Category Archives for Invest & Retire

4 Ways to Help Your Parents Prepare for Retirement

The following post is by MPFJ staff writer, Laurie Blank.  Laurie is a wife, mother to 4 and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom and to a simpler, more peaceful life.

It’s only been in the last decade or two that personal finance education has really begun to weigh importantly on the minds of adults. Because of that, many people find themselves wondering how to help their aging parents prepare for retirement.

Helping your parents prepare for retirement isn’t just about the money they’ll need to live on after they quit working; there are many other factors that need to be considered. As I recently worked through this with my mom, I thought I’d share our experience and what issues we addressed as we helped mom prepare for retirement.

Figure out Living Arrangements

This is a big one for those considering retirement. Some retirees prefer to stay in the home they’ve lived in for many years; some prefer to move on to less work-intensive living.

It’s important to talk with your parents about how they wish to live after they retire. If they want to and can afford to stay in their own home, who will do the maintenance and upkeep work? Will the kids and grandkids help?

If that’s not an option, can your parents afford to hire out to take care of home projects? Is there room in the budget for a maid? It’s important to have these conversations early so that kids can understand their parents’ wishes and parents can ascertain whether or not it’s realistic to stay in their current home.

If moving is the best option, where will your parents needs best be served? Will a 55+ apartment complex suffice, or is more intensive care – such as assisted living, – needed? If your parents are considering moving, visit several potential places before picking one.

Also, it’s important to start the moving research process early as many senior living facilities have long waiting lists for new residents.

In my mom’s case, we chose (after a lot of research) a basic 55+ apartment complex. The place we chose has a plethora of activities available for seniors but is somewhat small in terms of the number of apartment units.

There are many different types of living complexes for seniors to choose from, which is why you should allow plenty of time for the research period before deciding on where your parents will move should they decide not to stay in their current home.

Establish a Post-Retirement Budget and Financial Plan

How much money will your parents need to live on? How much do they currently have saved for retirement? What will they earn monthly from social security, pensions and part-time jobs?

Income often changes after retirement. Are your parents prepared for this change? Do they have an idea of how they want to live in retirement and if they can afford that ideal?

Some people’s parents may need the help of a professional financial planner to determine how to strategize investments to produce a sufficient monthly income. Others may simply need to sit down and create a realistic post-retirement budget.

Helping your parents assess their current financial situation and create a plan that will allow them to survive financially during retirement is key to making the senior years enjoyable and peaceful for parents and for their children as well.

Create a Realistic Plan for Medical Expenses

Your parents’ current health status is important as you help them determine just how much money they’ll need to cover medical expenses during retirement. Find out what prescriptions they’re currently taking and how much each one costs per month.

Factor prescription and other regular medical expenses in as you work with your parents to create a realistic budget.

Also, work with them to determine what types of medical insurance coverage they’ll be eligible for after retirement. Will they be covered by Medicare only, or do they have insurance coverage eligibility through their former employer or military time served?

How much will they pay monthly for their coverage? What does their coverage cover in terms of expenses and what are the deductibles? Having a thorough understanding of these factors will help you determine if your parents have sufficient income to pay for medical expenses.

Make Sure a Proper Will is in Place

Laws vary from state to state, so it’s important for you to check on the state laws governing estate property where your parents live. Some states require that all property go straight to probate if the property is only listed in a parent’s name, even if the will states clearly who the property should go to upon death of the owner.

In order to avoid long court battles, it’s wise to check on individual state laws where your parents live and to title all property (including bank and investment accounts) in a way that makes sense for your family.

It’s also important to discuss your parents’ burial wishes with them. Although this isn’t a fun topic, it’s important to know what your parents’ wishes are and to plan accordingly for those wishes (both financially and regarding the details) so that those details are out of the way and aren’t creating stress later on.

Retirement can be an exciting time and a scary time for one’s parents as they look forward to a new chapter of life. The more prepared you can help them be beforehand, the easier the transition will be.

How about you all? How have you helped prepare your parents for retirement and beyond?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/rzuranski/6444826991/

8 Unconventional Things You Could Do to Retire Early

The following post is by MPFJ staff writer, Chonce. You can read more articles by Chonce over at her personal blog, My Debt Epiphany. Enjoy! 

Early retirement is not just a craze. It’s a lifestyle and state of being that attracts many people who are either burnt out from working or just want to enjoy life to the fullest while considering work as an option and not a mandatory activity.

In order to retire early, it’s no secret that you need to start investing heavily early on. Compound interest and diversified assets will be your keys to achieving financial independence so you can retire way earlier than at age 65.

I always find it fascinating to read true stories about how certain people amassed enough wealth to be able to enjoy early retirement. At first, it sounded like an unrealistic fantasy and something that was out of my reach. But since I’m still in my 20s and I’ve learned how to adopt a frugal lifestyle and sacrifice the things I don’t truly want or need, I see early retirement being a real possibility for me and anyone else who wants to commit to the end goal.

As a result, here are 8 unconventional things you can do to help yourself retire early.

 

1. Save More than Half of Your Income

Saving 10%-20% is what most people will consider an acceptable savings rate if you want to live an average comfortable life. But since early retirement isn’t everyone’s average goal, you’ll need to take your savings rate to the extreme and in most cases save well over 50% of your income.

Of course the more you earn, the more significant your savings will be especially if you have a dual income household. A large part of your savings strategy should include investing not only in retirement accounts but in stocks and bonds so you can have a diversified portfolio.

In my opinion, your liquid savings should be kept at minimum and in a high-yield savings account. Depending on how stable your situation is, it would be best to carry anywhere from 6 months to 1 year’s worth of living expenses in your emergency fund.

 

2. Spend Absolutely Nothing on Clothes and Entertainment

In order to save 50%+ of your income, you’ll need to cut a few expenses temporarily or even permanently to free up more of your income to dedicate to your cause. Clothes and entertainment are the first spending categories I think of when considering which things to cut.

You probably have more clothes than you think when you go through your closet and consider everything you have. I was able to stop purchasing clothes for 8 months last year and just wear what I have. I saved so much during the time because I used to shop a lot.

With entertainment, consider it a fun challenge to see how long you can go without spending money on enjoyable outings and meetups with friends. I say ‘fun’ because you should still go out and have a social life. You’ll just need to search for free events, host some get togethers at your place, and get creative.

Take the savings you generate from having a $0 entertainment and clothing budget and invest it.

 

3. Sell Your Car and Invest the Money you Save Without It

Owning a car can cost you tens of thousands of dollars throughout your lifetime thanks to expenses like the price of the car, interest if you finance, repairs and maintenance, and more.

If you can get by in your neighborhood by walking, riding a bike, or using public transportation, you could save a ton of money that could be put toward your retirement goals. You can even use Uber to help fill in the gaps and score free rides by referring others to download the app and sign up.

 

4. Work a Side Hustle for Years

Having a low income can very well prevent you from being able to retire early. To combat this, consider asking for a raise at your current job, applying for a new position, or working a profitable side hustle. There are so many side hustle options out there and it basically just depends on what your skills are and what you like to do.

You can write, become a virtual assistant, do graphic design, sell items online, cater, give lessons, tutor, babysit and so on. Side hustles are often short-term since it’s challenging to managing a full-time job and a gig on the side. However, if you can manage your time properly and take care of yourself and your needs first, you may want to consider side hustling long-term so you can rack up a ton of extra cash.

 

5. Become a Minimalist

Becoming a minimalist is a great way to clear your mind and free yourself and your home from material possessions so you can become more appreciative of what you do have. It’s also a great way to save money and avoid lifestyle inflation.

