A Million Dollar Coffee Habit? Really? Ep 12

About once a week, Susan and I will stop for a latté at Stoked Coffee.  Each one costs a little more than $3.00.  Some people stop far more often.  Will a daily latté result in a million dollar coffee habit?  We’ll talk about it in today’s episode of Monday Morning Money.

Video: A Million Dollar Coffee Habit?

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Time for Some Math

So Suze Orman says the daily coffee habit equates to a million dollars over 40 years.  Is that accurate?

Three dollars per day is roughly $100 per month.  If you compound $100 per month for 40 years, how much will you have? We used 6%, 8%, and 10%.  The 90-year average annual return for stocks is about 10% per year. 

What did we get?

million dollar coffee habit

Not Quite A Million Dollars

To accumulate a million dollars saving $100 per month, you would have to earn nearly 12% per year.

Exaggerate much?

The Real Topic:  Opportunity Cost

Every dollar we spend costs what we pay today, plus the lost growth if it were saved. It’s called opportunity cost. Most people don’t consider it when they make any kind of purchase.

For most of us, money is a finite resource. We make what we make. We have to balance what we spend for the things we need and want today, with what we need to save for the future.

Ms Orman simply took something common, I see the cars lined up at Stoked…to exaggerate her point. The opportunity cost of some these little things add up to big amounts over a lifetime. I mean $350,000 isn’t chump change.

Does that mean you should give up your daily latte’? Not necessarily. If you are saving enough to gain financial independence and be able to retire the way you want, have your coffee.  Things will be fine.

But if you’re saving is out of balance with your spending, start looking at the little things. You may find they end up making a big difference in the long run.

5 Lessons for Financial Success – Ep. 11

Last week, my daughter graduated from college. Unfortunately, they don’t teach kids much about money in school. They learn some things from their parents. Others they learn from their own experience. I thought this was an appropriate “gift” for my daughter: 5 Lessons for Financial Success.

Video:  5 Lessons for Financial Success

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My Daughter and My wife at graduation in 2019 and my daughter at 22 months old in 1997

She graduated with a degree in early elementary education from the University of Cincinnati.  And she did so with honors.

5 Lessons for Financial Success
Yes, my handwriting is bad.  I won’t be working as a calligrapher anytime soon.   But this is the card I gave to my daughter when she graduated.  I hope she keeps these lessons in mind as she embarks on her adulting journey. Click to enlarge the card.

5 Lessons for Financial Success

 

1. Spend Less Than What You Earn

Nobody has ever been able to get ahead if they spend twenty two hundred dollars a month when they only bring home two thousand.  This involves hard choices.  But those decisions are critically important to your future.

The best way to know you are doing this….KEEP track.  Prepare a budget. Know where your money goes, know what is coming in, and use that as your guideline.

2.  Make Saving a Priority

Whether it is building an emergency fund, saving for a down payment on a house, or socking money away for retirement.  Setting aside money now for later is very important.  The future is coming, and you’ll be glad you did.

3.  Pay Off Your Credit Cards Every Month

The convenience and ease of using a credit card makes them very appealing.  But when you don’t pay it in full, things snowball out of control very quickly.  The interest charges for many credit cards is in the double digits. And that adds a lot of extra expense.

4.  Get The Free Money

401(k) matching contributions are free money.  So are matching contributions to a health savings accounts.  Your employers are giving you money if you save some of yours.  Ignoring these opportunities will prove to be very costly down the road.

5. Avoid The Predators

This includes pay day loans, check cashing services, the rent to own furniture companies. They all offer what appears to be a fix for a problem.  But it comes at an enormous cost.

6.  Always Obey Rule #1.  Spend Less Than What You Earn

Spend less than what you earn.  It just can’t be stated enough.

Mistakes to Avoid in Your 401k – Ep 09

Last week, we offered some tips to help you better manage your 401k. You can watch it here. This week we will share some common mistakes we see people make in their 401k plan. And, we will provide some suggestions on how to avoid them.

Video: Mistakes to Avoid in Your 401k

Did You Miss part 1?

Last week we offered some tips on how to better manage your 401(k).  You can view the entire post by clicking on the button.  If you just want to watch the video….

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401k Mistake 1:  Performance Chasing

You have a list of funds. Your employer provides you a list. Included with the list are trailing performance stats. We pay attention to the funds with the best results. Who doesn’t want to own the best performers?

