"If you live for having it all, what you have is never enough.” – Vicki Robin, American money book author (1945 - )
BY JULIA ANDERSON
A friend of mine, who recently retired from a management career in corporate human resources, said she, time and again, saw women make a big financial mistake by taking money out of their 401(k) retirement savings plans.
“When you hit mid-life, say 20 to 25 years into your career, you may change jobs, there may be a crisis with an adult child. Or you might want to buy a new house,” she said. “Women see 401(k) money as an easy way to pay for what they think they need. But people forget the time-value of money. They steal from their future thinking that they can make up for it later.”
Simply put: Borrowing from a long-term tax-deferred savings plan in mid-life can ruin your retirement by undermining the reinvestment growth potential of the account.
Exhibit No. 1 for my friend is a single woman she knows who enjoyed a high-paying career for 40 years. But every time she changed jobs, she took money out of her 401(k) during the transition to pay living expenses, buy a new car or go on a vacation. Now in her 70s, the woman is in ill-health and broke.
“That $15,000 you have saved from the latest job may not seem like a lot, but mid-career is when the miracle of compound interest/earnings begins to kick in,” my friend said. “My advice to women – set-up a rainy-day savings account to get you through the rough patches. Roll your old 401(k) into an IRA. Never borrow money from your future.”
She also recommends taking a hard look at your current life-style. “People think they need a certain standard of living but the reality is that we can live on a lot less,” she said. “Living on less means more money goes into long-term savings and you are not tempted to borrow to pay for something you don’t need.”
Financial advice experts agree. Writers at MarketWatch.com list these reasons for why taking money out of a 401(k) is a bad idea:
You are NOT saving when you borrow from a 401(k). Instead you are Losing Money. (Remember, money makes money)
Time will work against you. Money left untouched in a 401(k) investment portfolio will, on average, double every eight years.
Meanwhile, if you can’t repay the 401(k) loan…you are subject to a 10 percent early withdrawal penalty and subject to current income taxes.
Borrowing from your 401(k) is a RED FLAG that you are living beyond your means.
Borrowing from your 401(k) violates the golden rule of personal finance…PAY YOURSELF FIRST.
You cannot make up a withdrawal.
An estimated 20 percent of Americans with a 401(k) exercise the borrowing option, reports the Employee Benefit Research Institute. The average loan is 11 percent of assets.
When I left a teaching job in my early 20s, I thought nothing of spending the measly $800 accumulated in my retirement account over the prior two years. That was 50 years ago. I could have left the money alone, added nothing more but reinvested the 10 percent annual earnings. The nest egg could have grown over the next 40 years to $36,207 of savings. From $800 to $36,207…not bad. Our 401(k)s do this on a grander scale!
While 401(k)s have come in for criticism because of high management fees, they remain the best way to save and invest for the long-term. It’s not just saving but investing that will get you where you want to be. Stocks and bonds provide growth. Cash-only savings leaves you subject to inflation with not much return.
Additional 401(k) mistakes
Many people fail to put enough money in a 401(k) to win employer matching money…that’s free money that adds to the total. Meanwhile, make sure you and your employer understand what management fees are being charged on your 401(k) account. Higher-than-average fees eat into earnings.
While borrowing from your 401(k) can be a big mistake, trying to time the market by jumping in and out of investments can be equally harmful. YOU CAN’T TIME THE MARKET. Leave your investments alone, let them reinvest at bargain prices when markets are down. More shares mean more opportunity for growth when markets go back up. If you change jobs, roll your “orphaned” 401(k) over into a single Individual Retirement Account set up through a brokerage firm.
Most Americans have held 10 jobs by age 50 and 12 to 15 over a lifetime of work. “Too often, those orphaned accounts are frittered away in high-fee plans,” say writers at Investopedia.com. “Properly invested into a single account, it becomes much easier to choose investments for a (diversified) portfolio that fits your long-term goals while keeping costs down.”
Meanwhile, Congress may change some of the rules related to401(k) to make it easier to borrow from those accounts by reducing the penalties for doing so. I don’t get that.
Americans already have a dismal retirement savings record. Why would we want to make it easier to undermine long-term savings to finance a life-style that we can’t afford?
On the flip side, Congress also may make it easier for smaller employers to pool retirement savings money with a single state-verified retirement fund manager. Oregon is already under way with such a program called OregonSaves. Washington state is setting up the Washington RetirementMarketplace with the same goal.
Bottom line: Don’t borrow from your 401(k). Avoid the need to borrow by having a separate rainy-day fund. Embrace compound growth of your 401(k) over the long-term.