If you keep buying more and more stuff, you’ll never retire early. With minimalism, you can sell all of the belongings you don’t want or need and enjoy a clutter-free lifestyle while focusing on what you do value in life.

 

6. Only Travel Domestically

Traveling is a must for some people, but it’s expensive. If you don’t want to wait to travel but still want to retire early, consider taking only budget domestic trips and taking advantage of travel hacks for the time being.

Only taking one small trip within the country each year is not a bad tradeoff if it still allows you to reach your goals. Then, you can save international travel for when you retire early.

 

7. Pay Yourself for Coffee Each Day

Whether you purchase coffee each morning or not, this is a great strategy to implement to help you set more money aside for the future. Since the average cup of coffee costs $4 or so, make your own at home, but still pay yourself each day in the amount the coffee costs at a cafe.

If you give yourself $4 each day, that’s $28 per week, $112 per month, or $1344 per year extra that you can save and invest.

 

8. Don’t Buy a House

Buying a house was the American Dream decades ago and still is today for some people. However, more and more adults are putting off this huge financial step in their lives in order to pursue other passions.

Depending on where you live, renting may not be considered as throwing away money if market rates are low. Plus, the average person spends hundreds of thousands of dollars financing their home and paying it off. Imagine if you could be enjoying that money in retirement instead.

Of course you’d need to be okay with denying the option of homeownership.
But how much is your goal of retiring early worth?

When planning for early retirement, it’s all about maximizing your investment contributions and deciding what you will give up now in order to enjoy financial freedom later.

How about you all? Have you ever thought about retiring early? What unconventional things could you do to make that a reality?

Share your experiences by commenting below! 

***Photo courtesy of https://www.flickr.com/photos/jakerust/17160423251/in/

How to Get an Online Loan for Your Business

The following is a guest post. Enjoy! 

Many small business owners need to borrow money to help their business grow, but they find that getting a traditional bank loan is too difficult. Banks have extensive applications, credit score requirements and often are reluctant to lend to new businesses without several years of an established track record of earnings. Also, many banks have limited the number of loans they make in smaller amounts of $200,000 or less, which is often the amount of money that truly “small” or startup businesses want to borrow.

With these challenges in mind, many small business owners are looking to new options to get small business loans. Fortunately, there are several alternatives now available, known as platform lenders, which offer online loans for small businesses.

If you are considering getting an online loan for your business, here are a few key points to keep in mind:

Do Your Research

Before choosing a lender for your online loan, it’s important to do your homework. Compare a few different lenders and the types of loans they offer; read customer reviews and Google each company that offers online loans to see if they have any complaints or regulatory issues. You should make sure you’re dealing with a legitimate company that has a good track record of solid business ethics. Read news coverage about the various online lenders that you are considering to see how their lending platform works and whether their model of online loans is right for your needs. Different online lenders serve different types of customers and offer different sizes and terms of loans – not every lender is the same and not all of them might be the right fit for your business.

Provide All Necessary Information

Many small business owners get frustrated with the traditional bank loan application process – filling out pages of forms and waiting a long time to get a decision. Many small business owners feel like banks are only interested in their credit score and income history, and are not paying enough attention to the bigger picture of what their business is about and how their business can become more profitable. This is one area where online loans for your business can be a great solution because most platform lenders look at a wider variety of information when deciding whether to issue you a loan. Instead of just looking at your credit score or track record of earnings, platform lenders will often assess your PayPal transactions, your social media following, your current cash flow and other factors that are often more favorable for startups and online businesses. Especially if you run a relatively young business and you do a lot of sales online, online loans might be the right solution for your borrowing needs.

Understand How Your Loan Works

Before you commit to getting an online loan for your business, make sure you understand the fine print of how your loan works – including the terms, repayment deadlines and total fees. Many online loans work like a “line of credit,” also known as a revolving credit account, which gives you a credit limit (similar to a credit card) that you can borrow from as much or as little as you need, and then pay back over time in flexible installments (either all at once or in smaller amounts, as long as you meet your minimum payments). But some online loans might require fixed monthly payments, so be sure that you understand exactly what is expected and can pay off your loan in whatever manner works best for your business.

What’s It Like Attending the Berkshire-Hathaway Annual Meeting?

The following post is by MPFJ staff writer, Marie. You can read more of Marie’s articles over at her own blog, Family Money Values. Enjoy! 

Annual company shareholder meetings are typically pretty boring and infrequently attended.  The Berkshire annual meeting has, to date, been an exception.  Nicknamed the Woodstock of Capitalism, this meeting has historically been a sell out event in Omaha, NE.  Specifically, hotel rooms have usually booked up months before the spring meeting.

I’ve owned some B shares (the cheap shares) of Berkshire for 3 years now and have attended the meeting each year.  My family lives just a 2.5 hour drive from Omaha, so for us, the meeting is close enough for a day trip.  B shares have only been sold since 1996.  Baby B’s, as they are called, currently sell for around $140 per share while the original A shares market price hovers around $220,600 per share.

Attendance History

The first year we attended the meeting, we invited our two grown sons to go with us and since one lives out of town, we all drove up Friday evening and spent the night in a hotel so we could attend the morning activities.  We arrived at the meeting well after the doors open (we didn’t relish the thought of standing in line for hours to get in) but prior to the opening ‘show’.  The show is just a movie that is played on the multiple large screens in the Centurylink Center in downtown Omaha, NE.  That first year it seemed to us to be primarily a promotional movie – entertaining yes, but not what we came for.

In subsequent years, my spouse and I left our home early Saturday and drove up, missing the overpriced hotel rooms and the long lines trying to get into the stadium.  But we did arrive in time to listen in on several hours of Buffet/Munger Question/Answer time as well as to peruse the exhibit hall were many of the Berkshire owned companies offer discounts or information about their products.

Over the years, the number of attendees at this annual meeting has risen, from about a dozen in the late seventies to the probably max at last years meeting.  Attendance at the event last year was around 40,000 – so not everyone fits in the stadium at the same time (it holds around 20,000).  Although the stadium looked pretty full when we headed in after the lunch break, there were empty seats this year (unlike last).

The meeting was live streamed for the first time this year, probably reducing the number of live attendees.  You can listen to it until the end of May on Yahoo Finance.  I’m betting that 2015 will be regarded as the height of attendance for this event.  Some journalists are theorizing that Buffett and Munger are starting a transition phase wherein their predominance at the meetings will begin receding, but most anticipate that for next year, at least, barring unforeseen circumstances, both will still be strongly involved in the meeting.

It’s a Marathon

I’ve been hoping to take my grandchildren to the meeting, but knowing they are too young to take much interest, have avoided it to date.  Next year may be their year – I want them to go while Buffett and Munger are still highly involved with it.  The kids will be 12 and 9 and may be able to sit still for an hour or so of the meeting itself, and will no doubt enjoy eating Dilly Bars with us in the exhibition hall.  I need to take them soon, after all Buffett is 85 in 2016 and Munger is 92, and they appear to be phasing out of the meeting.  Not that I blame them!

It’s got to be an endurance test for both – 3 days of being ‘on’.  At least 6 hours of impromptu (to them) question answering in front of crowds in the tens of thousands; plus one on one interviews; walking the expo hall; dropping in on Omaha BRK company events throughout the weekend; and more.  You can see the full weekend schedule here.  I wonder if they are sorry they ever started making such a big deal out of the annual meeting.  By the end of the Q &A, Buffetts voice is typically cracking.  I couldn’t do it and I’m 20+ years younger than they.

At least they don’t attempt the 5K race on Sunday!

