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Is Retirement Savings Being Crowded Out by Student Debt?

By Posted on In Finding Confidence, Investment Behavior, Saving for College, Student Loans, Uncategorized

A recent study conducted by HelloWallet suggests that a dollar of student loan debt is associated with a 35-cent decrease in retirement account balances! That means, investors with lots of student loans are unable to save as much for retirement.

This is a big problem on a large scale:

  1. 60% of college graduates take on some form of student loan.
  2. The average loan size has tripled over two decades form $9,400 to $27,300
  3. There is more student loan debt than credit card debt.

You can read the study here

I take issue with this study in several areas:

  1. The study assumes that people have a given number of dollars available and must split it between debt repayment and saving for retirement. In reality, I am seeing many people make significant sacrifices in their lifestyle in order to stay on top of their debts and retirement planning. People are living at home longer, avoiding more debt by not buying a house, or living a more modest lifestyle.
  2. People I see coming out of college with significant levels of debt are going through a crash course in personal finance much faster than those with no student loans. They are experiencing a wake-up call in their 20s and 30s as opposed to their 40’s or 50’s. Smart financial habits that they develop now could lead them to a more prosperous future.
  3. I’m working with many families on a more complicated dilemma. Not only do they need to weigh existing student loan debts and saving for retirement, but they also struggle to save for their own children’s education.

The final issue I take with this study is a line repeated multiple times: “There are few widely available tools to help individuals decide whether to prioritize student loan repayments or retirement savings.” In reality, there are lots of tools available to help people analyze that question, such as a Certified Financial Planner™ professional.

What Sets Us Apart From 83% Of All Financial Advisors

By Posted on In Finding Confidence, Uncategorized

Even as the country moves toward economic recovery, personal financial security is still uppermost in many peoples’ minds. They’re eager for advice about their retirement, estate plan, insurance, emergency funds, liabilities and their asset allocation. It’s never been more important for clients and financial advisors to take a holistic approach – looking at an individual’s entire financial picture, not just one aspect or another. Working with a CERTIFIED FINANCIAL PLANNER™ professional is assurance that he or she is a credentialed expert who does just that, and performs to high ethical and professional standards.

Following in my father’s footsteps, I’ve recently become a CFP® professional. The designation comes with extensive training in financial planning, estate planning, insurance, investments, taxes, employee benefits and retirement planning, as well as in CFP Board’s Standards of Professional Conduct, which are rigorously enforced. As a CFP® professional, I’m required to uphold my certification through continuing education – something to consider with new financial instruments appearing regularly on the consumer market. It’s little wonder that CFP® certification is the most recognized in the industry for personal financial planning. So as you think about your financial future, please bear in mind that only 17% of all financial advisors in the industry can claim this distinction.

Most Valuable Career Skills You Need

By Posted on In Finding Confidence, Personal Development, Saving, Uncategorized

Money Magazine’s recent article on career skills shows that an entirely new breed of skills are needed to remain competitive in today’s markets.  The top four skills all deal with data – data mining, data modeling, search engine marketing and statistical analysis.  Just about every skill mentioned involves technology from computer aided design to IT to technical sales.  And there are a few staples that we all would expect to see – new business development, strategic planning, and financial analysis.

The full article can be found here

 

 

The Reverse Mortgage in Your Retirement Income Strategy

By Posted on In Finding Confidence, Retirement, Uncategorized

Recently, I had a few conversations with clients about their retirement portfolios. In these cases, there was some disappointment with the returns that the markets have provided, or not provided, in the last couple of years. For them, and I suspect other clients as well, there’s an added complication: taking big distributions every month, or every year, can reduce the IRA balance significantly and quickly. They fear they’re running out of money.

These discussions have led to my taking a refresher course on the concept of a reverse mortgage, loans that let you borrow against the value of your home, but don’t require repayment while you’re still living in it. This type of loan has been around for a while, but it may become more popular for several reasons. Here is what I learned.