Social Security facts: Estimates have 21 percent of married couples living on Social Security alone while 43 percent of single seniors rely on Social Security for 90 percent or more of their income. - Social Security Administration.
Many of my working friends doubt that Social Security benefits will be around when they retire in 20 or 30 years. If Congress takes absolutely no action, my friends will be partially right.
I don’t lie awake at night worrying about it. Here’s why:
Social Security Administration forecasts have the agency running short on money in the early 2030s. In other words, the reserves in the fund will have been depleted because since 2015 more money has been going out in benefits than is being collected from payroll withholding taxes from workers and their employers.
That means in 2033 or 2034, beneficiaries would see a 20 to 30 percent cut in their monthly benefit checks when trust fund reserves are gone.
For someone collecting an average monthly Social Security check of $1,254, a 20 percent cut would reduce the monthly benefit to about $960. A 30 percent cut would mean $840 a month.
The program would not go bankrupt, but beneficiaries would receive only the amount of money collected from payrolls in that current year. Social Security Trust Fund reserves that have been padding benefits will be gone.
Here are some facts to keep in mind:
Fact No. 1: Social Security is funded through a dedicated payroll tax (FICA) of 6.2 percent of your wages up to a taxable maximum of $128,700. Your employer puts in a matching 6.2 percent. The self-employed pay the entire 12.4 percent but get to deduct half the tax paid as a business expense.
Fact No. 2: This is a pay-as-you go system, not a savings account. The FICA money coming out of your pay check and the matching money from your employer is funding payments to people now receiving benefits…the retired, disabled, survivors of workers who have died and other beneficiaries.
Fact No. 3: The ratio of workers to beneficiaries is out of whack because Americans are having fewer children but are living longer. Meanwhile baby boomers (born from 1946-1964) are turning age 65 and retiring at a record pace.
Fact No. 4: Luckily, there are many ways to strengthen Social Security for future beneficiaries. Here are the most popular: Lawmakers could slow the growth of initial benefits for higher earners, adjust the retirement age for our growing life expectancy, adopt a more accurate measure of inflation for cost-of-living adjustments, raise the payroll tax rate, or increase the amount of income subject to the payroll tax. All or some of the above would extend Social Security to the end of the 21st Century.
Congress has faced the short-fall problem before. In 1983, a compromise between Democrats and Republicans rescued the program from a similar crisis. Then as now, Republicans want to fix the problem by reducing benefits -- raising the age when folks can collect full benefits, for instance. Democrats want to increase program income by raising payroll taxes targeting those with higher incomes.
As part of the 1983 compromise, Social Security became taxable income for many higher income retirees. Would that provision see the light of day, now? Not likely.
In our super-charged political environment, there is intense political conflict over how to extend the life of the Social Security program. Nothing, especially in this mid-term election year (2018), is getting done.
Meanwhile, there’s a lot of claptrap out there that undermines the ability of our elected representatives to compromise on solutions. For instance, from the start in 1935, Social Security was set up as a pay-as-you-go program. In other words, your payroll FICA tax money is NOT going into a savings account for you but instead is put in a Social Security Trust Fund, which has been and is now managed as a separate account to pay current beneficiaries.
Neither does Social Security tax money go into the federal government's general fund. The revenue is invested in U.S. Treasury securities with interest payments going back into the trust fund.
Fact No. 5: For many, Social Security benefit money is a significant portion of their monthly income in retirement. Estimates have 21 percent of married couples living on Social Security alone while 43 percent of single seniors rely on Social Security for 90 percent or more of their income.
Every year, administrators at the Social Security Administration provide the U.S. Congress with an update on the program and its revenue challenges. This year’s Trustees Report shows that the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Fund reserves would “become depleted between 2033 and 2034 under the intermediate set of economic and demographic assumptions provided.” That’s if no new legislation is enacted.
At that time (2033-34), “tax revenues will be sufficient to pay only about three-fourths of the scheduled benefits after trust fund depletion,” say trust fund managers.
Will Congress get around to dealing with the projected Social Security short-fall? My belief is that, yes, something will be done to preserve the program despite the gnashing of teeth and crisis rhetoric poisoning our current political discussion.
"Although we work through financial markets, our goal is to help Main Street, not Wall Street." -- Janet Yellen, former chair of the Board of Governors of the Federal Reserve System. (1946 - )
BY JULIA ANDERSON
With global stock markets treading water or in decline it’s time to pay more attention to management fees on your tax-deferred and/or tax-free retirement accounts.