Here’s the problem. The best performers in the past won’t always be the best performers in the future. Studies by both Vanguard and Standard and Poors show funds who outperfomed in the past often underperform in the future.

To avoid this, consider funds which track a specific index. They won’t always be the big winners. But you also don’t have to rely on whether a manager can repeat his past successes, either. Funds which track a specific index also tend to have lower costs.

401k Mistake 2: Trying to Time The Market

Major declines in your account values cause stress. This is the most difficult part of being an investor. People want to try and avoid those downturns. So, they try to guess when to move in and out of stocks. Unfortunately, most people struggle to be successful at timing those major moves. A study by JP Morgan showed the impact of missing the good days on investor returns.
401k

401k Mistake 3:  Misusing Target Date Funds

A few years ago, fund companies created target date funds. They were designed to simplify the allocation decision. You choose the fund with the target date closest to the date you wish to retire.

As you get closer to retirement, the fund automatically adjusts the allocation. It will reduce the amount it allocates to stocks, and increase the amounts invested in bonds.

Need some help?

We would be happy to help you look at your plan and discuss it with you.  Click on the button to get started.

Tips to Help You Manage Your 401k – Ep 08

Does managing your own 401(k), 403(b) or Deferred Comp plan intimidate you? The decisions you make have a huge impact on your long term results. Today is the first part of a two part series. We’ll offer some basic tips for your 401k.

Video: Tips for Your 401k

Watch Part 2

 

      Mistakes To Avoid in Your 401k

 
Or see the entire blog post by clicking the button.

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Tip 1: Asset Allocation

Asset Allocation describes how you mix the major asset classes in your account. How much you invest in stocks, bonds, cash and other assets will determine your returns. And it will determine how much your account fluctuates in value.

When investing, you make a trade off. Assets like stocks offer a lot of potential for return. But it comes with some wild swings in vlaue.

Investments in bonds or cash limit the volatility. But they don’t provide many opportunities for growth.

Tips for your 401k
Tips for your 401k
Tips for your 401k
Tips for your 401k

Tip 2:  Keep it Simple

Many plans offer a lot of different choices. It is tempting to own many different funds. But, owning 15 different stock funds doesn’t mean you are diversified. Identify a small handful of funds to build your account. Try to use between four and eight different funds for your allocation.

Tip 3:  Pay Attention to Costs

Every fund in your retirement plan has an expense ratio. This is how the fund company makes money. Some funds cost more than others. Expense ratios are often stated as basis points. A basis point equals 1/100th of one percent. Expenses eat into returns. Funds with higher costs have to earn more than the lower cost options to create equal returns for you. When possible try to use the lower cost options.

Tip 4: Don’t allocate too much to company stock.

Many plans allow you to buy the stock of your employer. Owning too much of your employer’s stock can increase your risk. A good guideline is to own no more than 10% of the stock in your account. Your employer may be doing well today, but things can change. History shows a lot of examples of companies who were doing well and then were suddenly worth nothing.

Want a second opinion?

We would be happy to help you look at your plan.  We will offer some tips for your 401k plan.  Simply click the button to contact us.

Replacing Income in Retirement — Ep 07

Replacing income in retirement creates a puzzle. Most of us will depend on two sources: Social Security and our savings. How much income you need from your savings depends on your Social Security. And, how much of your income Social Security replaces depends on how much you earn.

We’ll discuss how this fits together on today’s episode of Monday Morning Money.

Video: Replacing Income in Retirement

Progressive Benefits

The more you earn the more your Social Security benefit will be—to a point. There is a maximum benefit. But it is a progressive benefit. Social Security replaces a larger percentage of income for lower earners.
Replacing Income in Retirement
Replacing Income in Retirement
Replacing Income in Retirement
Replacing Income

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Some estimate you need to replace between 70 and 80% of your household income in retirement. And for most of us that will come from two sources. Social Security and what we save.

So how does Social Security impact how much you need to save for retirement? Stick around we’ll talk about that next.

So how do we know we’ll only need seventy to eighty percent of our income in retirement?

While this is somewhat generalized, there is some merit to it. Some of the outlays you have while you’re working will not be there. For one, you’ll no longer be adding money to your 401(k) or other accounts. And many people will have a smaller income tax liability. You may also see some other work related expenses decrease.

We need to know how much is going to come from what source.