Five Things You Should Know About Reverse Mortgages:

  1. Federal laws and regulations implemented in 2013 and 2015 were the game-changers. Added safeguards make these government-backed loans safer for both the borrower (especially seniors) and the banker, and also cheaper than they used to be (but still more expensive than a traditional home-equity line of credit). Most reverse mortgages today are Home Equity Conversion Mortgages (HECMs), a type of Federal Housing Administration (FHA) insured reverse mortgage. Home Equity Conversion Mortgages allow seniors, age 62 or older, to convert the equity in their home to cash up front, or a line of credit.
  2. Your age is a factor. The older you are, and the more equity you have in your home, the more you can borrow. The loan can amount from 50% to 70% of your home’s value. (You can estimate your borrowing limit at reversemortage.org)
  3. You’ll have a safety net. You can take the loan as a lump sum, monthly payments, or a line of credit. But the borrowing has no set time limit. And the lender can’t freeze, cancel, or reduce your credit line; in fact, it’ll grow over time whether you use it or not! The newer rules have the government on the hook in case the reverse mortgage ever grows to exceed the home’s value. Plus, if one spouse dies, or has to go to a nursing home, the non-borrowing spouse can’t be kicked out.
  4. There can be multiple benefits. If you’re 62 or older, you can establish a line of credit with an HECM, whether you need the money now or not. You might need it later. That credit line will grow annually, perhaps substantially over the years. When you do tap your credit line, you pay no income taxes. This added borrowing might relieve some financial pressure. Perhaps you’d postpone receiving your Social Security benefits, or reduce withdrawals from your IRA, or pay the taxes from a Roth conversion, or undertake some age-in-place renovations to your home. A lump sum withdrawal might be used to pay off an existing mortgage, perhaps entirely, or more quickly, and thus reduce the expense of monthly mortgage payments.
  5. You can still get into trouble. If you don’t pay your property taxes and your homeowner insurance, you can still lose your house. If you want to move out of the home, the HECM must be paid off (it holds a lien on your house). So if you can’t live with these restrictions, downsizing is probably a better idea.

Your retirement portfolio should not be the only resource you use for your income. I’ve always been a proponent of the 3-legged stool for income stability. For many people, the HECM can become one of those legs.

The One-Page Financial Plan: A Book Review

By Posted on In Finding Confidence, Investment Strategies, Personal Development, Retirement, Rule of Thumb, Uncategorized

I recently read Carl Richard’s “The One-Page Financial Plan” and was impressed with Richard’s approach to working through some complex financial issues.  In particular, he focused almost exclusively on the emotional issues that investors face.  What does money mean to the investor?  What are the investor’s goals?  It’s these issues that overwhelm many investors to the point where they give up or procrastinate for years.

For folks that need a plan and don’t know where to start, this is a useful resource.  It’s simple and easy to follow and the principles are very similar to what I employ with my clients. This is a great guide to help investors think about money in terms of goals and how to get on the same page with a spouse on what the future looks like.  It is the most difficult part of financial planning.

It lacks specificity and implementation ideas.  Since every investor has a unique situation.  This makes the title of the book a little misleading since you don’t end up with a true financial plan on one page.  The book doesn’t go into detail about growth rate assumptions or serial payments or how to calculate time value of money.  Rather it focuses on concepts at a high level.

If the goal is to starting thinking and talking about the future, this is a great place to start.

The Experts And Their Conflicting Predictions

By Posted on In Economy, Finding Confidence, Investment Behavior, Uncategorized

It’s become comical to see and watch the supposed experts lay out such convincing rationales explaining what the future holds. In the reading of the tea leaves, some are seeing some pretty dark days ahead, while others think all of the market volatility is a normal correction. This became especially clear when I recently attended the InsideETF conference in Florida. None of the economists and experts were wishy-washy – They were either very bullish or very bearish. Their charts and arguments were very strong and they would even take shots at each other to try to poke holes in their arguments. It was like watching a presidential debate!

The final speaker, Liz Ann Sonders of Schwab, put up a chart that really stood out to me:
Investor Sentiment

Liz asked “Have investors ever felt thrilled or Euphoric about the performance of the market at any point since the depths of the 2008 and 2009 recession? The answer is “No”. Despite some pretty impressive rates of return, investors have remained in the Hope and Optimism stage (maybe excitement). Every time the market corrects, investors are quick to move to safety. That’s a good thing! When the market becomes so hot that investors expect it to go up, then a problem is about to occur.

If you want to read the rest of her points, here is a good summary