Why? Fees can cut into your long-term investment savings results. One adviser calls it “death by a thousand cuts.”
In a flat market, fees become even more important because while the value of your portfolio may stop growing, fees continue to siphon off revenue. (Your money!!!)
Ask yourself:Do you know and understand the management fees that you are paying on your managed stock funds and other retirement investment products? (Both before your retirement and while living in retirement).
What are those fees? The average annual fund fee, according to Brightscope.com, is 0.39 percent. Costs are lowest for the largest plans because those plans have “buying power” with management services.
Are there cheaper fee options inside your fund menu while still giving you maximum revenue growth potential?
There are two types of fees: Administrative fees related to record-keeping and investment and advisory service fees. They may be reported separately as fees and expenses.
After the Great Recession, the U.S. Dept. of Labor implemented a new fiduciary rule requiring that advisers to 401(k) plans always act in the best interest of the plan participants. Who knew that wasn’t always the case.
Strict implementation of that rule is now in limbo because of Trump administration adjustments but advisers are more obligated to follow the rule for fear of class-action legal challenges and general awareness of investors.
The best way to compare your 401(k) management fees is with peer groups of similar size. (click here) If the information leaves you with more questions, talk to your employer. You may be surprised that your company CFO may not know any more than you do about what fees are being charged to employee accounts. However, your questions may spur deeper investigation by your employer into the outside firm providing retirement fund management services.
If you are unhappy with your 401(k) program, withhold just enough money from your paycheck to get the company matching money that goes with the account. Then set up your own IRA or Roth IRA where you can automatically put the rest of your long-term savings. The fees on individual accounts with online brokers (Fidelity, Vanguard, others) are more competitive and transparent and LOWER.
Also, if you leave a job you may want to move your 401(k) account. An existing IRA or Roth IRA is a nice place to stash your savings and a great way to avoid paying taxes and penalties because of an early withdrawal.
Here’s an apples and apples comparison for why fees are important from CNBC.com:
You put $25,000 in a 401(k) that earns an average of 7 percent a year over 35 years without further contributions. Earning are reinvested. With an annual management fee of 0.5 percent, the total result after 35 years will be $227,000.
If your $25,000 in a 401(k) earns 7 percent over 35 years (reinvested) but has an annual management fee of 1.5 percent, the result will be $163,000. That’s 28 percent less!!!
While 1 percent may not seem like much, your higher fund management fee cuts into the long-term power of reinvestment year after year. Should we call this a rip-off? Yes.
Federal regulations require that fund managers report fees levied on 401(k) funds every quarter. But these disclosures may not be easy to understand. Having a friendly face-to-face chat with your employer’s accounting/administrative staff may encourage them to look into 401(k) management fees and then negotiate lower fees. They have as much to gain as you do.
Brightscope.com - “shining a light on mutual funds, 401(k) plans and financial advisors. Click here. BrightScope is a financial information and technology company that ”brings transparency to opaque markets.” A resource of better decision-making.
“Five Ways to Improve 401(k)s," Wall Street Journal, click here
"How a 1 percent fee could Cost Millennials $590,00 in Retirement Savings," Nerdwallet, click here.
"The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them." - Peter Lynch, an American investor and mutual fund manager. (1944 - )
BY JULIA ANDERSONMy mother thought she was buying stock in a light bulb company when she invested in General Electric Co. years ago. Back then GE was the big name in American-made appliances and light bulbs.
Mom loved being modern.
Her GE kitchen wall refrigerator purchased in the early 1950s kept running for 50 years. She loved it and she loved GE.
Mother held on to her GE stock for 30-plus years, acquired more and reinvested the company’s rewarding dividend. By the time she died at age 98, GE held a significant position in her diverse investment portfolio.
She would be surprised (and dismayed) to know that GE is no longer a light bulb company. She would be surprised and down right angry to know that GE is in deep financial trouble thanks to its expansion into commercial lending and long-term care insurance businesses.
When she died, I inherited mom’s GE stock and continue to own it despite the fact the share price has dropped like a stone in the past 12 months and the company has cut its quarterly dividend by half. (Since then I sold at a loss).
This has been a shock to long-time investors who had no idea until lately that GE faces a $15-billion liability from its long-term care insurance business.
Who knew it was in the long-term care insurance business!
Neither did investors have any idea until lately the trouble GE’s finance division faces, left over from the Great Recession of eight years ago.
Why were investors like my mom and now me in so the dark?