 

Shopping the Exhibition Hall

Always before, we have waited until the meeting broke for lunch (an hour starting at noon) to hit the expo.  This year, my spouse and I went straight there after arriving in Omaha and hiking in from the parking lot ($8 to park plus gasoline was our only cost to attend).  It is a huge hall with 43 Berkshire companies exhibiting.  While still crowded before lunch (and was also on Friday – according to an employee – an insurance adjuster – of one Berkshire company we met standing in line to walk through the $300,000 Forest River RV), we could at least walk around without having to stop and wait for a break in the flow of people.

Some of the more popular exhibits included Justin Brands, which had a store sized exhibit with lots of different styles of boots available to purchase.  Fruit of the Loom was also well attended, with nice discounts on underwear and fun special products like t-shirts saying ‘Future Warren Buffett’ or “BRK Meeting’ or paper hand held fans with Munger’s face on one side and Buffett’s on the other.  If you want to wait in line you can walk through the inside of one of the Netjets plane models or (as we did), look inside luxury RVs; campers or mobile homes.  See’s candy, Nebraska Furniture Mart and DQ also had discounted wares for sale.  Not only were the Dilly Bars 50 cents cheaper, but it was also quick to get – and you could easily walk around with it while strolling through the exhibits.  We each had two!

While the BNSF model train exhibit was exciting (yes even for adults), knowing that you own a tiny share of a railroad is also exhilarating, even if maintenance costs still exceed depreciation costs as we learned during the Q & A.

Once the meeting let out for lunch, the floor gets so crowded that if you want to stay together, you’d better be holding hands!  We left to make our way to the meeting when the crowds got overwhelming.

 

The Q & A

Looking around the crowd, I saw mostly white folks, with a sprinkling of other races, evenly distributed between men and women, young and old.  Attire ranged from very casual to high heels, with dresses or suits and ties.  All of us had the ubiquitous lanyard with our blue plastic meeting credentials hanging around our necks.

Walking into the meeting arena you see at one end, a stage with 3 tables, the center one being where Bufett and Munger sit, the one one the left and right hold analysts and/or journalist who read or ask the questions.  Non participating press members sit high in the stands.  At the other end of the room this year, was the equipment to live stream the Q & A sessions.  On the floor in the middle there are folding chairs holding board members and other privileged attendees nearest the stage and other shareholders further back.  Bill Gates is a board member, so it is kind of a thrill to see him in person.

Across the other 20,000 or so seats you could see papers, bags, or signs taped to the backs of chairs or folks sitting in them – all reserving space for when the meeting started back up.  Multiple big screens are in place around the front of the arena, no need to bring your binoculars.  Taking pictures is prohibited, and you could lose your camera or cell phone by doing so.

Around the room there are 9 different microphone stations from which selected attendees ask questions.  The selection happens at 8:30 AM with a drawing.

Attendees get chummy – conversations spring up between folks in line, and folks sitting close by (as in most stadiums, the seats were cramped) and etc.  I sat next to a young man who looked like he might be Chinese. He was holding some equipment that I imagined to be a translation device. Some journalists estimate that there were at least 3000 people from China attending. On the other side of us was a young man from Omaha.  The folks in front were from New York.  It is fun and interesting to see where people are from and why they come to the meeting.

Security officers could be seen pacing the the floor, and yes, you do get your bag checked, and walk through a metal detector upon entry to the Center.  Attendees seemed quite comfortable leaving their possessions at their seat while they went elsewhere however.

After Buffett and Munger took their seats following lunch, the lights were dimmed and Warren casually said ” OK lets get started” and named the first person who was to ask a question.  He alternated letting questions come from journalist (reading ones pre-submitted by email from shareholders); analysts; or live selected shareholders (which he identified by the microphone station from which they were to ask the question).  One young shareholder from Arizona wanted to know what they thought of the cattle business – as his family had a cattle ranch in Arizona.  Although Buffett typically talks at length on each question before deferring to Munger, this time he passed it right along.  Charles Munger is nothing if not direct (he is also so very funny).  His response was something like “It’s among the worst businesses I can think of”.  Then there was this dead silence until Warren stepped in to attempt to soften the response just a bit.

For a nice summary of the questions, if you don’t want to sit through the saved feed on Yahoo, check out Market Watch.  Many with press credentials post live comments (like this Market Watch post) while they are attending the meeting.

Following the Q & A, the actual shareholder meeting part of the event takes place, again led by Buffett.  It has the typical format, do we have a quorum, election of board members, ratification of accounting and etc.  At this years meeting, however, a shareholder issue was presented.  I’ve seen these being voted on in other company’s proxy votes, but had never witnessed one in person.  This one was in favor of reporting by BRK on how climate change would affect the insurance part of the business.

In fact, it was an opportunity for activist to present a case to powerful board members in a highly public venue on why something should be done about climate change (specifically, they wanted carbon fees).  It was (as with many of these types of shareholder proposals) an attempt to draw attention to their cause.  The written proposal was projected on the screens and the proposers verbally made their case.

Speaking for the cause was a doctorate holder predicting that the seacoast cities would soon be destroyed by melting glaciers making the sea level rise, with multiple speakers following him who made a case for Buffett and Berkshire to get involved with the cause. After each speaker, Warren would comment – typically that yes, he knows that climate change is an issue and needs to be dealt with, but that it won’t be affecting the risk level of the BRK insurance arms in the next few years.  Although he probably personally would support the cause, he kept his eye on the mission of BRK and kept coming back to it.  The shareholders had already rejected requiring the report.

We enjoy attending this event in person.  It is interesting to see some of the other shareholders, knowing that they are probably among the world’s success stories (since we all own the stock) and to be in the presence of two of the countries financial ‘elders’ dispensing their wit and wisdom.  Attendees all appear to have a somewhat similar goal – learn from the best investors of our time – almost generating a cult like experience.  The shopping’s not bad either!

How about you all? Have you ever been to a stockholder meeting? What was it like? 

Share your experiences by commenting below!

***Photo courtesy of https://www.flickr.com/photos/e27sg/6725868673/in/

Reviewing Your Insurance Needs – Term Life Insurance

Over the past 1.5 years, I have experienced several significant life changing events (getting married in September 2014, moving, and had a baby in January 2016 – picture of Alex below!) that have given me the need to re-evaluate my current insurance needs. One of these potential insurance needs is life insurance.

The purpose of this post is to share my journey in to 1) discovering if this type of coverage is well-suited for my personal situation and if so, 2) how I went about obtaining life insurance from a provider.

Let’s get started! 

A brief side note: In a previous post, I looked at whether term or whole life (used for the Infinite Banking Strategy) insurance was better suited for me, discovering that term life was more appropriate. As such, the decision of using term vs. whole life insurance is outside the scope of this current post.

 

Do You Need Term Life Insurance?

A logical first step in this journey was to answer the question, “Do I need term life insurance?” Therefore, this is the first topic we will cover.

Eric Tyson in his book, Personal Finance for Dummies, provides the following concise bulleted list of the types of people who DO NOT need life insurance.

• “Single people with no children.”
• “Working couples who could maintain an acceptable lifestyle if one of the incomes were to disappear.”
  • This essentially means that both individuals in the relationship earn equal incomes and/or have the same amount of assets.
• “Independently wealthy people who don’t need to work” (ie people with rich relatives, people who have received a large inheritance, etc).
• “Retired people who are living off their retirement assets.”
• “Minor children who are dependent on their parents.”

Therefore, he suggests that anyone who falls OUTSIDE of these categories above NEED term life insurance coverage because you have others who are fully or partly dependent on your income.