Replacing Income From Social Security

For the overwhelming majority of us, part of that income is going to come from Social Security. The Center for Policy basics estimates 97% of the people over 60 will receive Social Security. But how much can we depend on?

Social Security has a complicated formula. The more you make during your working years the higher your benefit will be, to a point. It does max out.

But Social Security retirement is a progressive benefit. If you make $50,000 per year, Social Security will replace a larger percentage of your income. If you make $150,000 per year, it will replace a smaller percentage.

Let’s show you what we mean, and keep in mind these are general examples

A couple who earns $50,000 per year has 53% of their income replaced by Social Security.

A couple who makes $100,000 will discover Social Security replaces 38% of their income.

And a couple with an income of $150,000 will have 27% of their income replaced by Social security.

As income levels increase, Social Security benefits replace a smaller percentage of income.

Replacing Income From Savings

The more you earn, the more important it is to save for retirement. Because your savings will have to do a lot more heavy lifting.

Let’s show you what we mean.

So if our income replacement target is 75%,

that couple who makes $50,000 , will need 22% of their retirement income to come from savings. If we use the 4% rule, That equates to about $275,000 in savings.

The couple who makes 100,000, will need 37% of their income from their nest egg. This means they need a nest egg of about $925,000.

And the couple who makes 150,000 will need their savings to replace half of of their income. This requires retirement savings of roughly 1.8 Million dollars.

This is a general example with certain assumptions about Social Security benefits. Real life will look different for most of us, but the general concept still applies.

The best thing you can do is get a copy of your Social Security Earnings record and benefit statement. This can improve how you plan for your future.

Get A Copy of Your Social Security Benefit Statement.

To plan for your retirement, you need to have a good idea of what your Social Security benefits will be.  You can get a copy of your Earnings Record and Benefit Statement, by visiting the Social Security Administrations website.

Watch Other Episodes of Monday Morning Money

Catch up on the previous episodes of our weekly video series, Monday Morning Money.  You can also see them on our facebook page and our YouTube channel.

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529 Plans and Financial Aid – Ep 06

A new grandchild often inspires us to do something to help with future education costs.  And Most  people automatically think about a 529 plan.  That’s understandable. There aren’t many types of accounts which allow for TAX FREE growth.

But before you open that new account, you should be aware of a couple of “traps.”  We’ll talk about it on today’s episode of Monday Morning Money.

Video: 529 Plans And Financial Aid

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529 plans were created in 1996. They allow for Tax Free growth when used for qualified education expenses. On the surface, they seem like the perfect tool to help save for the future costs of college.

But there are a few traps. Most of those issues center around how this account impacts financial aid.

The Hidden Financial Aid Trap for a 529 Plan

A 529 plan owned by a parent impacts the financial aid formula. But, an account owned by a grandparent doesn’t count in the expected family contribution. At first thought, you might think grandparents should own the account.

And here is where you find the hidden problem.

A distribution from a 529 plan owned by a grandparent counts as income to the student on the financial aid form. And, the distribution can reduce the financial aid package by 50% of the distribution.

This means, if your grandchild was to get $10,000 of aid, a $10,000 distribution could reduce their aid by $5,000.

Having the parent own the account might be a better option.

Parent owned assets do count towards the expected family contribution. But, their impact may not be as great as the distributions from the grandparent owned account.

Only 5.64% of the value of a parent owned account counts against a financial aid award. In number terms, a $10,000 account will only reduce the aid award by $564. On top of that, distributions from a parent owned 529 plan won’t count as income either.

If you, as the grandparent, own the 529 account, you need to plan the timing of the distributions. This means, the distributions should happen in the final two years of college.

Other Financial Aid Traps

This also brings up a couple of other things which could impact a financial aid award.

Sizable Gifts from a grandparent also get treated as income to the student on the FAFSA form.

Parents who tap into a Roth IRA to help their kids pay for college can also cause a problem with financial aid. Those tax free distributions count as income on the FAFSA.

Those items could reduce the amount of the financial aid award by 50% of the distribution or gift.

Helping your grandchildren save for college is a tremendous gift. The future costs will be staggering for certain. But it is worth looking at the big picture before you open an account.

 

Ohio’s 529 Plan

Click the button to visit the website for Ohio’s 529 Plan

West Virginia’s 529 Plan

Click the button to visit the website for West Virginia’s 529 Plan

Watch Other Episodes of Monday Morning Money

Catch up on the previous episodes of our weekly video series, Monday Morning Money.  You can also see them on our facebook page and our YouTube channel.

