Reconsidering Reverse Mortgages

I always thought of reverse mortgages as a last resort for retirees who had spent down their retirement savings and needed more income in retirement.  The reason why I felt this way, and perhaps why a lot of people had learned to dislike these products, was because of the high fees and interest embedded in the product.  However, with recent changes to various mortgage programs, it may be worth taking a closer look.

Last resort or income stream?

Let’s begin by first looking at how these products used to work and why they typically weren’t advisable except as a last resort.  For a lot of retirees, one of their largest assets is the equity in their houses.  Unfortunately, other than providing shelter, a house doesn’t have a lot of financial benefit.  You might still carry a mortgage in retirement; you pay property taxes, home owners insurance, utility bills, and the occasional home repair.  All of these are money out of your pocket, but when is the last time your house paid you?  Enter the reverse mortgage….a potential way to create an income stream (or lump sum) which can turn the house into a more meaningful asset rather than a money pit.  Everything sound good so far?  Not so fast! The problem is that, in the case of a married couple, the bank used to come knocking at the first death and demand repayment of the income stream plus interest that had been accruing the whole time.  Can’t afford to pay that back all at once? No problem…the bank will just sell the house from under you, take their money back, and give the survivor the remainder (if any) so they can go and try to find a new place to live.  All of a sudden this program doesn’t sound so good.

Reverse mortgages get a make-over

This idea of the survivor losing their house was the primary reason why I rarely recommended clients consider these products in a serious manner. However, in 2013 there were major revisions to how a lot of these products were structured. The fees still seem to be fairly high, but no longer is the bank able to sell the property out from under the survivor.  Now the repayment of the loan isn’t due until both people have died.  With these new changes, it may be worth taking a look at tapping into your home’s equity, knowing that you and your spouse won’t have to leave your house unless you want to.  Work with your financial professional to understand more fully if this type of product might make sense for your specific situation.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This is not a solicitation or recommendation for a reverse mortgage strategy. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. There are significant costs associated with Reverse Mortgages, such as: up-front mortgage premium, annual premium, origination fee, closing costs, monthly services charge, and appraisal fees. There are significant risk associated with Reverse Mortgages. Generally, the homeowner is still obligated to pay taxes, insurance, and maintenance and if the borrower moves, the loan becomes due, and the total amount due may be larger than anticipated or planned for. Medicaid may also be affected. C14-040266

Capital Gains: 3 Ways to Avoid Buying a Tax Bill

Many asset management firms have started to publish estimates for what their respective mutual funds may distribute to shareholders in short- and long-term capital gains. Moreover, early indication is that some firms will be paying out capital gains higher than recent years. As you may be aware, when a manager sells some of their holdings internally and realizes a gain they are required to pass this gain on to its shareholders. More specifically, by law and design, asset management firms are required to pay out 95% of their realized dividends and capital gains to shareholders on an annual basis. Many of these distributions will occur during November and December. Remember this is only relevant for taxable accounts; capital gain distributions are irrelevant in IRA’s or 401k’s.

Capital gain distributions are a double edged sword.  The fact that a capital gain needs to be paid out means money has been made on the positions the manager has sold. The bad news – the taxman wants to be paid.

What can we do to minimize the effect of capital gain distributions:

1. We exercise care when buying funds at the end of the year to avoid paying tax on gains you didn’t earn, and in some cases hold off on making purchases.

2. We may sell a current investment before its ex-dividend date and purchase a replacement after the ex-dividend date.

3. Throughout the year we harvest tax losses, when available, to offset these end of the year gains. 

As always, there is a balance to be struck between income tax and prudent investment management.  Please feel free to contact us if you would like to discuss your personal situation.