In my case, I am not single, not (yet anyways) independently wealthy, not retired, and not a minor anymore. I am, however, married, and my wife and my incomes are pretty intertwined. Currently, we are essentially living off of my income and saving all of hers (she works from home and is self employed) for retirement and other purposes. In this regard, it could be argued that my wife is quite dependent on my income, and could not maintain our current state of living and working situation if I were to pass away. However, since my wife does have a master’s degree, I do believe she could find a non-self-employed job that pays a good income and providing an “acceptable” lifestyle within a couple years after me dying, if she needed to. Therefore, in the current state, it appears that I would need life insurance (but my wife would not), and that it would be of a reduced amount due to my wife’s future earning potential.

However, my wife and I also had a child in January of 2016, which will require support for a minimum of ~ 25 years, warranting a larger amount of life insurance for myself than if we had no children. Additionally, as David Bach recommends his book, Smart Couples Finish Rich (one of my favorites since it covers value-based financial planning!), a stay-at-home / working-at-home parent should also be insured, since if the working-at-home parent passes away, additional child care expenses would be incurred, which can be quite expensive if done full time.

My Decision: Because of the considerations above, it seems warranted for both my wife and I to have a term life insurance policy, in some amount.

 

What Type of Term Life Insurance Policy Should You Purchase?

So, you’ve decided that your personal situation is well-suited for obtaining a term life insurance policy. The next step is determining the type of term life policy that is best for you.

Below are the recommendations of from the books of several of my favorite PF authors:

• Dave Ramsey in his book, Total Money Makeover, recommends to purchase a 20 year level-term life insurance policy.
• Eric Tyson in his book, Personal Finance for Dummies, recommends to purchase a guaranteed-renewable policy that adjusts in price every 5-10 years over the period of time needed for life insurance coverage.
• Stewart Welch, in his book, The Complete Idiot’s Guide to Getting Rich, recommends to purchase a 15 or 20 year level-term policy, with the reasoning that after 20 years, that should allow enough time to have accumulated enough wealth to be independent.
  • He also recommends a smaller 10-15 year level-term policy for a stay-at-home / work-at-home parent.
• JD Roth in his book, Your Money The Missing Manual, recommends to purchase guaranteed renewable term life insurance.
• David Bach recommends his book, Smart Couples Finish Rich, to buy a level term policy for 20 years.

From the advice above, the consensus seems to be to purchase a 20 year level-term policy, meaning that you have the same death benefit and same premium for 20 years. This is almost akin to the the fixed rate loan of the mortgage industry.

My Decision: From the advice above, it seems that 20 year level-term policies are best suited for myself and my wife.

 

How Much Term Life Insurance Do You Need?

Having decided that you need one or multiple term life insurance policies, the next step is to determine the Dollar value of coverage you need.

In reading the literature, there seem to be two ways of doing this – 1) going for a ballpark figure and obtaining coverage X number of times your annual income or 2) actually calculating the amount of insurance to purchase by predicting future needs, current income, investment rate of return, etc.

Listed below is a summary of my literature findings:

• Dave Ramsey in his book, Total Money Makeover, recommends to purchase policy equal to about 10 times your annual income.
• JD Roth in his book, Your Money The Missing Manual, recommends to purchase life insurance somewhere between 10-20 times your annual income.
• David Bach recommends his book, Smart Couples Finish Rich, to buy a policy between 6 – 20 times your annual income.
• Eric Tyson in his book, Personal Finance for Dummies, provides a nice table correlating the desired number of years of income to replace with a factor with which your annual after-tax income should be multiplied by to determine how much life insurance needed.
  • To replace 5 years of income, multiply your annual after-tax income by 4.5.
  • 10 years –> multiply by 8.5.
  • 20 years –> multiply by 15.
  • 30 years –> multiply by 20.
• Stewart Welch, in his book, The Complete Idiot’s Guide to Getting Rich, provides a pretty simple 3-step calculation (shown below) for determining life insurance needs (He recommends a $200,000 – $400,000 policy for a stay-at-home parent).
  • Multiply your total annual family income by 0.80 discount factor.
    • = Total income needed by surviving family.
  • Total income needed by surviving family minus surviving spouse’s annual income.
    • = Surviving family income need from outside sources.
  • Surviving family income need from outside sources divided by decimal form of rate of return expected on life insurance proceeds and other investment assets (0.075 is a reasonable estimate here).
    • = Total amount of money needed to provide for your survivors.
  • Total amount of money needed to provide for your survivors minus current savings and investments
    • = Total life insurance policy needed for deceased spouse (this calculation repeated for surviving working spouse).

In my opinion, the best approach (without considering costs/premiums) to estimating life insurance needs seems to be a hybrid one. This means comparing the results of a “more detailed” calculation with a quicker annual income multiplication (a factor of 20 seems best given the literature findings above) estimate and then use the most conservative / highest number.

My Decision / Results:

As mentioned above, I ran the numbers for my wife and I, and I can came up with 3 life insurance policy values for her, and 2 for myself.

• Myself (not working from home)
  • First, I came up with a target life insurance value representing 20 times my annual gross income.
  • Next, I performed the calculation recommended in the book, The Complete Idiot’s Guide to Getting Rich, and came up with a value representing ~7 times my annual gross income, so much lower than the “quicker” 20 x estimate.
• My wife (self-employed, working from home)
  • As I did with myself, I came up with a target life insurance value representing 20 times my wife’s annual gross income from working from home.
  • Next, I performed the The Complete Idiot’s Guide to Getting Rich calculation, and actually came up with a negative number after we subtracted our current savings/investments.
  • Finally, we have the number of $200,000 – $400,000 policy recommended for a stay-at-home parent, which is lower than the 20 x estimate previously mentioned.

Ideally (not considering cost), the general rule of thumb is that you want to be as conservative as possible with life insurance, and the most optimal course of action for me is to obtain two policies, one that represents 20 times my wife and myself’s incomes, respectively. This is the most conservative course because the 20 x estimates yielded the highest life insurance values.

 

Where Should You Buy Term Life Insurance?

So, you’ve decided what type of term life insurance you want to buy and a ballpark estimate of how much you need in a policy. Great!

The next step then becomes determining 1) where you should buy your policy and 2) how much will it cost.

Employer / Group Plan vs. Individual?

The general consensus in the financial literature seems to be that it is best to purchase a life insurance plan as an individual policy (in other words, not through your employer) since it is about the same price (health and disability insurance, however, are much cheaper purchased through your employer). This also avoids having to worry about if your life insurance is “portable” in that it follows you when/if you change jobs.

However, it is important to note that employers often do provide some amount of life insurance for free to you. For example, my current employer provides life insurance in the amount of 1x my current annual salary without having to pay any premiums myself. Of course, this free insurance is likely too little for most people who need life insurance, but it is a nice freeby!

Online – Direct or Through an Independent Agent/Broker?

Having now decided to obtain an individual policy, the question becomes, “Do you purchase the policy online or through an independent broker?”

It is important to stress here the word INDEPENDENT, as an independent agent/broker can shop around among multiple companies to find you the best deal. This is much different than a “captive” agent, who only sells for one company (examples include your local State Farm agent, local Geico agent, etc).

My opinion is that you won’t go too wrong by choosing either online or an independent agent. If you like to do things quickly and are self-sufficient, online is probably the best way to go. If you value the guidance of a real person, on the other hand, an independent agent is probably a good idea.

For me personally, the way I will likely go is to use both – first obtaining quotes online and then buying the actual policy through an independent agent (and using the online quotes to ensure that I am getting the best price from the agent).

 

Where Do You Obtain Term Life Insurance Quotes Online / How Much Does Coverage Cost?

