Category Archives: college fund

Catching Up on Saving for Retirement After Age 50

Posted on March 26, 2012 by admin

Most American workers view age 50 as the beginning of the final phase of their lives before retirement. Many workers’ careers-and living expenses-have peaked by that point and their children are either in college or about to enter, which can pose a major dilemma concerning where their savings dollars get spent. Then there are those who have yet to begin saving at this age, and there are a large number of people in this category. But all is not lost for them; they must simply take a somewhat different (and most likely more austere) path into their nonworking years. And even those with substantial retirement assets have some issues to consider at this point in their lives. If You’re Behind Those who have saved little or nothing for their retirements by age 50 will need to make some major changes in their budgets and lifestyles if they want to retire earlier than age 70. Although Social Security will likely still be there for them, they may not be able to live the kind of lives that they want in retirement if they don’t immediately begin an aggressive savings program. Those without any type of retirement savings should start by maxing out their employer-sponsored retirement plan contributions and probably also make the maximum possible contribution to a traditional or Roth IRA. They should also make the additional $1,000 catch-up contribution if at all possible. A 50 year old earning $60,000 a year who does both these things could accumulate a whopping $225,000 by age 65, plus any growth on the contributions. Lower and middle-class workers who haven’t started to save by age 50 can realistically expect to work at least another fifteen years, unless they earn a phenomenal rate of return on their retirement savings. College Funding vs. Retirement Parents of kids who are at or near college age must inevitably grapple with the dilemma of either funding their own retirement plans or paying for their kids’ college educations. Most financial experts will counsel parents not to forfeit their retirement savings to pay education expenses, because their kids will have the chance to pay off their own expenses themselves eventually. But the use of annuities and cash value life insurance can reduce the amount of assets that must be reported on the financial aid forms, which can increase the amount of financial aid available to pay for tuition and other expenses. For the Savers Those who have been saving diligently since they were young can pat themselves on the back for starting when they should, but it may be time to start adjusting the mix of assets in their retirement portfolios. Workers who are invested entirely in stocks may want to start thinking about reallocating at least some of their savings into more conservative asset classes such as bonds. Those who are invested in target-date funds will have this done automatically, but those who have constructed their own portfolios should make the preservation of their savings a growing factor in their investment decisions. Of course they should still preserve a growth element in their portfolios, but once they get within ten years of retirement they should probably start moving most of their savings from equities to fixed-income securities in an appropriate systematic fashion. For more information on saving for retirement after age 50, consult either IRS publication 590 for IRAs or your financial or retirement adviser. Continue reading →

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How College Savings Plans are Changing

Posted on March 5, 2012 by admin

States are offering promotions and new features to make 529 savings plans, state-administered college savings plans, more attractive to investors. These plans are also known as Qualified Tuition Programs, or QTPs. In recent years, the steep rise in tuition and reports that some plans were underfunded slowed contributions. Some plans are now closed to new contributors as states struggle to meet the needs of their existing clients. Many of the open 529 savings plans now pulling in contributors build more risks into the savings accounts to offset inflation and market volatility. The promotions for 529 plans include matching funds: dollar-for-dollar matches from private donors; savings accounts for near-term payments; allowing contributors to select mutual funds managed by firms other than the main, state-selected manager; and offering FDIC-backed bank products and CDs with high interest rates. State-run plans vary greatly in terms of ratings and rules. Contributors should compare the advantages of plans with a professional financial advisor. Increasingly, states are finding that providing good advice helps them retain contributors and increase the amounts of contributions. For example, IRS rules for 529 savings plans allow plan holders to change investments only once a year. The exception is if the contributor changes their beneficiary. If a parent is contributing to plans for two or more children, they can change beneficiaries and asset allocation frequently. States are also drawing attention by offering low-risk and high-risk plans. The former are typically tied to market performance and the latter to inflation and increases in tuition. Contributors should determine whether they need new features after considering the rules of their 529 plan, the goals of the beneficiary, and the age of the beneficiary. Many plans are engineered to become more conservative as the beneficiary ages. In order to maximize their return, contributors should ask what advantages they want from their investment. When a contributor allocates money to a plan outside their home state, they may miss out on state tax breaks, discounted fees, and other incentives. There are a number of dangers in investing in 529 savings plans. Low-cost index funds advertised by advisors may only be available to residents who live in the state offering the plan. Money-market and index funds can give low or negative returns. If a contributor selects an outside fund to manage these funds, the fees for the funds can be higher. A plan manager can purchase too few safe instruments such as bonds and keep too little cash in the account. Contributors can avoid problems by closely monitoring how the plan performs year to year. Another tip for contributors is that adults can benefit from 529 savings plans. Adults who are returning to college or interested in pursuing a professional or technical degree can set up a 529 savings plan for themselves. Relatives and family friends can be contributors. There is another type of plan known as a 529 plan, the prepaid tuition plan. The changes and tools in 529 savings plans are typically not offered in prepaid tuition plans. Continue reading →