Because GE was less than honest about what was happening to its bottom line. GE Capital is now being investigated by the U.S. Justice Department because it may have violated federal lending laws in 2006 and 2007.
The company faces a shareholder class action law suit filed by a union pension fund that accuses GE of fraud for misstating the seriousness of its insurance liability.
How are investors supposed to track a company’s financial performance? How are investors supposed to determine if a company is worth investing in and/or whether it might be time sell? The time to get out of GE stock was back in 2007 but nobody knew that until now.
It turns out GE is not the only company that may be fudging the numbers.
Jason Zweig, writing in the Wall Street Journal (May 2018), has looked into how U.S. corporations like GE have been and are misleading investors.
In his report, “How companies use the latest profit fad to fool you,” Zweig said that in the past to assess profits, investors have looked to net income, or earnings per share.But, “over the past two decades or so, companies have come up with newfangled measures of profit. Chief among them: Ebitda, or earnings before interest, taxes, depreciation and amortization.” He said. “This is a modified measure of the cash generated by the business.”
Ebitda is NOT cash flow. It is not net income.
In another recent WSJ article, writer Charley Grant explains how evaluating the financial health of publicly traded health-care stocks is “getting trickier” because a new accounting rule means “companies no longer need to include an estimate of noncollectable debt on their income statements as a deduction from gross revenue.”
Neither do these companies have to mention uncollectible debt as a reduction to accounts receivable on the balance sheet. Huh?
So, what’s going on?Should investors be worried that they are being lied to? Should we be worried that the rule of law is being eroded, that corporate accountants can muddy the waters, making it hard to make an informed stock investment based on known risk and reasonable reward?
Are financial advisers and brokerage firms going along with the smoke and mirrors? Maybe.
In my mom’s case, she got lazy with her GE stock because it was kicking off a good dividend and going up in share price every year.
By the time she was in her 90s, she did not have the capacity to evaluate the company’s performance at a deeper level. She died happy thinking she still owned a light bulb company.
There still are reliable ways to measure risk and reward when investing in stocks. Here are a few tips (some of them from my mother):
- Buy what you know. Stick with blue chip companies that have a long track record of solid revenue growth.
- Buy companies with a reasonable dividend in the 2 to 3 percent average annual range.
- Reinvest the dividends for the long-term.
- At least every six months review your stock holdings: look at revenue growth, stock price performance and the P/E ratio, the comparison of share price to corporate earnings. If the P/E ratio gets over 20, consider selling all or part of your holding in that company. Put the money to work elsewhere. Don’t buy into a higher flyer with a high P/E ratio.
- Look at corporate earnings growth over several quarters. Steady but moderate increases are a good sign that corporate managers know what they are doing.
- Stay reasonable. Do NOT make buy or sell decisions based on what happens in Washington D.C.
- Always balance risk with reward. In stocks, bonds or anything else…the higher the REWARD, the higher the RISK.
- Count on a free American business news press to keep everyone honest by monitoring corporations and their reports as well as the regulatory arms of federal and state governments.
- Read the Wall Street Journal, Barron’s, Bloomberg News and other financial news outlets to stay up on the ebb and flow of corporate business news. Pay attention to creeping bad news. Don't be the frog in the pot of soon to be boiling water.
- Never stop learning, reading and being interested in economic and business trends.
Marketwatch.com “How to get started buying stocks.”
Fidelity.com “Investing Basics FAQs”
Investopedia.com “5 tips on when to buy your stock.”
Fool.com “Investing help for beginners: 10 things to knowbefore you buy your first stock."
"To the well-organized mind, death is but the next great adventure." - J.K. Rowling, British novelist, screenwriter, producer known for her Harry Potter fantasy series. (1965 - )
BY JULIA ANDERSON
Stories about women, men and money come my way all the time. Here are a few.
A woman lives with a man for most of her adult life – more than 25 years. They never married. First together in their youth, they brake up for a couple of years before getting back together in their 30s for the long haul.
He dies in his 60s.The long-time live-in girlfriend knew that while she and her partner were apart in those early years, he briefly lived with another woman. What she didn’t know was that while with this other woman he named her as beneficiary of his pension when he died. He never got around to changing that beneficiary assignment.
Now, even though that old relationship is long over, the former girlfriend collected a death benefit of more than $120,000 from his pension policy at his death. His long-time live-in girlfriend of 25 years gets nothing!
Because they never married and because he never changed the beneficiary designation, there is no way to challenge this. The other woman’s name was on the document. The long-suffering girlfriend’s name was not.