The following sites were recommended in the PF books I have previously mentioned in this post as good sources for term life insurance quotes:

• Reliaquote
• Selectquote
• Term4Sale
• Ameritas
• Einsurance
• Intelliquote
• Insweb
• Insure

However, having gone through the process of obtaining quotes from these websites, the most straightforward sites (which give you a immediate online quote the fastest and don’t require an agent to spam your phone 5 times per day) I found are listed below:

• Reliaquote
• Intelliquote
• Term4Sale (my favorite site)

My Results

For myself, the best premium quotes obtained from the 3 websites above for a 20 year level-term life insurance policy in the amount representing 20x my annual gross income were around $80 per month, or $960 per year.

For my wife, the best premium quotes obtained a 20 year level-term life insurance policy in the amount representing 20x her annual gross income were around $24 per month, or ~ $294 per year.

So, if I was to go the most conservative route and choose to obtain life insurance policies equal to 20x our annual income, we would be looking at spending almost $1,300 per year on life insurance premiums.

 

Reality Check Based on Online Life Insurance Quotes

However, looking at the $1,300 per year price tag for maximum life insurance sort of bothered my cheap side.

While I could definitely afford $1,300 per year in premiums, it makes me wonder if it is necessary / worth giving up the chance to invest that money. This seems more appropriate in my personal situation given that I have been saving since I was 18 and have accumulated a medium amount of assets for a 30 year old. In other words, I simply don’t “feel” that it is necessary to have the largest amount of life insurance possible (20x annual income).

What Is The Purpose of Life Insurance For You?

So, where do you go from here if like me, your reality check revealed that 20x annual income is too much of a premium to warrant the large amount of insurance?

Personally, I next asked myself how I would want my life insurance policy to be used if I were to pass away. I would essentially want my life insurance policy to 1) pay a lump sum, 2) be invested by my surviving family at a reasonable interest rate, and 3) provide enough income for my family to live off of without them having to touch the money I have currently saved for retirement (so it can be used for their retirement).

In other words, my desire for how life insurance should be used is quite similar to the policy value calculation method from Stewart Welch, in his book, The Complete Idiot’s Guide to Getting Rich, discussed previously. However, current savings and investments would not be subtracted at the end since I would want to preserve that.

Performing this calculation lands me at needing a term life insurance policy approximately equivalent to 10 times my current annual income, which coincidentally, is what Dave Ramsey recommended in his book.

Listed below are the premium quotes for 20 year level term life insurance policies for my wife and I equivalent to 10x our annual incomes:

• Wife – $17 per month, or $204 per year.
• Myself – $49 per month, or $588 per year.
  • Total for 10x annual incomes policies = $792 per year, which seems pretty reasonable.

 

Term Life Insurance Application Process – Independent Life Insurance Agent

Armed with the prices of the term life insurance quotes obtained online, I then approached an independent insurance agent (the same insurance agent through which we obtained our Acuity homeowner’s insurance) in our area to also provide me with quotes for the same type of life insurance coverage.

As expected based on my previous experience with this agent providing very competitive pricing, the quotes provided by the independent insurance agent for the same type of term life insurance coverage for my wife and I were either similar or cheaper than the quotes I found online. As such, I decided to proceed with obtaining life insurance through the agent.

Step 1 of the Term Life Insurance Application Process – The Application

Shortly after giving the go-ahead to my agent that we wanted to proceed with obtaining life insurance through him, my wife and I were contacted by a third-party hired by the insurance company (Protective Life) to handle the application process.

The questions they asked us to provide answers for were pretty straight-forward and expected (everything needed to assess when we would potentially die and our ability to the pay the annual insurance premiums):

• Current and past job information, including salaries.
• Checking, savings, and retirement account information.
• Information about what debt we currently are carrying.
• Current and past health information, including history of diseases in family, health problems, and doctor contact information.

Step 2 of the Term Life Insurance Application Process – Health Exam

After completing the paper/electronic application, my wife and I set up appointments for a comprehensive life insurance exam through another 3rd party (ExamOne, part of Quest Diagnostics).

The health exam included getting our physical vital signs taken (heart rate, blood pressure, etc), a question/answer interview session about our health history, and blood + urine samples submitted for an in-depth battery of tests for indicators of the function of our internal organs. Being a scientist myself, I was pretty impressed at the large number (approximately 30) of test endpoints that our blood/urine was measured for.

Step 3 of Term Life Insurance Application Process – Underwriting / Life Insurance Policy Approval

After we received the laboratory results from the health exam, our entire insurance application was reviewed by Protective Life’s insurance underwriters to determine our risk of death, insure-ability, and what level of premium to charge us.

In the end, my wife received the highest health rating (lowest premium pricing), and I received the 2nd highest health rating (2nd lowest premium pricing).  We then reviewed/signed Protective Life’s insurance offer to us. The finalized premium pricings are shown below. As expected, they were right on par with the online quotes and the preliminary quotes from the insurance agent prior to submitting our application.

• Cost of my policy – $49.49 per month
• Cost of my wife’s policy – $14.94 per month.

Protective Life – Universal Life Insurance Structured as Term Life Insurance

One interesting twist came up when I was doing the final review of the policy offers from Protective Life. Intriguingly, instead of issuing a straight-forward term-life insurance policy, Protective Life insurance issues term life insurance policies as Universal Life Insurance.

A usual universal life insurance policy features a portion of the monthly premium going towards building cash value in some sort of investment vehicle. However, the term-structured universal life policies we obtained from Protective Life had no dividend payments, and no premium goes towards building policy cash value. The policy is designed to have a level/constant face value and non-changing premium cost for the 20 year term that I requested.

After 20 years, the policy provides the flexibility to continue having life insurance coverage if I so choose. Each year after the 20 year period, the face amount of the life insurance coverage decreases, and after ~ age 80, the premium cost would increase. However, I don’t have any plans to continue the coverage after the 20 year period.

So, there you it – our journey of obtaining level-term 20 year life insurance policies. Overall, I was pretty satisfied with the process, and it wasn’t too much of a headache at all. We are happily paying our ~$65 per month of premiums through automated bank withdrawals, and we haven’t really noticed any significant difference on our monthly finances.

How about you all? Do you have life insurance coverage? If so, what type of insurance did you opt for? Did you purchase online or through an agent? 

Share your experiences by commenting below! 

Why You Should Live on Less Before you Start Earning More

The following post is by MPFJ staff writer, Chonce. You can read more articles by Chonce over at her personal blog, My Debt Epiphany. Enjoy! 

Should you spend less or earn more? This is a common question with a tough answer. While the answer heavily depends on who you are and what your financial situation and preferences are like, I’ve always been in favor of spending less and adopting a frugal lifestyle before you start to earn more. It’s one of the best ways to improve your finances quickly and truly get what you want out of life.

To fully understand the concept of spending less over earning more, you have to understand the benefits of earning more and how they are only sustainable after you’ve committed to living on less.

So why live on less when you can just work on earning more money right away?

Adopting a Frugal Mindset and Lifestyle Forces you To Work with What you Have

Living on less helps you prioritize your wants over your needs since there is a limited amount of money to go around. When you start living frugally and cutting your expenses, all of the sudden, budgeting becomes more of a necessity as you learn to strategically spend and save your money and make do with what you have.

When you have more money to spend, it’s easy to not take your budget seriously and splurge on items that you don’t truly need.

Back when I was in college and taking care of my son, I’d be happy if I earned $10,000 per year annually. While I definitely wanted to earn more money, I learned how to make ends meet so we could live comfortably and prioritize what our main expenses were, and which ones we didn’t need.

To help get through my low earning years, I gave up a lot of non-necessities and losing out on those expenses never made me any less happier. It actually gave me a relief because I didn’t have much to worry about each month.