This material is being provided for information purposes only and is not a complete description of all available data necessary for making an investment decision, nor is it a recommendation to buy or sell any investment. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, tax situation and time horizon before making any investment decision. Any opinions are those of [insert FA name] and not necessarily those of Raymond James. For any specific tax matters, consult a tax professional. C14-040561

An Easy Guide to Year-End Tax Planning

With the end of the year fast approaching, tax planning is top of mind for many clients.  At The Center, we are proactive throughout the entire year when it comes to evaluating a client’s current and projected tax situation, but now is typically the time most people really start thinking about it.  We like to share this simple checklistthat we feel is very user friendly and a good guide to evaluating your tax situation for the year.  Let’s be honest, does anyone feel like they don’t pay ENOUGH tax?  Most clients want to lower their tax bill and be as efficient with their dollars as possible. 

Questions to Consider

Here are some questions we ask clients that could ultimately help save money at tax time:

• Are you currently maximizing your company retirement account (401k, 403b, Simple IRA, SEP-IRA, etc.)?

  • These plans allow for the largest contributions and are deductible against income

    • In our eyes, this is often the most favorable way to reduce taxes because it also goes towards funding your retirement goals! 

    • How are you making charitable donations?  Are you writing checks or gifting appreciated securities?

      • Gifting appreciated securities to charity allows you to avoid paying capital gains but still receive a charitable deduction – a pretty good deal if you ask me!

        • Donor Advised Funds are a great way to facilitate this transfer and are becoming increasingly popular lately because of the ease of use and flexibility they provide for those who are charitably inclined – take a look at Matt Trujillo’s recent blog on this great tool.

        • Should I be contributing to an IRA?  If so, should I put money in a Traditional or Roth?

          • These are fantastic tools to help fund medical and dependent care costs in a tax-efficient manner

            • HSAs can only be used, however, if you are covered under a high-deductible health plan and FSAs are “use it or lose it” plans, meaning money contributed into the account is lost if it’s not used throughout the year – take a look at the blog I wrote earlier this year that goes into greater detail on the advantages and disadvantages of HSAs and FSAs

This is a busy time of year for everyone.  Between holiday shopping, traveling, spending time with family, and completing year-end tasks at work, taxes can get lost in the shuffle.  We encourage you to check out the link we’ve provided that will hopefully give you some guidance with your personal tax situation.  Although we are not CPAs, tax planning is something we feel is extremely important.  We would love to hear from you if you have any questions or ideas you’d like to discuss with us!

Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Raymond James financial advisors, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. C14-037860

Establishing Clear Direction for your Retirement Plan

Retirement planning is an exercise in imagining your future.  We all posses the ability to think ahead and plan for the future; whether it is making plans for tomorrow, arrangements for a trip next year or planning ahead for retirement in 5 years, 10 years or even longer. Thinking ahead allows us to carefully arrange our financial lives to align with our future vision.

Be Ready to Adjust Your Plan

Like life, adjustments will be necessary along the way.   It is more common than you may think for couples to approach retirement with an agreed upon plan, only to have divergent thoughts surface before reaching the goal.  Financial planning and thoughtful conversation can help to reestablish clear direction and a workable plan to follow together. Here is a simplified case study to help illustrate crucial planning steps leading to retirement.

Try 3 Action Steps to Jumpstart Your Plan

When Jack and Sally began to think about retirement, they had more questions than answers.  Sally was looking forward to relaxing and spending time in a warmer climate, while Jack couldn’t imagine moving to another state away from his volunteer work and grandchildren.  This is not a unique situation.  With a goal of retirement in 5 years, we established these three action steps:

• First they needed to review assets, future income sources and anticipated expenses to determine how much money they will need to live their retirement plan.  Increased longevity is factored into the financial analysis.

• They were in agreement to be debt free and have enough assets and income sources that cash flow would not be a limiting factor in retirement.  That gave them a clear picture of how much they needed to save and invest leading up to retirement.

• Jack and Sally agreed they would downsize their home to accommodate the goal of renting in a warmer climate for 5 months during the coldest part of Michigan winters.