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Leaking Money? Try a Zero-Based Budget

Posted on February 28, 2012 by admin

Zero-Based Budget Setting a budget can be the single best thing you do in order to fix your finances and make smart money decisions.  There are a few different ways to structure your savings and spending and you need to choose the one that works best with your financial habits and your lifestyle.  One option to consider that is successful for many is called a zero-based budget. What is a Zero-Based Budget? A zero-based budget is a budget in which you give every single dollar you make a job or a purpose.  You budget all of the money that you earn, so you are left with zero dollars unaccounted for.  The idea behind a zero-based budget is that you won’t have money leaks or unexpected expenses when all of your cash is accounted for and allocated to meet your goals. You don’t need to budget every single dollar of your money to “responsible” endeavors such as debt repayment or saving.  You will also budget for things like entertainment, and even for miscellaneous unexpected expenses that might crop up during the course of the month.  The point is simply to know where every dollar is going so you can spend consciously. Creating a Zero-Based Budget Start by creating a list of all of your sources of income to determine exactly how much you have coming in.  Most people create their budgets on a monthly basis, so you should include your entire monthly income including income from paychecks, self-employment income, child support or alimony and any other regular sources of money. Once you have accounted for your monthly income, you get to allocate it.  You’ll do this by creating different budget-line items for all of your spending.  Typically, you should start by allocating cash towards things you need or have to spend money on – rent or mortgage payments, gas or transportation, car payments, and minimum debt payments. You should also include spending for required but irregular expenses, such as groceries.  Once you decide how much you want to spend, stick to it!  For instance, you might decide you only want to allocate $400 a month to groceries.  You should make every effort possible not to go above $400 a month.  If you find you are consistently unable to meet your budget amount for a required irregular expense, you may need to increase the budget for that item and adjust other categories accordingly. Once you have allocated money for all the necessary and required expense, you should set aside some money for savings as part of your budget.  Most experts recommend you save between 10 to 20 percent of your income.  Some of your savings should go towards things like a retirement account and perhaps a college fund for your kids.  You should also be saving for other things as well, including building an emergency fund or saving for a house.  You can – and should- even set aside savings accounts for things like car repairs, the inevitable new car purchase, a vacation fund or Christmas presents. The next step is to include line items in your budget for all of the other things you want to buy each month.  You may want to include a set amount of giving to charity  and a set amount of money for entertainment, dining out or other purchases. Whatever it is you are buying each month should be in the budget and you should set an amount and stick to it. Adding it All Up Once you have included all of the items that you plan to spend money on each month, make sure this amount matches the total amount of income that you have coming in exactly.  If you plan to spend more than you are earning each month, you’ll need to adjust some budget categories downward so you don’t have a shortfall.  If you end up with cash left over after all of your allocated spending, you’ll need to budget more for savings or in some other category of your choosing. By creating a zero-based budget, you can save and spend with confidence, knowing all of your money is working hard for you. Continue reading →

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Are You In Danger of Overspending On Your Next House?

