Monthly Archives: August 2016

Survivors Benefits

Social Security Survivors benefits are paid to widows, children, parents and ex-spouses of covered workers.

The Social Security program actually consists of three benefit programs that make payments for various reasons. They are:

  1. Retirement benefits,
  2. Disability benefits,
  3. Survivors benefits.

This post covers number 3, Survivors benefits. These are not the same as the benefits commonly referred to as spousal benefits.

If a worker, who is covered by Social Security, dies and leaves family members behind, they are the “survivors” and are covered under the Survivors benefits program. Social Security will use the deceased worker’s record to calculate payments for his / her family.

There are four eligible parties that may receive payments after the worker’s death. They are the widow (or widower if the wife dies first), children, parent, and ex-spouse. Each has detailed rules for eligibility.

A widow(er) will get benefit payments if:

  • They are age 60+, or
  • Age 50+ and disabled, or
  • Any age and caring for a worker’s child under 16 or disabled and entitled to benefits on worker’s record.

A child will get benefit payments if:

  • They are under age 18, or
  • Between 18 and 19 and still in secondary school, or
  • Over age 18 and severely disabled before age 22.

A parent will get benefit payments if:

  • They are dependent on the deceased worker for greater than 50% of their support

An ex-spouse will get benefit payments if:

  • They fit one of the three requirements for widow(er) above and were married to covered worker for 10 or more years, and
  • They are not entitled to a larger benefit based on their own record, and
  • Not currently married unless marriage was after they turned 60 or 50 and are disabled.

Fear or Uncertainty

As I meet with clients to present their financial plan, it is common to sense a figurative (and often literal) sigh of relief at the meeting’s end. Admittedly, some may just be glad to have survived the long presentation, but I’m fairly certain that most are relieved to have a path forward.

 

A recent article on Govexec.com (“From Voting to Writing a Will: The Power of Making a Plan”) struck a chord with me and added a little bit of science to my observation. In this piece, Todd Rogers and Adan Acevedo apply behavioral science to show how having a plan can reduce the “intention-to-action gap” that so many of us can relate to.

 

Ideally, we should have a plan in place before a crisis hits and we need to act. This is a central theme in all aspects of financial planning – do you have a Will, is your emergency fund sufficient, is your home adequately insured, are you saving enough for retirement? Thinking about these questions and then building a plan to address them can decrease some of the stress and anxiety in our lives.

 

During the recent Metro Washington Financial Planning Day, one of the presentations addressed the value of running a “financial fire drill.” As children we were taught to “stop, drop, and roll” during fire safety awareness events. As adults, a financial fire drill can help us assess whether we are prepared to address adversity in our financial lives.

 

An effective plan defines the desired end goal as well as the necessary steps to achieve that goal. We may need to adjust our initial path as “life happens,” but the planning process is iterative and can help keep us on track. I borrowed a bit of wisdom from my colleagues and now use it at the conclusion of each financial plan I write: “Financial planning is an ongoing process as opposed to a single event and your plan will need to change as your life changes.“ Do you have a plan to push beyond life’s challenges and reach your goals?

Investment Fees Like a Hawk

John Bogle, the founder of Vanguard, once said: “In investing, you get what you don’t pay for.”

That may sound strange, but it’s true. In fact, minimizing your investment fees is one of the easiest and most powerful ways to increase your odds of success. Here’s why.

 

1. Low Fees Lead to Better Returns

 

This is pretty counterintuitive. We’re used to better things costing more money and cheap alternatives meaning important sacrifices. But it’s the exact opposite when it comes to investing.

 

In 2010, Morningstar released the results of a study in which they found that cost was the single best predictor of a mutual fund’s future investment return. The lower the cost, the better the future return. In other words, in investing, the cheap alternatives aren’t a sacrifice at all. They’re actually the higher quality items and they increase your odds of success.

 

 

2. Even Small Fees Cost You a Lot of Money!

 

You may think that a 1% difference in cost isn’t that big a deal, but over long periods of time it adds up to a huge difference. Let’s put aside the fact that lower cost investments typically outperform and assume that you’ll get a 6% return no matter what.

 

Now let’s say that you’re saving $5,500 per year (the annual maximum for an IRA) and you have two investment choices: an index fund that costs 0.10% per year or an actively managed fund that costs 1.10% per year.

 

After 10 years, here’s your balance in each fund:

 

  • Low-cost fund = $76,412
  • High-cost fund = $72,230
  • Difference = $4,182

 

Here it is after 20 years:

 

  • Low-cost fund = $211,969
  • High-cost fund = $188,770
  • Difference = $23,198

 

Finally, here’s what it looks like after 30 years, which is a pretty standard amount of time for most people investing for retirement:

 

  • Low-cost fund = $452,449
  • High-cost fund = $376,801
  • Difference = $75,648

 

What would you do with an extra $75,000?