Scenario No. 2:
A couple, long married, plans their retirement and decides that they will start collecting the full pension benefit from his 30 years of employment. That’s instead of taking only some of the monthly benefit so that the wife would continue to collect on the pension policy if she survives him.
He was in apparent good health, they wanted to enjoy an active retirement, so why not?
Within six months of retiring with the full pension benefit, he is dead from a massive heart attack. She is left to pay her bills on her own without any long-term benefit from his lifetime of work and their shared life together. The pension payout dies with him.
Scenario No. 3: A couple had been married since their youth. A successful journalist and marketing guru, he launches a community newsletter in the 1990s during the exciting transition from paper to online news delivery. The newsletter was a money-maker.
Down the road, he is diagnosed with a blood cancer that slowly kills him. Despite the dire illness, he persisted in putting out the newsletter as if nothing is changing. He never talks with her about dying or about the details of the newsletter operation after he’s gone.
While she had been handling the business accounting, he dies without giving her training in news gathering or in technical support for its online delivery.
She struggled to learn on-the-job while grieving his loss. It was a lonely, miserable transition filled with stress and anxiety. She eventually (ala Martha Graham) prevailed and ran the publication for many more years.
There’s more: The newly widowed woman who faced massive debt left by her husband who owned a failing business. Or the woman who discovered unpaid mortgage debt left by a husband with a secret gambling problem. These men were in death denial.
A lot of men are.
In fact, Americans in general don’t talk about death, estate planning, end of life issues or even the details of retirement. Experts say it’s because few of us are ever exposed to death because we don’t live on farms anymore where the cycle of life is always present. We don’t witness death of family members because they are sheltered away in care centers rather than dying at home surrounded by loved ones, young and old.
When the topics of illness and death come up, we cringe. If pressed, men offer the pat answer, “we’ll be fine,” emphasis on the “we.”
Men, I think, more than women do not want to think about getting old or about dying. That leaves many women picking up the financial pieces after they lose their spouses. It means many women “pay” for the mistakes made by the men they live with because they ignore their mortality.
Those mistakes might be:
- Never getting around to updating beneficiaries on a pension plan or a life insurance policy or brokerage account.
- Choosing to take all the payout on a pension plan rather than preserving half for a surviving spouse after they are gone.
Men are certainly at fault for failing to plan to when they are gone. But women also get blame for not being more assertive about estate planning, for not making sure that they will be financially whole, if their spouse or their live-in boyfriend dies?
Yes, if men don’t want to talk about money, it’s difficult to have the conversation.
Talking about money is stressful, causes anxiety and can create push-back. But let’s say you live with someone in HIS house. How will that shake out if he’s gone and his kids want the real estate?
Are beneficiaries up to date on his accounts and policies? Avoid the ugly surprises.
What about jointly-owned vehicles, RVs and savings accounts? Is everybody clear on what happens if one of your dies?
Here’s what you can do, right now:
Make sure beneficiaries on all checking, savings, brokerage accounts are up to date.
If you marry or move in with someone after age 50, get a pre-nuptial agreement that spells out who gets what, when you each die.
On individual bank checking and savings accounts, put a POD (payable on death) name on the account. You can do it by filling out a form at the bank. The money goes to the POD beneficiary without the hassles of probate court or trusts. It can be your kids, live-in boyfriend or spouse.
If you own an account jointly, the surviving co-owner will automatically become the sole owner of the account.
Consider setting up a legal living trust to save time, money and the hassles of settling your estate in probate court when you die.
Here’s a suggestion from Dr. Keith Ablow, a psychiatrist, author and nationally-known mental health expert:
“If you do just three things in the next three weeks that you would do, for sure, if you knew you were going to die, you will improve your life,” he says. By taking this action, you will alter your life’s course, he suggests. You will be on the way to “truly living your life,” Ablow says.
Some women skim along on the surface of life...…. work, kids, grandkids. It’s busy-ness but not taking care of business. They are making assumptions about their financial future and what happens when the man they live with dies. Have the Money Talk!
“Why Denying Death Means Denying Life,” FoxNews.com, clickhere.
“The Psychology of Death: Facing up to our own mortality,” Psychology Today, click here.
Avoiding Probate with transfer on death accounts and registrations, click here.
Avoiding probate, www.nolo.comLiving trusts, www.nolo.com
I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
Editor's note: All information provided at sixtyandsingle.com is for informational purposes only. Sixtyandsingle.com makes no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions in this information or any damages arising from its display or use.