Test your pre-retirement plan by laying out your unique objectives to see if you have a clear direction and workable plan to follow together.  The most successful transitions hold the promise of retiring to something, not away from something.  Contact me if you need help getting started or making adjustments along the way to your retirement goals.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-034237

A ROTH IRA Strategy for High Income Earners

Do you have a 401k Plan from your current employer?  Does it allow you to make after tax contributions (these are different than pretax contributions and Roth 401k contributions)?  If the answer to both is “yes”, a recent IRS notice may present a welcome opportunity.  IRS Notice 2014-54 has provided guidance (positive guidance) allowing the splitting of after tax 401k contributions to a ROTH IRA. Although I believe that ROTH IRAs are used in many less than ideal situations, this is one strategy that can make sense for higher income earners; tax diversification and getting money into a ROTH without a big upfront tax cost. 

After answering “yes” to the first two questions, the next question is, “Are you making maximum contributions on a pretax basis?”  That is, if you are under 50 years old, are you contributing $17,500 and if you are over 50 (the new 30) $23,000? If you are making the maximum contribution, then a second look at after tax contributions should be considered.  Whew – that’s three hoops to jump through – but the benefits might just be worth it.

Putting Notice 2014-54 to Work

For example, Teddy, age 50 has a 401k plan and contributes $23,000 (includes the catch up contribution) and his employer matches $5,000 for a total of $28,000.  Teddy’s plan also allows for after tax contributions and he may contribute $29,000 more up to an IRS limit of $57,000. 

The new IRS Notice makes it clear and simplifies the process allowing this after tax amount at retirement to be rolled into a ROTH IRA.

The bottom line:  It is more attractive to make after tax contributions to your 401k with the flexibility of converting the basis to a ROTH at retirement or separation of employment without the tax hit of an ordinary Roth conversion.

As usual, the nuances are plentiful and your specific circumstances will determine whether this strategy is best for you.  To that end, we are here to help evaluate the opportunity with you.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James.

The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. C14-033701

Retirement Spending: Is My Savings Goal Too High?

 Determining how much you actually spend each month is really the first step in dialing in on how much money you need or want in retirement. (If you missed it, check out my last blog on this!) With so many payroll deductions (taxes, 401k savings, medical premiums, insurance, etc.) it can be pretty staggering when you crunch the numbers and see what you’re truly spending each month. It’s probably much less than you thought!  The good news is that several of these payroll deductions will disappear or be significantly reduced when you retire.  Let’s dive in and take a look at some of those items to shed some light on what might be your “number” for desired retirement spending.

The Good News on Taxes

There’s a good chance your tax liability will be lower in retirement.  Two items that go away upon retirement are Social Security and Medicare tax (FICA).  As an employee, you are responsible for kicking in 6.2% to Social Security and 1.45% to Medicare – a total of 7.65%. Think about it, that’s $7,650/yr if you earn $100,000 annually.  Kiss those taxes goodbye on your last day of work. 

When you begin to receive your Social Security benefit, the benefit may or may not be taxable, depending on your adjusted gross income (AGI).  However, most clients see at least some taxation of benefits. Per SSA.gov, the maximum amount of your benefit that can be subject to federal tax is 85%. Meaning if you were receiving $35,000/yr in benefits, the maximum taxable amount that would be included in your AGI would be $29,750 ($35,000 x 85%).  In addition, most states, including Michigan, do not tax Social Security benefits.

Pension , IRA, qualified retirement plan (401k, 403b, etc.) distributions will be included in your income for the year on the federal level – these income sources are treated as ordinary income.  This is why being cognizant of your current and future tax bracket is so important in proactive tax planning.  A few years ago, Michigan began taxing these income sources on the state level, but the amount that is included in taxable income for the year is dependent on your age and total benefits.