 

Fees to Watch out For

 

How can you tell how much your investments are costing you? Here’s a quick rundown of some of the most common types of fees.

 

Expense ratios – Every mutual fund and ETF has an expense ratio that’s expressed as a percentage (e.g. 0.10%). This is the percent of your account balance that is taken each year to pay the fund’s expenses.

 

Sales loads – These are commissions paid to investment salesmen. Many financial advisors make money this way, which is one reason why it makes sense to seek out a fee-only financial planner.

Buck the Traditional Financial Advice

Let’s say that you’re 30 and you inherit $500,000. What should you do with the money?

 

Traditional financial planning advice might look something like this:

 

  1. Establish an emergency fund
  2. Pay off debt
  3. Get yourself on track for retirement

 

That’s all nice and prudent, but is prudent always the right move?

 

I say no. Sometimes it pays to buck the traditional advice and be a little daring.

 

What Do You WANT?

 

No one lies on their deathbed feeling fulfilled because they made all the “right” decisions. No one is ever truly satisfied by checking off all the boxes someone else laid out for them.

 

True happiness comes from doing the things that matter to YOU. The things that scare you a little bit, excite you a lot, and just feel downright important.

 

Going back to the example above, assuming you suddenly and unexpectedly had a large amount of money, what if you asked yourself the following questions before making any decisions about what to do with it:

 

  • When you’re 80, what will you regret not having done?
  • When are you happiest in your life right now?
  • Is there anything you’ve been wanting to try but felt like it was too big a financial risk?

 

Maybe you’ve been wanting to quit your job so you could go back to school. Or maybe you’d like to take some time off to volunteer in another country while you learn a new language.

 

Those things don’t fit into the traditional financial planning paradigm but they’re the things that make your life worth living

 

And isn’t that the entire point?

 

Finding a Balance

 

Of course, traditional financial planning advice exists for a reason. Building an emergency fund, paying off debt, and investing give you the security and the freedom to enjoy yourself both today and in the future.

 

They just shouldn’t be the only things you consider. You should absolutely make room for the things that excite you too, and you don’t need to receive a big inheritance to do it.

 

Here are some thoughts on how you can balance the practical with the aspirational today, no matter what your financial situation looks like:

 

  1. Make a list of all the practical financial goals you know you should be working towards.
  2. Make a list of all the life goals you’d like to experience.
  3. Pick one from each list and put a dollar amount and timeline on each. How much will each cost and when would you like to achieve it?
  4. Divide the dollar amount for each by the number of months between now and your target completion date.
  5. Automate that monthly savings into separate accounts dedicated to those specific goals.
  6. If you can’t meet the full savings target now, save what you can and make it your mission to get to that full savings target over time.

Huge Financial Gains

Most personal finance advice misses a crucial point.

 

Lost amongst all the calls to cut coupons and skip your morning coffee is the fact that cutting costs isn’t the only way to get ahead.

 

In many cases, a raise can be far more powerful in helping you reach your biggest financial goals. And it may not be as hard to get as you think.

 

The Power of a Raise

 

Let’s say you currently make $60,000 per year and you’re able to negotiate a 10% raise (more on how to do this below).

 

Assuming that 25% of that new income goes to taxes, that means you now have an extra $4,500 to save each year, which is almost enough to fully fund an IRA.

 

Looking at it another way, that extra $4,500 represents a 7.5% return on investment, which is right in the range of what experts expect from the stock market.

 

So by negotiating a raise, you’ve given yourself a stock market-like 7.5% return. And unlike the stock market, that 7.5% return will be consistent year after year.

 

And if you’re investing that $4,500 each year, you’ll earn additional returns on top of your contribution. Assuming a 7% annual return, that investment will grow to $197,393 after 20 years and $454,828 after 30 years.

 

Plus the increased salary sets a higher baseline for future raises and for your salary at future jobs, making it more likely that your income will increase even further over time.

 

And all of that comes with pretty much no risk. As long as you present your case respectfully, the worst that happens is you get a no. And even then you’ll have planted the seed, which may make it more likely that you’ll get a raise in the future.

 

How to Get a Raise

 

Of course, the trick here is knowing how to negotiate so that you actually get the raise you deserve.

 

This can be intimidating for a lot of people, myself included! But the good news is that there are some simple strategies you can follow to strengthen your position and even increase your value in the eyes of your employer through the negotiation process.

 

My favorite resource on this topic is Ramit Sethi’s Ultimate Guide to Getting a Raise & Boosting Your Salary. Yes, the title is a little hyperbolic, but the advice is practical and solid.

 

And remember, as long as you present your case well, the worst that happens is you get a no. There’s little risk in giving it a shot.

 

Side Hustle for Extra Income

 

Getting a raise isn’t the only way to increase your income. People are increasingly turning to side hustles as a way to make some extra money on top of their day job.