Living on Less Motivates you to Learn More about Personal Finance

If you really think about it, why do most people turn to personal finance websites and resources? Often times, it’s because they want to learn more about how to manage the money they have, increase their income, get out of debt, or grow their money.

If your financial situation is perfect and you’re earning plenty of money, what motivation do you have to increase your knowledge about personal finance?

What piqued my interest in learning more about how to manage my money was having student loan debt and a low entry-level salary of $28,000 per year when I obtained my first job out of college. Today, I’m so thankful for my student loan debt because without it, I never would have started reading about personal finance nor started my own blog to document my journey out of debt.

Learning more about personal finance can educate and empower you to improve your habits and manage your money better but it all starts with living on less.

When you Should Work Toward Earning More

I’m definitely not against earning more. I just believe it’s crucial to understand that frugality can be a choice and not just a necessity. If you don’t have a lot of money, it’s obvious that you’re going to be interested in adopting a frugal lifestyle. But once you experience the benefits of frugality, it’s not hard to realize that you can choose to live frugally to optimize your income even when you do start earning more.

Ever since I graduated college a few years ago, my income has consistently doubled each year. While I’m so grateful to have the opportunity to increase my income, I realize that I could very easily be tempted to increase my spending and fall into lifestyle inflation as well.

Lifestyle inflation involves spending more just because you have more to spend. If you get a raise or start side hustling, it’s easy to want to treat yourself with the extra income you bring in and purchase something you feel you’ve always wanted. There is often no value behind this method of increased spending though and the extra purchases you make probably won’t help improve your life in the grand scheme of things.

If you spend everything you earn, you’ll never ever get ahead. This is why it’s best to start improving your finances by lowering your expenses and making ends meet with the income you have first. Then, when you start to earn more money you can use the additional income to go toward major goals like paying off debt, building your retirement fund, or saving up for a down payment on a house.

You’ll know that you’re ready to start earning more when:

• You’ve lowered your living expenses as much as you possibly could
• You’ve embraced frugality and gotten creative with making ends meet
• You’ve educated yourself about personal finance and determined how you will make the most of an income increase
• You know how to manage your money properly to avoid lifestyle inflation
• You want to earn more money to help meet your financial goals and work toward stability, not because you believe more money will make you happy

Once you’ve mastered the art of living well on less, you’ll know that you don’t actually need the extra money to live when you start to earn more and you can use it for other purposes.

How about you all? When it comes to spending less and earning more, do you favor one concept over the other? Do you use both strategies to improve your finances?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/bradipo/4333249778/

Top Resources for Aspiring Investors

The following is a guest post by Ben Barlow. Enjoy! 

Whether you’re a novice trader or someone with a rich history of trading, it still remains a very difficult way to make money. Markets are difficult to predict and move quickly, meaning that you need to act fast when executing trades, spotting patterns before anyone else. As such, you need all the help you can get. Luckily, a number of tools are available. Here, we take a look at the top resources for aspiring traders.

• News Sites – Get to Know the Market

It may sound a little boring, but the best way to improve your trades is to read, read, read. Markets fluctuate based on world events so, by logic, the more you know about world events the easier it will be to make informed trades.

Start by continually reading reputable sites such as the BBC, which is widely used for technical analysis. When you have a good grip on the geo-political situation, expand your reading further to include more complex financial sites, such as the Financial Times. Here, going online is far better than buying a broadsheet, as the information is more up to date.

• Trading Calculators – Know the Rate Information

When you’re calculating your trades, it’s important to know exactly what’s at stake.

All you have to do is input your appropriate currency, account currency, leverage and position size. Once you’ve hit enter, you’ll have all the information you need to trade with. A good calculator should even be able to factor in the fees.

Calculators can be used to work out how much margin is needed to open a position, or you can use a profit calculator to see how much you stand to make from a trade. It’s simple and only takes a few clicks – there’s no need for pen and paper ever again.

• Apps – Trade on the Move

In the 21^st century, there’s absolutely no reason why you shouldn’t be monitoring your trades on the move. The markets move so quickly and with every second you’re away from the screen, you’re risking your profits.

To ensure you have all bases covered – even if you have stop-losses – ensure that you download as many trading apps as possible. Thanks to free public Wi-Fi and fast 4G networks, you should have no problems accessing them.

To conclude, tools are essential when you’re trading and they can prove a great help. Let us know about any of your favourites.

Why an IRA is the Best Use of Your Tax Refund

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

The 2015 tax season came to an end on April 18, or at least for those who do not need to file for an extension. Now comes the blessed tax refund process. And with that, comes decision time – will you spend the money on something that you need or want right now, or will you invest the refund to improve your long-term financial picture?

It’s a more important question than most of us think. According to the IRS, the average federal income tax refund for the 2014 tax year was $3,120. While that isn’t the kind of money that could change your life today, it could have a major positive impact if you handle it as part of a long-term strategy.

Investing your tax refund in an IRA could represent just such a strategy. Here are five reasons why an IRA is the best use of your tax refund.

Turning “Found Money” into a Long-term Asset

If you choose to spend your tax refund immediately, you can certainly get a “short-term high”. It could be spent on a much desired vacation, a room full of furniture, or even used as the down payment on a new car.

As exciting as those options would be, every one of them would have zero value after a few years, including a new car (since cars depreciate all the way down to near zero). But if you choose to invest the money, it will become a long-term asset, and part of your financial portfolio for potentially the rest of your life.

While it’s always fun to spend money in the short run, it’s your ability to invest for the long term that ultimately determines your financial future. Investing your tax refund in an IRA will turn a temporary windfall into a permanent asset.

Making a Contribution While You Have the Money to do it

We all have good intentions when it comes to saving and investing money. But sometimes reality gets in the way, and the planned savings strategy never happens. If you always desire to invest for the future, but never seem to have the cash to do it, receiving your tax refund is the best time to make it happen. The money will be available, and all you have to do is transfer it into an IRA account.

One of the big advantages of depositing a tax refund into an IRA is that it represents a way to kickstart your savings and investment plan. With your tax refund safely squirreled away in an IRA account, you may then have the motivation to continue funding it, all the way up to the maximum contribution of $5,500.

Converting a Windfall into a Perpetual Cash Flow

We’ve all heard the term the gift that keeps on giving, and that’s basically what an investment plan does. You are investing cash now, to create more cash later. That is a form of creating a perpetual cash flow.

In the case of making an IRA contribution with your income tax refund, if that amount of the refund is the IRS average of $3,120, and you invest it in your IRA at 8%, the account will provide you with cash flow of $250 over the first 12 months. And because of compounding of interest, future cash flow amounts will be higher in each succeeding year.

We can think of using your tax refund to fund an IRA as a way of converting cash into a cash flow. Millionaires learn that strategy early in life, and that’s largely how they become millionaires.

Getting a Jump Start on Early Retirement

It doesn’t matter how young you are, almost everybody thinks about and dreams about early retirement. Putting your income tax refund into an IRA each year could make that dream a reality in your life.

Let’s say that you are 25 years old, and for the next 30 years you commit to moving your annual tax refund – averaging $3,120 per year – into an IRA, instead of spending it now. At an average annual rate of return of 8%, your contributions will grow to $366,230 by the time you’re 55 years old.

Even if you are not making a serious effort to retire early, accumulating that kind of money well before traditional retirement age could create the opportunity to do just that. The accumulation of large amounts of money has a way of turning dreams into reality.

For what it’s worth, if you continue with the same pattern of investing your tax refunds each year until age 65, you will have $837,495 for the effort. That kind of IRA could make retirement a reality in your life, even if you have no other retirement savings available at the time.