Forget Saving for Retirement

One of the many benefits of being retired is that you no longer have to save for retirement!  The maximum 401k contribution for someone over the age of 50 in 2014 is $23,000. We commonly see clients saving the maximum while in the latter half of their working years.  For a couple who both maximize their retirement plans at work, we are talking about a $46,000/yr outflow that will no longer exist upon retirement.    

Getting Rid of Debt

The goal of many is to be debt free (or close to it) upon retirement.  If your mortgage (not including taxes and insurance – unfortunately those items never go away) is $1,500/mo, this is $18,000/yr in savings … a huge amount if you are able to eliminate your house payment prior to retirement.  With rates as low as they have been, it often makes sense to keep the mortgage because it’s “cheap money”.  However, being debt free in retirement is a very personal decision and is typically more of a “what makes you sleep better at night” decision rather than a strictly “numbers” decision.

Adding it All Up

When you factor in what you are saving for retirement, taxes, and having a mortgage, many clients are shocked to realize that those items can eat up close to 50% of total gross income.  So, if a client has joint income of $200,000 we may propose $100,000 in retirement spending (when we do, they often look at us like we’re crazy).  But if we back out their total 401k savings of $46,000, Social Security and Medicare tax of $15,300 ($200,000 x 7.65%), their $1,500/mo or $18,000/yr mortgage and a total tax reduction of approximately $10,000 because less total dollars are being generated, that is a total of almost $90,000 that will no longer exist in retirement.  So what does that mean?  It means the couple can live the equivalent of their current $200,000 lifestyle on $110,000 in retirement – pretty close to the suggestion of $100,000 in retirement spending! 

For this reason, I cringe when I hear advice like, “You need $2,000,000 to have a fighting chance at retiring,” or, “You will spend 70% of your current income in retirement.”  Everyone’s situation is different and many folks are probably living on a heck of a lot less than they actually think.  If you’re retiring in the next 10 years, I urge you to walk through this process. Really start thinking about what you want to spend when that time comes.  It will help you plan accordingly and will hopefully significantly improve the chances of you reaching your retirement goals.

Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Any example is hypothetical in nature and is used for illustrative purposes only. Individual cases will vary. Every investor’s situation is unique. Please consult with your financial advisor about your individual situation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. Investors should consult a tax advisor about any possible state tax implications. C14-026884

Retirement Spending: Finding Your Actual Cost of Living

 When you’re approaching retirement, it can be hard to determine how much you would like to spend when you stop working.  It’s a scary thought for most.  You wonder: Have I saved enough?  Is what I want to spend reasonable and safe?  It can seem a bit overwhelming, but hopefully part one of this two-part blog series will help to simplify that discussion. 

How much does my lifestyle really cost?

Start the conversation by figuring out your current cost of living. To illustrate, look at an example of how this figure might be much less than you think.  Tom and Mary are both age 58 and plan to retire at age 62.  The discussion of retirement planning is becoming increasingly important to them as they near retirement.  Tom works for Ford and earns $100,000/yr and Mary works as a teacher earning $55,000/yr.  Tom and Mary are great savers and each contribute the maximum to their 401k each year ($23,000 each, $46,000 total for 2014).  They have health insurance through Mary’s work and pay $400/mo for excellent coverage – they also save $200/mo towards a Health Savings Account (HSA) to be efficient with their out-of-pocket medical expenses each year.  They each pay into a group disability policy that costs $100/mo in total.  Of course, we can’t forget about taxes.  In 2013, they paid $12,000 in federal tax and $4,000 in Michigan state tax. Social Security and Medicare (FICA) cost them $11,858 (7.65% on their income).  Below is a breakdown of these payroll deductions on an annual basis:

Assuming no additional dollars are saved beyond the 401k, Tom and Mary are actually living on $72,742/yr ($155,000 – $82,258) – only 47% of what they are earning.  This is a great starting point but this is where we start to explore a bit by asking questions like: 

• Are they happy with their current lifestyle? 
• Do they feel constrained right now and want to spend more on things like travel in retirement?
• Or, do they already travel and do the things they love on their $72,742/yr lifestyle? 
• What personally meaningful things do they want to accomplish once they are retired? 