 

There are lots of ways to do this, from dog walking to freelance writing to website design. It doesn’t have to take a ton of time, and even a little extra income can go a long way.

 

J. Money at Budgets Are Sexy has chronicled over 60 different side hustles real people have used to earn extra money. You can also check out the websites Fizzle and Side Hustle Nationfor ideas, inspiration, and practical advice on how to get started.

 

The key success of investing

I don’t know if there are any studies on this, but my guess is that investing causes more stress than all other financial topics combined.

 

Between the confusing jargon, the endless list of mutual funds, ETFs, and retirement accounts to choose from, and the constant ups and downs of the market, it’s easy to feel overwhelmed, confused, and downright anxious about whether you’re making the right decisions and whether you’ll be okay.

 

But today I’d like to give you a little relief. Because there are a lot of things you shouldn’t be worrying about when it comes to your investments, and here are five of the biggest.

 

1. What the Stock Market Has Done Recently

 

The US stock market dropped 24.63% over the first 68 days of 2009 in the midst of the housing crisis and international financial meltdown. Bad sign, right? Sure, except that the total return for the year ended up being a positive 29%.

 

Or how about the two years from September 1998 to August 2000 when the US stock market increased by 25% per year, only to decrease by 21% per year over the next two years.

 

In other words, you shouldn’t spend any time worrying about what the stock market has done recently because it doesn’t in any way predict what it will do going forward.

 

2. What “Experts” Think the Stock Market Is Going to Do Next

 

Did you know that active investment managers underperform basic index funds year after year? Or that “expert” prognosticators are wrong more often than they’re right?

 

Even the experts have no idea what the stock market is going to do next. The less you pay attention to their predictions, the calmer you’ll feel and the more likely you’ll be to succeed.

 

3. What Your Friends Are Investing In

 

It’s pretty easy to read a little bit about something, repeat it to your friends or family, and sound like you know what you’re talking about. I’ve done it. You’ve done it. We’ve all done it.

 

So the next time you hear someone talking about how they’re investing, remind yourself of the following three things:

 

  1. They may or may not know more about investing than you do.
  2. They definitely don’t know about your personal investment goals and the right way to reach them.
  3. Therefore, what they’re saying is completely irrelevant to your investment plan and you can safely ignore it.

 

4. How Exciting It Is

 

Nobel Prize-winning economist Paul Samuelson is famous for saying that “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

 

Good investing is actually pretty boring. You put a strategy in place, contribute to it for decades at a time, and stick with it through the ups and downs.

 

It’s not exciting, but it’s prudent.

Psychology of Plastic Effect

At some point in the midst of holiday shopping, most of us will dip into our wallets, take out a credit or debit card and make a purchase. Many times, we leave the mall or put down our tablets and phones having spent more money than we intended.
We’re moving into a world where we hold less cash and are increasingly comfortable using cards and electronic payment methods. Before diving into the possible effects this could have, I’d like to point to a famous quote by notorious gambler Julius Weintraub: “The guy who invented gambling was bright, but the guy who invented the chip was a genius.”

 

The psychology of symbolic money
When you go into a casino, you see people throwing chips around: $50 on red in roulette, raising $25 in poker, doubling down $100 in blackjack. Unfortunately, sometimes we can’t afford to lose the money we gamble away. The $100 lost on a double down in blackjack could have been several days of groceries for the family or overdue maintenance on the car. The $10,000 lost on a weekend binge could have been college tuition.
You may be able to relate to these examples personally or through family or friends. One aspect of the psychology of gambling is that people are parting with poker chips, rather than cash in their hand. The chip changes the form of your cash, not just physically but metaphorically, too. It can cause you to justify taking a risk. It can create an excuse so the $25 that was in your pocket is only a green chip on the blackjack table. The monetary value is the same, but your mind is more comfortable separating a poker chip from a bill in your pocket.

 

How it works with credit cards
The technological advances that have accelerated the use of credit and debit cards and other payment options can act in a similar way.
From 2006 to 2014, payment volume for Visa has increased from $2.13 billion to $4.76 billion. Other major credit card companies have shown similar increases. While this may or may not lead to carrying higher credit card balances, it most likely leads to less money in the bank account for the consumer.
In my opinion, we’re likely to spend more money with these cashless payment options. We pull out our cards or phones and make purchases without consciously contemplating the downstream impact as much as we would have if we’d paid in cash. We don’t physically hand the money over. Yes, we may hand a credit card over, but that’s the same motion whether we’re buying a pack of gum or a diamond ring. The rise of mobile payments creates even less friction for purchases, since buyers don’t have to sign anything.
Another consideration is the restriction that cash creates: If you don’t have enough cash to buy something, you can’t make the purchase.
For these reasons, people who use cards and mobile payments may be increasing their purchase frequency as well as the value of their purchases.