Setting Up Another Tax Deduction for Next Year

Earlier we talked about using the cash from your income tax refund to create a cash flow; but you can also use it to create another tax deduction. If you are eligible to make a tax-deductible IRA contribution, then the amount of the tax refund going into your IRA will create a new deduction for the current tax year.

If you are in the 25% tax bracket for federal tax purposes, and say, 7% for your state, depositing a $3,120 tax refund into an IRA can reduce your tax bill by $998 (32% X $3,120). That’s like getting a 32% return on your tax refund just for putting it in the right place. Or using your tax refund from this year to build an even bigger refund next year.

How about you all? Can you think of a better place to put your 2015 income tax refund? What do you have planned for your refund?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/pictures-of-money/16687016624/sizes/q/

3 Financially Motivating Tips to Learn from the Irish

The following is a guest post by Savanna O’Conner. Enjoy!

In 2015, it was assessed that no less than 4.6 billion dollars would be spent on St. Patrick’s Day. Of course, that’s not as much as Americans planned to spend on Christmas – but it’s still a pretty large chunk of cash to invest in a celebration associated with the Irish alone.

Is this big-spending just a way in which they take pride in their ancestry and culture, or is there something bigger we could learn about the way the Irish handle their finances?

We’ve gathered three important financial lessons from them – so read on to find out how they can motivate you to save more, live happier and become debt-free.

The Irish Debt

The majority of Ireland isn’t necessarily full of great money-savers. However, considering Ireland as a whole (and, in general, Europeans), they aren’t suffering from as much debt as the U.S. is. While the average household debt in America is approximately $129,500, in Ireland, it’s just over $37,700. What’s more, the Irish household debt has dropped to its lowest since 2005, while it’s grown by 26% since 2003 in the U.S.

Of course, numbers alone aren’t enough to understand the huge gap between the two countries’ debts. The social security, financial, health and educational systems are completely different in the United States – in this sense, it makes sense that Americans would borrow more money than people in Ireland.

However, the point is that people can and should live with less. It’s doable!

The Irish Dream

The American dream is of a house, a job and a car; encouraging entrepreneurs and hard workers to achieve their dreams.

The Irish “dream”, is simply a pot of gold at the end of a rainbow – or, better yet, having three wishes granted by a mythological leprechaun.

Sure, it’s make-believe. But the lesson we can draw from it is that dreams should allow you to aim high. You may not stumble across a pot of money that solves all your problems any time soon – but sprinkling your financial endeavors with a bit of humor and “magic” is definitely a great idea.

Saving money doesn’t have to be a chore. Think of your end goal as the leprechaun and his gold, and remember, your efforts will pay off.

The Irish Courage

Last year, more than 50% of Americans said they would celebrate St. Patrick’s. Plus, the Irish ancestry is the second-most reported in the U.S. (right after German) – so that’s a big community taking part in St. Patrick’s Day festivities.

Despite their well-known folklore about good luck and fictitious fairies being so widespread, the Irish also know how to take luck in their own hands. They know how to get out of their comfort zone and make the best possible life for themselves.

We can certainly learn a lot from this courageous trait and sense of adventure. Your finances may not be stable right now, but once you decide to take action against your financial issues, you’ll be starting out in the right direction.

Today, Irish nationals living America win more money than American households do (almost $61,000 vs. $52,250). They also have a home ownership rate of just less than 70%. And they’ve even made their mark by naming a total of 16 places in the U.S. after Dublin.

In one way or another, the Irish’s leprechaun wasn’t located at the end of the rainbow. It was often just across the Ocean.

Although for others staying in their home country was the better option, the conclusion is still this: the Irish know how to make their own luck – and anyone in monetary distress should do the same to start seeing healthier finances!

How about you all? What other financially motivating tips can you think of?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/infomatique/179122558/

Asset Allocation in Retirement

The following post is by MPFJ staff writer, Marie. You can read more of Marie’s articles over at her own blog, Family Money Values. Enjoy! 

What should your asset allocation strategy be once you are actually retired?

You know what it is.

As readers of My Personal Finance Journey, you know what asset allocation is. Jacob has written about it many times.

But, just to repeat: Asset allocation is the process of keeping your investment portfolio diversified across multiple different types of assets (asset classes like bonds and various types of stocks -domestic, international, and etc) in an effort to get the highest returns, avoid catastrophic loss across the portfolio in a downturn and still let you sleep at night. At least, that is my definition.

The goal of using an asset allocation strategy should also hopefully allow you to take some of the emotion out of investing, allowing for more logical and consistent decisions about what to keep and when to sell or buy.

Why asset allocation is important

In my terms, as a past project manager, asset allocation is a plan for investing. Without a plan you might end up where you want to be, but more likely, you won’t get there.

Forbes lists 10 of the reasons asset allocation is important in 10 Reasons Why Asset Allocation Is Everything For Retirement Saving:

To me, the one that makes most sense is the first they list, as explained in this quote from the article:

“Most returns are “explained” by asset allocation, in investment parlance. That means it matters more how you divide up the pot into bonds, U.S. stocks, international stocks, etc., than it does whether you pick the best (or worst) funds in each of those asset classes. “

The author cites multiple studies that claim that 100% of your returns are due to your asset allocation.

What is the typical recommendation for your target allocation (and why)?

Investing pundits try to help the masses of people investing by simplifying what we should stake out as our ‘target’ allocation. Here is what CNN Money quotes as the rule of thumb for your target:

“The old rule of thumb used to be that you should subtract your age from 100 – and that’s the percentage of your portfolio that you should keep in stocks. For example, if you’re 30, you should keep 70% of your portfolio in stocks. If you’re 70, you should keep 30% of your portfolio in stocks.

However, with Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age. That’s because if you need to make your money last longer, you’ll need the extra growth that stocks can provide”.

The reason being that as you age, your income from non portfolio sources will most likely drop. Your portfolio becomes very important to your continued ability to buy groceries and pay your taxes. So, you must be ultra conservative as you approach retirement, so as not to lose your nest egg.

I’m 67 and retired since 2010 and I don’t buy it for my situation. You’ll see why later.

What should be included in your asset allocation?

You would think that figuring out what things you should include when allocating assets would be pretty simple, but sometimes this isn’t the case.

Jacob has raised this question before in several posts, like Should You Include Emergency Fund and Specifically-Earmarked Savings in Your Overall Asset Allocation? or Should You Incorporate Gold / Precious Metals in to Your Asset Allocation?

The American Association of Individual Investors has the following suggestion:

“An investment portfolio should consist of financial assets that you would be willing to sell for spending money or that generate some form of spending money, either now or some time in the future.”

The article suggests that you can make the decision by asking yourself (and your spouse) questions such as: can you put a dollar value on the asset; how much is it worth (if not much then maybe not include it); is it really an asset or is it instead a purchase that you consume – in other words, would you mind selling it for cash?

In New Take on Asset Allocation: Include Your House and Social Security, Anne Tergesen, the author, suggests that for some, it might be appropriate to include these things in your list of assets to allocate saying:

“So, for a 65-year-old woman who receives $25,000 in annual benefits, the value of those payments as an asset is about $500,000. Next, she would add that $500,000 to the bond portion of her investment portfolio.”

Whoa! Not for me. I like my house and won’t be selling it for spending money except as a total last resort. Plus, I don’t count my chickens before they hatch, do you?

So what should your asset allocation be once you retire?

Well, as Bonnie Baker, database technician, consultant and award winning speaker of the “Things I Wish They’d Told Me 8 Years Ago” DB2 database series always says in her presentations (yes I am an ex-mainframe programmer who used IBMs DB2 product!):

“IT DEPENDS!”

I believe it depends not just upon your age but also on a whole lot of other things. Here are a few of the things I think matter.

• How big is your portfolio?