These kinds of questions open the discussion surrounding retirement spending and goals.  It is also worth mentioning that there will be several expenses and payroll deductions that will ultimately disappear or significantly reduce upon retirement.  I will go into detail on these items and show how things change in retirement in part two of this blog series – stay tuned!

Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Any example is hypothetical in nature and is used for illustrative purposes only. Individual cases will vary. C14-026770

Richard Marston on Investing for a Lifetime

 What does a financial planning geek do for fun? He visits the Wharton School of the University of Pennsylvania for a day of lectures! The first part of the day was spent hearing from Professor Richard C. Marston. Professor Marston is the James R.F. Guy Professor at Wharton, a graduate of Yale, MIT, and Oxford (on the east coast they would call him “wicked smart”). Moreover, he has taught asset allocation for over twenty years and in 2011 wrote the book Portfolio Design: A Modern Approach to Asset Allocation (Wiley, 2011). Needless to say, it was a thought-provoking and worthwhile day.

In two lectures -- the first taken from his new book, Investing for a Lifetime” Managing Wealth for the “New Normal” and the second titled “Investing with a Fifteen Year Perspective: Past and Future” – Marston shared what he believes to be some “best practices” in savings and investing. He talked about choosing an asset allocation focusing on stocks when you are still years from retirement. You then gradually shift towards a 50/50 portfolio while saving 15%-20% of income during the accumulation period. And once you reach retirement, he discussed spending 4% of accumulated wealth. My sense is that these are consistent messages that our clients have heard from us over the years. 

During one of the wicked smart professor’s lectures, he shared that as he gets older, he has a greater appreciation for the role that investor and advisor behavior plays in ultimate investment success.  For example, he believes in using active managers. He also believes that selecting the right investments is important (and he is paid by several family offices to do so), but behavior such as letting fear or greed control actions plays a critical role as well.

Professor Marston’s recent work also focuses on determining a savings goal for retirement. A common rule of thumb is that investors must save 8 times their income before they retire.  So, if you earn $100k, then you need $800k saved at retirement.  Professor Marston was intrigued by the simplicity of the general rule and decided to put it through his own analysis. In the end, his analysis suggested that 8 times income is probably too low for most people.  His own conclusions, obviously depending on the exact assumptions, ranged from 11.5 to 18.4 times income. In his opinion, your savings goals will vary widely depending on two main factors:

• If you are single: Your savings must be higher because a couple will receive more in social security benefits at the same earnings (consider it a marriage premium).
• If you earn much more than $100k: Your savings rate needs to be higher because social security plays a lessor role in your retirement income.

As a quick aside, I was pleased to hear Professor Marston include and emphasize the importance of social security in the retirement planning analysis.  Without it, the savings rates above would need to be increased significantly.  I invite you to read our many previous posts on social security and let us know if we can help answer any questions.

On the flight home from the lectures, I read Professor Marston’s newest book Investing for a Lifetime (Wiley, 2014). It’s about making saving and investing understandable to the investor.  Probably the most important statement, that occurs early and often, is SAVING IS MORE DIFFICULT THAN INVESTING. Meeting your life goals, such as retirement, is much more dependent on our savings than getting another 1% from investment portfolios.  As I have written in the past, saving is much more than dollars and cents; it takes discipline and perseverance.

For our long-time clients, the book would provide a good refresher on many of the concepts we have discussed and encouraged over the years.  If you have a family member or friend starting their career or looking to take more control of their finances, Professor Marston has the ability to make the complex simple and I think his books would be a wonderful gift.

The second part of my Wharton School visit was spent hearing from Professor Christopher Geczy, Ph.D., another wicked smart guy.  I will leave that review for another post.  If you like Alpha, Beta, Correlation coefficient, Standard Deviation, R Squared, Systematic risk, and Idiosyncratic risk…well you are in for a treat!