Posted on February 24, 2012 by admin

When you start to house hunt, it can be a challenge to stay within your budget.  You may see a home that is just outside of your price range and that seems to have all of the features you want.  Worse yet, you may have champagne tastes on a beer budget and see a house that is way above what you can comfortably pay and fall in love with it.  In any case, whether you stretch a little or stretch a lot, buying a house you cannot comfortably afford is a recipe for disaster. Why You Should Never Buy at the Top of Your Budget There is a term for buying at the top of your budget and purchasing the most expensive home that the bank will give you a mortgage for.  That term is “house poor.” Being house poor means that such a large portion of your income goes to pay for your home that there is nothing left to pay for the other things you want or even need. The most extreme and visible example of those who are house poor are people with large or expensive homes who cannot afford to furnish them.  When you walk through gigantic rooms that have no furniture in them at all, it becomes readily apparent that the homeowner’s overspent.  Don’t let yourself fall into this trap. Being house poor is a much more serious problem than just not being able to buy your sofa for a while.  You may experience months or even years where you spend all you have on your home and you don’t put anything away for retirement, a college fund for your kids, or even for an emergency.  This can leave you unprepared for the future and very vulnerable to financial set-backs. So How Much Should You Borrow? While banks and mortgage lenders set some limits on your ability to borrow based on your income, these limits may be higher than you personally are comfortable with.  Some lenders, for example, allow you to borrow enough that as much as 40-45 percent of your monthly income goes to taxes, insurance and other costs (banks usually won’t let you go above this ratio). If your bank approves you for this much, think about whether you can achieve all of your other financial plans with only 60 percent of your income coming in.  You should actually practice doing this if you can, setting aside the amount that your mortgage will cost over-and-above your current housing costs each month to see how it feels to live without that money .  If you can’t do this, at least create a detailed budget that shows what you’ll do with what is left of your cash and make sure that you can fit everything into the budget and make the numbers work. If you aren’t 100 percent confident that you will be able to do other things besides just scrape together enough for your mortgage payment, then you shouldn’t be borrowing as much as the bank is willing to give.  Instead, to avoid overspending on your next house, consider your budget and goals how much you can afford to pay and then work backwards from there to determine how much house you can buy. Continue reading →

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Secrets to Keeping Your 2012 Finances On Track

Posted on February 5, 2012 by admin

Now that the groundhog saw his shadow, it’s time to recommit to getting your financial house in order. Here are 5 things that you should be doing now to keep your 2012 finances on track: Start saving for retirement – If you aren’t saving anything for retirement right now, then it’s time to either enroll in the retirement plan offered by your employer or else open a Roth IRA-or both, if you can afford to contribute to each of them. Be sure to take advantage of any matching contributions offered by your employer, because this is free money to you. If you can only fund a Roth account, then it will take $416.66 per month to make your maximum annual contribution of $5,000, or $500 per month if you are over age 50 and can also make the additional $1,000 catch-up contribution. You may also be eligible for the Retirement Saver’s Tax Credit if your income is below a certain level. Pay off your credit card debt – If you have high interest debt on credit cards, pay this off before anything else. Those who carry large balances on their credit cards damage their credit in several ways. First, the credit rating agencies don’t like to see large card balances, particularly when most or all of the available credit limit is being used. Furthermore, the amount of interest that credit card companies charge leaves you less money to pay off principal or other debt. Refinance your mortgage – If you haven’t done this yet and your credit is good enough to let you refinance, use this historically low interest rate environment to get a better rate on your loan. Rates now may be low enough to let you switch from a 30 to a 20 or 15 year loan, which will save you many thousands of dollars in interest paid over the life of the loan. Start a college education fund – If you have not begun saving for your kids’ education yet, now is the time to start. If you can even save enough to get them through a year or two of college, then that will drastically cut down on the amount of loans that they will need to finish school. There are several different types of college savings accounts, such as 529 plans, Coverdell Education Savings Accounts and custodial accounts. Each type of account has its own set of tax and distribution rules. Create a budget – This may be the most important resolution of all, because it can help you to follow through on all of your other resolutions. Knowing where all of your money goes can help you to start spending and saving your money much more efficiently and control your financial future. There are several websites and programs that can help you do this such as Microsoft Money or www.mint.com . Budget programs can also send you email alerts reminding you of upcoming bills and amounts that are due at irregular intervals. Continue reading →

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