In general, I think (and I am NOT an investment professional, by the way) that if you are post-retirement and living solely off your portfolio income and principal, you do need to consider being ultra conservative. Of course, even this depends – how big is your portfolio? If you have tens of millions, you probably can be a bit more exuberant in your investment selections.

• What are you including in your asset list to allocate?

If you are targeting a fairly aggressive allocation, are you leaving assets out that can mitigate the risk?

• What is your lifestyle?

If you are satisfied with less, you won’t need as much income. If you like to shop impulsively, travel, spend on hobby’s grandkids or give considerable amounts to your favorite causes, you will need more backing and higher levels of income.

• How much debt do you have?

With debt, especially debt on things you need to live (ahem… your home), you need to make sure your portfolio will continue to kick off enough to cover the debt.

• What other sources of income do you have and how reliable are they?

If all your current needs and wants are covered by income that doesn’t include that from your portfolio, then you can be more aggressive in seeking higher returns with more risk.

What we do

My spouse and I are ordinary folks who worked and saved hard for a really long time. We aren’t finance gurus but we do believe we have done well enough.

In our situation, those ‘it depends’ items are as follow.

He gets a pension equal to 3/4 of his working salary. I collect social security but also have $600K + in a traditional IRA, from which I will start having to take required minimum distributions in a few years. We paid off our mortgage in 1993 and have a fully paid vacation condo as well, only travel when I force the issue, live a fairly inexpensive lifestyle that is well covered by his pension alone and we have a significant net worth (putting us solidly in the upper middle class). We have no debt and pay off credit cards in full each month. Our kids and grandkids don’t require supplemental support and except for my mother-in-law we have no family financial obligations.

While I was still working, I bought into the idea of reducing exposure to risk by moving our target asset allocation more to the ‘safe’ side. But now I am rethinking that after 5 years of no salary income and no money problems.

Our current target allocation is:

• 35% Large Cap stocks and mutual funds
• 20% Small-midcap stocks and mutual funds
• 15% International stocks and mutual funds
• 25% bonds
• 5% cash (or near cash)

So… 70/25/5

The rule of thumb quoted above, tells me I should be targeting 54% in stock instead of 70%. That just doesn’t make sense to me in our situation.

What I include in my asset list:

I exclude many of our assets from our allocation strategy. I only include liquid assets like bank accounts, investment accounts, and etc. I exclude our home, our condo, his cash value in the life insurance, and I definitely never include money we don’t have yet (like future pension or social security payments).

Because I exclude all of those things, I feel we have a pretty big security net. We can continue to sleep in our beds, keep food on the table, and stay retired even if our portfolio falls to zero.

How to get to and maintain allocation targets

Setting an allocation target and actually meeting it are two very different things – and both have benefits.

Just setting a target forces you to list what you own and owe, think about and discuss risk, review your lifestyle desires and more.

Meeting and maintaining your targets maximizes your hoped for returns, and can take some of the emotion out of buying and selling.

I must confess that I have historically had trouble maintaining our target allocation. However, I’m sort of a control freak and also kind of thrifty. I don’t want anyone else managing our money and I certainly don’t want to pay them a percent of my managed asset base to do it.

Therefore, it is up to me to track where we are with our asset mix and decide what to do about meeting the allocation targets.

I’m also a buy and hold type investor and really hate to sell. Unless there is good reason (like the investment really sucks AND I need a capital loss for tax purposes), I tend to try to balance with dividends and new purchases. This negates one of the benefits of an asset allocation strategy – selling when a class of assets has risen in price, putting you over your allocation in that class.

How I check my progress towards target allocations

Once a quarter, I produce Quicken a report of all of our liquid investments, classified by asset type (bonds, the various types of stocks and cash). Since I manually classify these assets by type in Quicken, I really should also be checking that classification each time. This is hard to do with mutual funds and is a constantly moving target as to how much of each fund is actually invested in what type of asset. Sometimes even the actual stock I own can change from large cap to mid or vice versa.

After printing out the Quicken report, I then start fiddling with it. Currently, we are in a very low interest rate environment so I have put some of our cash into short term bonds to get more interest. I’ve also allocated our cash positions to various projects my spouse and I believe will be needed – things such as buying a new car, putting on a new roof and siding, investing more when prices come down, taking the family on vacation (OK, that one is really mainly mine) and etc.

When I figure out how much cash is in our portfolio, I subtract out the things on which we will be consuming (siding, roof, car, etc) as well as our emergency living money (in case those pensions and payments stop coming for whatever reason this would give us time to find jobs).

I also move the ‘cash’ that we have put into short term bonds out of the bond category.

Then I re-figure the percentages and figure out how much over or under we are in each category. This reduces our overall asset base and removes part of our bond portion (the part that is currently actually in bonds, but which, in our minds is actually cash).

Following that exercise (which takes me several hours), I ponder what to do about it. I write down action items to do during the coming quarter. These are things like, “keep looking for opportunities to buy bonds” or “buy Chevron (large cap that we already own shares of) while the price is down”.

Since we no longer are actively investing salary or pension income, any buys have to come from dividends or sales in another asset class.

While I am diligent about reviewing our allocation and deciding what to do, I must confess that I often don’t take action on the items I list. Sometimes this is because I get sidetracked. Other times it is a conscious decision that now is not the time.

It’s kind of a pain, so how could this be done differently? Here are a couple of ways to let someone or something else share the burden.

Should you use a portfolio manager?

There are firms, if you have enough money, that will manage your entire portfolio for you. They typically charge a percent of the portfolio value each period, and those percents can be pretty high.

I guess if you are a mega millionaire or a billionaire, these managers might be worth their cost, but for we average Janes, they are either not available or too pricey.

Should you use target date funds?

As this CNN Money article explains:

“Based on the year you expect to retire, target-date funds are supposed to invest in a mix of stocks, bonds and cash that reflect an age appropriate level of risk that changes as you get older.”

You are supposed to pick the date at which you want to retire, then let the fund control your money. You could, I presume, pick a date based on your risk tolerance as well, however. If you are very risk adverse, then you could pick a date closer to now, for instance, which would cause your money to be invested in things in which people closer to retirement are theoretically supposed to invest.

I never have liked target date funds (remember I’m kind of a control freak), and the above article notes also that you may be incurring more fees than you would want. In addition, these funds are typically one size fits all and don’t consider the particulars of your individual situation

Would robo advisors make this all easier?

In this 21st century, software companies, combined code writing talent with modern portfolio theory allow you to use robo advisors to manage your asset allocation/portfolio.

Main St article Top 10 Robo Advisors Ranked: Find the Best Automated Online Investing Services describes these as:

“Robo advisors– automated computer algorithms that allocate, deploy and rebalance our investments.”

All of these appear to be somewhat different variations on a theme. Many will, in addition to a fee of a percentage of your portfolio, also incur other fees, such as fund management fees, commissions, etc.

Some of them have absolutely no human component, while others allow you to decide how much control you or an advisor has over the assets.   Some will automatically buy and sell to re-balance while others allow intervention or just provide suggestions.

The jury is still out on how viable these will be for other than absolute investing beginners (although reports are that the Millennials are loving them). As these robo advisors grow in flexibility and complexity, perhaps they will be able to take into account some of the things I consider today in defining and executing my own asset allocation strategy, things such as my individual lifestyle, portfolio levels, risk tolerance, and tax situation.

Wouldn’t it be nice just to not bother with all the work and have it all automated? But, as with liberty, eternal vigilance is the price of financial freedom.

How about you all? What’s your asset allocation strategy?

Share your experiences by commenting below!

***Photo courtesy https://pixabay.com/en/stock-exchange-bull-bear-securities-642896/