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning Inc. and Richard C. Marston and not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Asset allocation does not ensure a profit or guarantee against a loss. C14-026186

Factoring the Cost of Living in a Post-Retirement Relocation

Your retirement plan may involve a move. You could be moving some place warm so you don’t have to put up with the wonderful Michigan winters or perhaps moving to be closer to your kids and grandkids.  Whatever the motivation, there is always a financial component in the decision-making process.

Paying for what you want vs. what you need

The cost to live in other areas of the country can be higher or lower, but some people don’t know the specific figures you will probably pay after you make the move.  Is a dollar in Michigan the same as a dollar in California or Utah? A recent conversation with a client evaluating relocating placed focus on this specific issue. His thinking was that it didn’t matter where you lived, you can always find a way to spend money.  While I certainly have to agree with him on that point, I think the bigger point is that there is a difference between spending money on things you want versus spending money on things you need.

Comparing Expenses

Let’s take a look at the cost of different goods and services in the two cities. These figures were taken from www.costofliving.org and they are an average estimate taken from people who live in Salt Lake City and San Francisco. The list of goods and services has more than 75 commonly purchased or used items but we’ll look at just a sampling of expenses.

As you can see, everything in San Fran is more expensive except the T-Bone steak. Unfortunately, after you pay for your basic living expenses, you might not have any money left over for that T-Bone! According to the living expense calculator on www.costofliving.org someone living on $70,000 of net income in Livonia, Michigan would need approximately $120,000 net in San Francisco.  In Salt Lake City, that same person would only need $69,000 to maintain the same standard of living. 

If you think a move might be in your future, talk to your financial advisor to weigh the costs associated with the new location and make sure it fits within your retirement income goal.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. C14-022592

The 50/50 strategy turns your next raise into lifelong savings

 Ever wonder how much you should be saving? We hear it from a lot of clients who want to make sure they’re putting away enough each paycheck towards retirement.  We typically suggest saving at least 10% of your before-tax income and for those approaching retirement within 10 – 15 years, we like to see that number closer to 20%.  Although we never like to make blanket statements in financial planning, those savings rates are typically what most should be striving for while still maintaining a balance to live a full life now.  But is there a better strategy that could be more efficient?

Give Your Savings a Raise

What do most people do when they get a raise?  Many people keep their savings rate the same but increase their standard of living.  Sure, the actual dollar amount is increasing because the savings percentage is now based on a larger salary; however, my argument would be that controlling your standard of living is what is most important, especially when approaching retirement.  So how do you keep your standard of living from getting out of control and far surpassing savings? 

Spend 50% of your raise and save the other 50% 

Let’s see how that strategy could impact our hypothetical client, Jack.  Jack is 30 years old and is earning $100,000/yr as a business consultant.  He is currently saving 10% towards his 401k ($10,000/yr).  Jack had a great year in 2013 and earned an 8% raise for 2014, increasing his base salary to $108,000.  Assuming Jack kept his savings rate of 10% the same, he would now be putting $10,800/yr into his 401k.  However, what if he took the “spend 50, save 50” approach?  After taxes and other payroll deductions, Jack actually realizes a “take home” raise of $5,000.  In the 50/50 strategy, Jack would tack on $2,500 to his annual 401k savings, increasing total annual contributions to $12,500 (from $10,000 prior to his raise).  By simply saving 50% of the money that didn’t exist the year prior, Jack has increased his total retirement savings to about 11.6% ($12,500/$108,000). He’s controlled how quickly his standard of living increases. 

As a young professional, I can certainly attest to the difficulty of looking down the retirement road to a goal that is 35+ years away.  However, committing to your goals and having a clear, simple strategy, such as the 50/50 savings approach, can help you reach the financial goals you set for yourself or family!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. C14-025359