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Read More

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Read More

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What If Things Don’t Go According to Plan? Ep 04

What if life doesn’t go according to plan?  We take the time to plan for our retirement. But often times, life doesn’t happen as we draw it up on paper.  We may find our nest egg isn’t as big as we need it to be. Or, we may be forced to retire earlier than we expect.  And for some, we may have to support our kids or our parents when we retire.  What if life doesn’t go according to our plans?

We’ll talk about it in today’s episode of Monday Morning Money.

Video:  What If…

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We all have visions of what our ideal retirement should look like.  Perhaps its traveling a little bit, maybe playing a round or two of golf.  For some it’s volunteering.  For me it’s making sawdust and scrap lumber.  But sometimes life has other ideas and throws a wrench into the works.

Life is what happens when you’re busy making other plans (John Lennon)

So much of what we do is helping people plan for the financial part of retirement.  And those plans center around what our clients want to do when they leave the workforce.  But sometimes, many times, real life doesn’t always work out as we draw it up on paper.

Less in Savings Than Expected

It could be that future returns on our savings are well below what we expected.  Or maybe, a major stock market crash happens right before we retire.

In either event your savings may not be what you were expecting.

Does this mean you delay your retirement? Maybe you work part-time for a while.  Or maybe you figure out ways to adjust your lifestyle.

Maybe you’re forced to retire earlier than you planned.  37% of retired Americans reported they retired earlier than expected.  Health problems, early buyout offers, layoffs and family issues were the reasons given.

Retiring Early

A forced early retirement creates its own set of challenges.  You have less time to save, so you could have a smaller nest egg.  This could also force you to start your Social Security before your normal retirement age.  This results in a smaller benefit, in some cases up to 30% less.

It could also mean a significant expense for health insurance until you are eligible for Medicare.

Family Matters

And for many, family can be the disruption.  A study revealed for people over 50 nearly 15% have a child or grandchild under the age of 18 living with them.  Approximately 10% had another family member living with them.  This could be adult children, parents, or other family members. And roughly 28% support someone outside their home in some way.

Helping the people we care about the most can also change your retirement.

What if

We need to plan for the possibility of a significant disruption in our lives.  The specifics are nearly impossible to identify or predict.  But as we’re thinking ahead we need to ask ourselves the “what if” questions.

  • What if we can’t save as much as we need?

  • What if we have to retire early?

  • What if we have to help support our kids or our parents?

  • What if things don’t go according to our plans?

Sometimes when life happens we have to adjust, chart a new course,  and figure out how to use what we have to create the best situation for both today and the future.

Monday Morning Money Ep. 02

When thinking about how you spend money in retirement, do you consider what you might spend for healthcare?  You probably should.  Fidelity estimates a couple will spend over $280,000 on healthcare in retirement.  It is a staggering number.  We’ll talk about that in today’s video.

Video: Monday Morning Money Ep. 02: Healthcare in Retirement

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Where the $2800,000 Goes….

healthcare

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Video Transcript

As your thinking about retirement, how do you see yourself spending your money? A few rounds of golf, maybe some other Hobbies? Travel? Spoiling those grandkids?

Those answers are typically what we hear.  Most people look forward to the good things. But there is something else we need to consider.  It will likely be one of your biggest expenses during retirement.

Stick around we’ll talk about that right after this.

Hi I’m Neal Watson, Welcome to Monday Morning Money. Please take a minute to like our facebook page, And subscribe to our YouTube Channel, A link for all of those can be found below.

Planning for retirement should be something we look forward to.  Once we leave the workforce, we’ll have time to do many of the things we’ve wanted to do, but couldn’t seem to fit them into our daily lives.   And people tend to get excited about those new opportunities.

But there are some realities we must face. And one of those are health care costs.  A recent study estimated the average couple will spend over $280,000 on healthcare in retirement.  That’s a pretty staggering number when you think about it.

It’s even more surprising when you consider this figure doesn’t include premiums for medicare supplements, costs for a nursing home or long-term in home care.

It simply includes things like your part B and part D medicare premiums.  Prescriptions, and other common costs like co-payments, and deductibles.

Over a quarter million dollars on health related expenses.  It’s Mind boggling!  But this will easily be one of your biggest expenses in retirement. And one many people aren’t considering

So what are some of the things you can do to help with these costs?  Let’s take a look.

