     Pay yourself after you’ve paid off the bank

When your mortgage ends or your car loan is finally paid off, keep making the same payment to your emergency fund savings account. If you don’t, the money will naturally expand to fill the hole left for it in your budget and before you know it, it will be gone each month and you will have nothing at all to show for it.

But if you are in the habit of not having that money, you will be amazed at how your savings will add up if you just continue to make the payment to yourself. Then, when the roof starts to leak unexpectedly or your car needs unbudgeted repairs, you can pay for it without piling up more debt on your credit card.

5.     Quit one of your expensive habits

People who don’t gamble or throw their money after antique cars or other expensive habits often congratulate themselves for their frugality.

But even if you don’t have any of the obvious money vices, you can still waste more money than you should if you are a smoker or a wine connoisseur or a collector of shoes.

These habits can really add up. Smoking just one pack and a half of cigarettes a day comes to about $3,000. Some families spend up to $1,000 a year on soft drinks and bottled water and have nothing to show for it.

To determine how much your habits are costing you, it is a good idea to take each expense and determine how much it amounts to a year. That’s when you begin to get a really clear idea of where your money is going and if you are really getting the value you deserve from it.

6.     Never shop without a list

It may sound boring and restrictive, but if you don’t have the money you want, one way to start getting it is to hold yourself to a pre-determined list every time you go into a grocery store or department store.

By planning meals you can save between $150 to $170 a month, according to Cat, author of the BudgetBlonde website. Not only that, but you usually eat more nutritious meals when you prepare them and eat at home.


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Tax strategies and tips

With the April 15 deadline for filing federal income tax looming, as an investor you need to take some time now to ensure that you are handling your taxes strategically and preparing yourself for a secure future.

No tip is more important than the dedicated act of organization all year long so that tax season can be a routine exercise, not a period of stress and frantic searching. Even if you have a financial planner handling your investments or you hire a Certified Public Accountant, they can only assist you to the degree that you provide them with thorough and accurate information.

The days of shoving everything into a shoebox and showing up in the rush period of tax season hopeful that a virtual stranger can create order in your affairs and take full advantage of all tax savings for you is bordering on the ridiculous. Tax strategy is a 12-month exercise.

However, there are a number of portfolio checks you can consider this time of the year to ensure that you maximize your tax savings.

Owning rental properties

One source of investing that has sizeable tax advantages in the United States is rental property. An investment in a $100,000 rental home, for example, means that you can depreciate the structure of the home over 27.5 years.

You cannot depreciate the land basis, but you can still save a lot. For example, if the lot is valued at $10,000 and the house itself is valued at $90,000, each year you can claim a tax deduction of $3,272.73. Simply calculate the house value divided to 27.5 years to see how this would apply to you.

When you further deduct your expenses and maintenance of the house, and then calculate your rental income, you still may end up not having to pay a penny on this asset.

And even if the house and property increase in value substantially throughout the years, you still don’t have to pay tax on the appreciation until you decide to sell it. It can amount to a substantial saving.

When you do decide to sell that property, if you do a 1031 exchange, which means to move your profits into a new property purchase, you may again escape taxation.

The 1031 Exchange
The United States Internal Revenue Code Section 1031, often referred to as the tax deferred exchange, is a tax strategy that allows you to sell one qualified property and purchase another qualified property within a specific time frame and save taxes in the process. In essence, the IRS is allowing you to classify this transaction as an exchange, not a sale, and you do not have to pay taxes on the profits you gain from the sale of the first property.

If you decide to engage in this strategy, be sure that you are familiar with all the rules and caveats of the Section 1031 or have an adviser who can assure you that you qualify.

Basically, however, if you plan to replace one kind of real estate with a similar kind of real estate, you should consider this.

Asset Placement

Another effective tax strategy, asset placement, involves re-examining your investment portfolio to check whether or not some of your investments which produce ordinary income could produce better inside a tax-deferred plan. It also considers whether or not investments that produce long-term returns might produce more favorable tax results if they were in taxable accounts.

You may sometimes find yourself surprised that a person with a portfolio similar to yours is actually paying less tax. That is when you realize that where you are holding your investments can be just as important as what you are holding.
The bottom line you need to be watching when you examine asset placement is what you earn on your capital when you factor in the compound annual after-tax, inflation-adjusted return.

When you are not diligent about this, and you end up overpaying taxes because of it, you are essentially cheating yourself twice. You lose the money to the IRS initially and then you lose your ability to take that money and re-invest it to earn more profit.
It is a good idea as tax season approaches to sit with your financial advisor and find out more about the different tax treatments your different investments receive based on where they are held.

As an example, you will pay less tax on income you receive from capital gains than you will on income received from bond interest and dividends.
As a general rule, if you have high-yielding common stocks that have consistent dividend payouts, risk arbitrage transactions, corporate bonds and shares of real estate investment trusts (REITs), they should all be placed in such tax-advantaged accounts as the 401k or the IRA.

If you have common stocks that you expect to hold for more than a year and which have no dividend payouts, or very little, you should keep them in regular, non-tax advantage accounts. The same can be said for tax-free municipal bonds.

Check out your passive income

For the investor, the ultimate prize is passive income, that money that just keeps on coming without a fresh infusion of labor or cash.

During tax season make sure that you are getting to keep the money that is coming in.
For example, if you invest in a tax-free municipal bond, you can escape taxation entirely, but if you purchase a traditional corporate bond, you could be paying as much as 41 percent of your passive income back to the IRS.

It is important to always figure out your actual, after-tax income each year. You may be able to keep more of your money just by shifting the types of holdings you have.

Revisit your portfolio yearly

When it comes to effective tax strategies, include setting aside time each year in the non-tax season to review your entire portfolio. Some people link their review to a specific event in the year, the week after their birthday for example. It doesn’t matter so much when as that you book it and do it.

Go through every single one of your investments, analyze them, and ensure that they are still growing, that they are still safe, that they are diversified and that they yield good after-tax results.