Financial Tip #5: Find Income In the Right Places

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Find income in the right places.

Our present low interest rate environment makes for a difficult time to be a conservative investor. Bank interest rates are very low and bond funds are very sensitive to rising interest rates. You may have to change your investment strategy and look to equities that pay dividends but be careful, the complexity in the markets today require advanced skills, which is where the need for professional active management fits in.

Adding a fixed indexed annuity allows you to participate in stock market performance without risk to your principal, and can work nicely as a bond replacement in this environment.

Financial Tip #4: Pay Taxes Now, While They’re Low

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Recognize that taxes are very likely to go up in the future and add some tax efficient strategies to your retirement plan. Current tax rates are low. In the past the federal tax rate has been as high as 94%.

With our federal deficit over 18 trillion dollars and unfunded entitlement promises close to 100 trillion, where is the funding going to come from to get this in control? You can’t fix the deficit, Social Security, and Medicare, but you can be proactive and use tax efficient strategies to protect against the threat of higher taxes.

Do you contribute to a Roth IRA? Even better does your employer offer a Roth plan which would allow you to contribute $18,000 for 2016 and an additional $6,000 if you are age 50 or over.

Financial Tip #3: Invest In A Way That Is Right For You

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Invest in a way that is appropriate for your objectives and your comfort level. I taught a class on the Thrift Savings Plan at the US Patent office in January 2014. Many of the participants were in high spirits because the S & P 500 index had finished 2013 with an increase of 32%.

At the end of the class a woman came up to me and showed me her statement. She was invested 100% in the Government Fund (G), which guarantees not to lose principal. The G funds annual return for 2013 was 1.89%. My comment to this woman was that if she was not comfortable with any risk and was able to reach her goals with this rate of return, then she was doing very well.

The point is that you have to manage your investments for growth as well as risk. It is very important to know your comfort level and allocate your investments accordingly. The best way to do that is have a thorough review of your investments and determine if you have too much or too little at risk based on your risk tolerance. We have a simple risk questionnaire that we can email to you.

Click here to request the Riskalyze questionnaire.

Financial Tip #2: Know Your Magic Number

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How much do you need in savings to sustain your retirement over your life time? First you need to determine how much income you need to pay your needs and wants. Your needs are your necessary expenses: utilities, car payments, insurance, taxes, etc. Now what do you want to do in this phase of your life: golf, travel, classes, dining, music lessons, boating, and so forth. I recommend coming up with a monthly figure, and make sure it is a net after tax amount. How long do you expect to live? Of course no one knows the answer to this but you do not want to outlive your money so at least plan for a long life expectancy.

A starting point is to take your desired monthly net income and multiply by twelve. You must consider inflation so take your annual total income and see what it will be in the year you plan to retire.  You can use an online inflation calculator. Next subtract out your estimated Social Security, which you can get off www.ssa.gov, and your estimated pension, if you are fortunate enough to be getting one. Now multiply this amount by your life expectancy. This will give you a rough idea of what your savings goal should be.

This is very rough because we are not considering what rate of return you expect to get on your investments as well as ongoing inflation in retirement. Now that you have an estimated goal how much do you need to save out of every paycheck to reach that goal. This is when it is best to work with a qualified financial advisor to not only help you plan, but to monitor the plan and track your progress.

Financial Tip #1: Plan A Fund

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Here at FedSavvy we’re ending the year with 10 Financial Tips for 2016! We’ll be posting one every day until the full list is available on January 2nd. Be sure to check back for more tips and have a Merry Christmas!

Did you ever wonder what you did with your money? Make 2016 different by being proactive and making a plan to fund what is important to you.

Maybe you want to pay off credit card debt. If you have a $12,000 credit card balance and want to pay this off in two years, use a financial calculator that will incorporate the interest rate to get your monthly payment. You must make this a priority. The best way to make this happen is to schedule automatic payments from your bank account. Or maybe you want to redo your kitchen which will cost $15,000. How much can you afford to save every pay period? If you get paid bi-weekly and want to have this done by next summer, you will have to save $416 a pay period. If you can’t do this, don’t throw in the towel.

It may take you two or three years to fund this goal but at least you will have a plan in place. Longer term goals such as college planning and certainly retirement planning take a little more consideration since you are likely to invest in stocks, bonds, mutual funds, exchange traded funds, annuities, etc. You also need to know how the various retirement plans work and the tax laws associated with them. Schedule a meeting with a financial advisor to create or review your retirement strategy.

Check back tomorrow for another tip and have a Merry Christmas!