Chuck, I believe it would serve you well to spend a couple of hours modeling your financial future with an advisor. You can take a look at how delaying retirement savings might impact your retirement.
Great discussion! Thanks everyone. Debbie, I have a question for you from "momonbeach."
David, your next question's from Nate ...
Take a look at these 6 ways to retire without a mortgage -- www.kiplinger.com/features/archives/retire-without-a-mortgage.html
Rainwater: First off, I recommend you immediately implement a savings program targeted at 15% of your gross income - you can maximize your employer sponsored plans to do this. Next, I recommend you set up a savings process to create an emergency fund equal to 6 mos expenses. Do not run up credit card debt. How much can you pay on the student loans under these circumstances? Pay as much as you can. When you get to the point where you have the emergency fund, start saving for the down payment on a home. As your income goes up, DO NOT increase your standard of living with all the raise. Split the raise between your loans and savings programs. YES you want to retire the debt, but you also want to be improving your financial circumstances, and building your savings and investing muscles as you go.
LadeyDi, have you pulled a copy of your credit report? You need to know what is on it so you don't get blindsided. You might be making all of your payments on time but your score has declined because you are using most of your available credit. Then, if the employer does a credit check (you will have to sign something to allow this) be up front about it. Tell them your issues before they see for themselves. I think they will appreciate your honesty and understand that many people who would make terrific employees have similar circumstance because of recent, universal financial problems. You are not the only one. You might add that you need the job because it is important for you to pay your obligations.
It is always a good idea to add to principle periodically. It is best to make regular principle payments when you have the extra money. If you would prefer to build up money in a savings account, that is fine also.
Really great advice, Bill, thank you. We have another question from a young person for you -- here's Eliza.
Bobbie, I have a question for you from Bob B. And Debbie, here's one from DeboraDee. (Very popular name in today's chat!)
Gee: David is right on. Also, depending on where you live another reason for a trust is to avoid probate costs. Here in California they can be quite high. So depending on where you live this could be another aspect of the analysis.
Hi Eliza - give me a moment.
David, can you take this next question from CJ?
DeboraDee, when you invest in one custodian such as Vanguard, you are not investing in their ability to be a marketplace. The funds you invest in own certain company stocks or bonds, which would all have to go belly up for you to lose 100% of your money. BUT, there are cases of fraud in certain company mutual funds. Look at the insurance against loss at Vanguard. The area of concern for us at this time is money market funds. I have read and heard that they are losing money and the company is having to add money annually. Be very careful of moneymarket funds. Cash that you need needs to be insured against loss.
I have to say goodbye, work interfers with this fun afternoon. Thanks to all.
Bob B, there is no doubt that the most agressive investors were hit the hardest by the financial downturn. But accounts should have recovered nicely by now if you didn't sell out. But let's talk about your use of a full service brokerage. There are some good guys in that business but 1.35% is a very high fee and perhaps all you are getting for that is investment management. A financial planner could help you determine if you NEED to be agressive to reach your goals. If not, why take the risk? Most planners can also do investment management (for a percentage--usually lower than what you are paying, a flat fee, or hourly advice--you get a check up every year or so). But they manage your investments in the full context of your life which, because of the other work they have done with you, they understand pretty well. As part of ongoing investment management, most financial planners keep underlying expenses very low (look for fee only) and they are willing to help you with financial planning issues along the way. I think you would discover the value of that kind of relationship is much higher than the traditional relationships between clients and their brokers.
Thanks very much Debbie! Have a good day.
Eliza: I understand your conundrum. But the very definition of an emergency is something unexpected. Increase your payments on the higher interest rate loans as soon as can. But do not use your emergency fund to pay it down. If you have an emergency and have no cash resources, your 401k and credit cards are likely to be tapped. Using these would be worse than paying the interest on your loan for a while longer. I hope this helps!
Great, thanks Bobbie and Bill. We're going to try to squeeze in one more question each. Bobbie, this is from Suzie.
And Bill, this is from Elizabeth.
CJ target date funds can be very helpful as they provide a simple way to diversify your account (much better than just buing the S&P 500 for instance). But Target Date funds can have different mixes for the same age group depending on what fund company you are using. I suggest you look at the underlying mix of investments in the 2050 fund. You might be more comforable using the 2045 fund or some other age range. Take a look.
Bob b: I would add to what Debbie said in that most full service brokers use what we call "active management" of their client accounts. Interestingly, academic research has shown that active management approaches cost more and more often that not, do not beat the indexes. You'll be better off using a globally diversified low-cost investment approach going forward.
Thanks David! Care to jump on Elizabeth or Suzie's question? We are almost out of time for today.
Suzie, the best form of asset protection is good insurance. I suggest that clients have high limits of liability on the property/casualty/auto insurance AND that they add an liability umbrella policy for at least 1 million. Such policies provide coverage when the limits of the underlying coverage have been exhausted. The good news is that they don't cost much (because there are rarely claims) and you should be able to get such a policy for several hundred a year...a lot of protection for a very reasonable cost. Talk to your current carrier about this as bundled rates can be very low.
Hi Elizabeth, yes you can save $ on your mortgage by using this approach provided your lender will credit your account with the payment on the date received and recalculate your balance accordingly. Personally, I've never attempted to figure this one out. But all you're doing is giving them the same amount of money you normally would, but half of it sooner. So on a mathematical basis this should reduce your costs. Without doing the actual math, I cannot tell you how much, but I do not expect it to be significant.
Now let's talk about asset protection with LLC. I'm not sure if your home is in a trust or not. But I've never seen a personal residence in an LLC. I do have clients set up LLCs for any rental property so that any claim is limited to the assets in that LLC (for instance, they might be able to take the equity in the rental home but they cannot take your personal assets). LLCs for rental property are a must in my opinion.
We're about ready to wrap this afternoon's chat.
Thank you very, very much to Bill, Bobbie and David, as well as Rich and Debbie who were with us earlier.
Finally Suzie, you need to talk to your attorney who can walk you through the steps you would have to take if you put property into an LLC. That said, sometimes I am suspect of the need for living trusts. I think they are oversold.
Once again, it was a marvelous opportunity. Many thanks Kiplinger for providing this great service to consumers and for letting me participate.
Thanks for your wisdom, everyone. Have a great afternoon.
And readers, make sure to look out for more Kiplinger live chats -- we have one every Thursday, and you can see upcoming chats in the far right of the banner on Kiplinger.com.
Brush up on the basics of estate planning -- www.kiplinger.com
Gee: You *may* not need a trust when you are single, without children, and your estate is not complex. There are five documents, however, that everyone should have:
Rainwater: First off, I recommend you immediately implement a savings program targeted at 15% of your gross income - you can maximize your employer sponsored plans to do this. Next, I recommend you set up a savings process to create an emergency fund equal to 6 mos expenses. Do not run up credit card debt. How much can you pay on the student loans under these circumstances? Pay as much as you can. When you get to the point where you have the emergency fund, start saving for the down payment on a home. As your income goes up, DO NOT increase your standard of living with all the raise. Split the raise between your loans and savings programs. YES you want to retire the debt, but you also want to be improving your financial circumstances, and building your savings and investing muscles as you go.