1.  Invest in a Healthier Lifestyle.

By this we don’t mean putting money in an account.  We mean, make the effort to change some of your habits. Lose weight, exercise more, be more active.  Also take time to give your brain a work out.  Making healthier choices can help reduce some of those expenses you’ll face later in life.

2. Delay retirement to age 65 when you are eligible for Medicare.

Many people want to retire as early as possible, but one of the major obstacles to retiring prior to age 65 is the high cost of health insurance. Health insurance premiums for a 62 year old couple could easily exceed $1,500 per month. That’s over $54,000 total to get to Medicare.

3. Consider Medicare Supplement Insurance.

Some of the deductibles and co-pays for medicare can be significant. These supplements are designed to help cover some of those costs. These supplements do come at an expense, so consider that in your decision making process.

4. Do you have a Health Savings Account?

Not everybody participates in a high deductible health plan that offers health savings accounts.  But if you do, consider maximizing your annual contributions.  This money can be used to pay for health related expenses, and the earnings are tax free.

The cost of healthcare in retirement is not something any of us like to think about.  But it could easily be one of your largest expenses.  And something we should consider in our plans.

Monday Morning Money Ep. 01

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We face a number of financial risks in retirement.  And, when most people hear the word “risk” they automatically think about a stock market crash.  And while those events are possible, one threat always impacts our nest egg.  Every year, everything you buy costs more.  We’ll talk about that in this week’s episode of Monday Morning Money.

Yes there is a Big Mac Index. It was created by the magazine The Economist

Plan for A Better Retirement

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Other things we buy also cost more.

Every Year Everything You Buy Costs More: The First Class Stamp

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Every Year Everything You Buy Costs More: The Big Mac

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When I Was A Kid…

What are some of the things you remember buying years ago?  What are some of the stories your parents or grand parents told you about the prices they paid for the things they purchased?

Leave your comments below.

Video Transcript

We face a number of risks in retirement. Most people focus their attention on another stock market crash like we saw in 2008. Rightfully so. That was rough. But there are other threats we need to consider and plan for. One of the most significant ones: Every year everything you buy costs more.

Who hasn’t heard a parent or grandparent tell us “when I was a kid, a loaf of bread was a nickel and a movie was a quarter. And I had to walk up hill both ways to buy both!”

We all know bread hasn’t been a nickel for decades, and when I was a kid, Buck night at the Athena and Varsity in Athens was a treat.  And my parents dropped us off.

Every year, everything you buy costs more.  It is a simple way to explain inflation. Over time, the prices of the things we buy increase.

But we don’t always notice in our day to day lives. It’s not until we look at the cumulative effect over many years, that we see just how much inflation impacts our wallet.

One of the best ways to illustrate this is a first class stamp.

A little more than a month ago, your cost to mail a letter increased to 55 cents. And while this was the largest increase ever announced by the postal service, it probably didn’t seem like a big deal.

But if we go back 30 years, you could buy 4 stamps for a dollar. Over time the cost to mail a letter has increased gradually.  A penny here, two cents there, And now thirty years later, it will cost you more than a dollar to mail two letters.

Stamps aren’t the only thing which has increased in price.

In 1988 a big mac cost two bucks. Now three decades later, this signature sandwich has more than doubled in price. There is actually something called the Big Mac Index.

The same can be said for

Bacon,
Movie tickets,
gasoline,
bread,
Ice cream
and electricity.

All of these items cost more.

Prices go up, And this impacts how we need to plan for retirement. When thinking about what you’ll spend in retirement, most people look at how they spend their money right now. And that’s a good starting point. But it won’t remain constant over time.

If something costs a dollar today, you should expect to pay more in the future.

If inflation averages 3%,

That same item will cost $1.16 in five years.

It jumps to $1.34 in 10 years.

In fifteen years, you can expect to spend over 50 percent more.

After two decades, that one dollar item jumps to a dollar eighty,

And after 25 years, the price will more than double.

For years, we were able to depend on Social Security to help us with these rising costs.  But in more recent years the cost of living adjustments have been much smaller.  And on top of that, Medicare premiums have been eating up much of those annual increases.

This means we must rely on our savings to provide the raises we will need in retirement. Without a good plan, Inflation could be as much of a threat to your nest egg as a major stock market crash.

So, what’s your plan to deal with this threat?

Leave your thoughts or questions in the comments section below. We’d love to hear from you.

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