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Despite Low Interest Rates, Keep Cash on Hand

With interest rates at ultra-low levels today, clients often ask us how they can get their cash, in checking or savings accounts, or bank certificates of deposit, to “work harder for them”. In fact, we were recently speaking with a new client about how to arrange her finances after her divorce settlement. One of the items discussed was how much cash to keep as a liquid emergency fund. Since she had a stable job and modest expenses, we suggested 3-4 months worth of expenses as a contingency fund. If something came up, she wouldn’t have to dip into her longer-term investments accounts. She frowned at this idea, sniffing that, checking accounts “weren’t paying anything” and she was “losing” by keeping too much in cash.

Having ready cash is a core for short-term goals and liquidity, (as well as a measure of risk-management) is a key concept in effective financial planning. The client above may have opted to commit all but a small amount of cash to something less liquid in the name of squeezing out a percentage more in earned interest. All well and good, but for the relatively insignificant amount of interest earned, there could be a greater penalty in the form of illiquidity and the absence of ready cash if something unseen and unexpected occurs.

We see this all the time in our daily lives. The car breaks down and needs an expensive repair (just when we’ve committed to paying down the credit card(s)), the old washer gives up the ghost and needs to be replaced, or how about a heavy rainstorm that unexpectedly causes rivers to flood and your basement is now a swimming pool? Certainly would be a good time to have some cash to fix any of these issues.

Job loss and outsourcing is all too common today. Your employment may be secure for the moment, but corporations and small businesses alike have discovered that “lean and mean” is the way to go today to keep profits growing, so many formerly secure jobs are in jeopardy or whole divisions are being consolidated. With the job market still tenuous, having several months of cash to pay the bills and buy groceries could be the difference in your family’s financial life.

Low interest rates are tough on savers, but remember that a main purpose of ready-cash is to provide security and keep your financial ship afloat and sailing forward during rough seas.

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Help! I’m 55, Outsourced and Out of a Job. What Do I Do?

In today’s difficult employment market, many people in their 50’s suddenly find themselves outsourced and out of a job, perhaps when they were hitting their so-called “peak earning years” or when facing multi-whammy obligations of mortgages, college expenses and adult-children weddings . Of course, this is also prime-time for ramping up savings for retirement, which may be less than 10-15 years away. What does one do when faced with suddenly having no working income, maybe some severance pay, and the daunting prospect of keeping your financial plan on course? Here are some ideas:

  • Circle the wagons with your family. Discuss the new financial realities and how everyone can help keep household expenses down.
  • Take stock of available resources and make a new budget. Determine unemployment benefits and how long your severance pay (if available) might last. Prioritized expenses, separate “needs” from “wants” and put off major purchases, if possible.
  • Make “Job Hunting” your new full-time job. If out of the job market for awhile, consider hiring a consultant to help you with polishing your resume and job-search activities, (a lot has changed over recent years).
  • If you have children in college, know that financial aid is an “every-year” process. Inform the college financial aid office of your new circumstances. Chances are your student might qualify (more) aid in the following year(s), if not this year, if income matters haven’t improved.
  • Remember to take your employer retirement account with you via a qualified rollover to an IRA. Consider adjusting your asset allocation to a more conservative stance to avoid worry over market set-backs.
  • Revisit your financial plan and consider alternative goals and objectives if your job prospects and new saving realities don’t improve.

Wealth Management Resources can be helpful to those in this kind of difficult situation. If you’ve been outsourced suddenly, give us a call for a free consultation to see how you can stay on-track toward your retirement and other near/long term goals.

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The Complex World of Social Security

We frequently get phone calls at our office about Social Security planning, both from clients and other pre-retirees. Despite a vast amount of information at the Social Security Administration (SSA) website and other online resources, seniors and pre-retirees still seem confused by their options with this very valuable retirement income program. Here are some interesting items you may not know:

  • Although many people want to file for benefits at age 62, most financial experts and the SSA itself state it is generally better to wait until your Full Retirement Age (FRA) normally 66-67 to file for benefits (except maybe for married couples, see below). The SSA reduces your benefits permanently if you file earlier than your FRA.
  • You cannot “buy back” higher benefits anymore. Prior to 2010, if you filed early, then later changed your mind and wanted higher FRA benefits, you could pay back the income you’ve received and get a “do-over” for your Social Security income election. This little-known technique was disallowed in 2010.
  • Prior to your FRA, if you file for benefits and continue to work, some of your benefits are withheld (roughly $1 for $2 earned). The withheld benefits are not lost, however. They will be credited back to you for future benefits once you’ve actually reached your FRA.
  • Divorce may have significant impact on Social Security planning. If you’ve been married at least 10 years, you can claim your own benefit or 50% of your ex-spouse’s benefit, (whichever is higher). Whether or not your ex-spouse remarries has no effect on this option, though if you remarry, your spousal benefit with your former spouse is no longer available. In addition, if you are the second, third or even fourth spouse in line, as long as you’re married for 10 years to that one person, you still have this option. (If you are the fifth spouse though, you’re out of luck!)
  • In general, a married couple might maximize their collective benefits by coordinating their benefits and timing of their individual filings. As an example, a younger wife may apply for her reduced benefit at 62, add on the spousal benefit at her FRA at 66 (as long as her husband files, even if he suspends to age 70) and then she can claim higher survivor benefits if he predeceases her. By using smart strategies, the couple may realize more aggregate benefits from Social Security over their combined lifetimes than if they filed for benefits individually and without planning.

Social Security benefits are significant assets to a retirees. If you’re unsure about how to strategize your retirement and Social Security income, give us a call and let us assist with our experience and specialized analysis tools.

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Saving for Retirement with the myRA

In his recent State of the Union speech, President Obama introduced a new initiative called the “myRA”, designed to encourage Americans to save more, particularly for retirement. The premise behind the myRA is that many Americans work where traditional payroll-deduction retirement programs are not available. Even though such workers are able to save for retirement on their own through a Traditional IRA or a Roth IRA, many do not.

The myRA attempts to solve many of these issues. Under the proposal, these accounts would operate much like a Roth IRA and are established by businesses for their employees. Contributions are made via payroll deduction and contributions can be as little as $25 to start, and $5 thereafter. Account owners would be able to take their myRA with them if they change jobs, or roll over the account into a normal Roth IRA at any time. There would be only one investment choice; an ultra-conservative Fund modeled after the Federal Thrift Savings Plan’s G Fund.

The myRA program has some advantages, but also some drawbacks. The payroll-deduction feature is a strong plus. As a ‘starter’ retirement account, many workers who have little investing experience may be motivated to save in the myRA. And any kind of savings for retirement is better than none at all.

Some aspects are troubling. Access to contributions without penalty is not a good idea; raiding such accounts for short-term spending may be too tempting. The anticipated low returns may discourage those who feel their money isn’t growing enough. Finally, offering a new retirement savings vehicle isn’t going to solve the significant retirement income/Social Security problem in the US. Workers may need more incentive (or saving capacity above just meeting monthly bills) to put more away for the future, not another savings vehicle.

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Paying for College: What is the college Net Price Calculator?

Right now, college-bound high school seniors and their parents are putting the finishing touches on their financial aid applications for the coming academic year 2014-2015. A significant concern, of course, is the cost of college, how much aid the family may qualify for, as well as how much in loans and savings will be needed to meet college expenses over the next four years (or more!).

One recently implement tool that could be useful to parents of college applicants as well as to those with high school juniors and sophomores, is the Net Price Calculator. The “Net Price Calculator” (NPC) is a Federal requirement on each college’s website, designed to provide families with an estimation of their out-of-pocket obligation for the student to attend that college, based on data entries of parental and student income and assets. Most NPC’s can be accessed via the college’s own website or through the College Board, www.collegeboard.org.

Intended to provide a general idea of what a family might have to pay, it’s important to remember that these are estimates only; each college has its own specific criteria and the results provided are not guaranteed. In addition, even if two families enter similar figures for income and asset values, differences such as the students’ GPA’s, SAT scores, class rank and other criteria may cause the results to differ between the families by many thousands of dollars.

Despite the Federal government’s attempt to make college aid more transparent, there is still a significant amount of secrecy about how colleges decide what the financial aid award letter may look like. Depending upon the college’s enrollment goals, the criteria used may also change periodically. The NPC is a helpful tool, but families may still have to wait until March or April to see the final award letter before making the firm decision.

For parents with high-school juniors and sophomores, a useful technique to uncover more information may be to pay a visit to each school’s financial aid office during campus visits and ask the Aid Officers directly what specific criteria is used. You still may not get more than a general answer and certainly not a firm commitment, but the interview may be more productive than the on-line calculator.

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Let Your Investment Advisors Help Manage Expectations for 2014

Back in the days of the Roman Empire, generals returning to Rome from victorious battles were often honored in parades through the city. Through the celebration, a servant rode in the chariot to continually whisper in the general’s ear, “All glory is fleeting” as a warning against overconfidence.After a rather good year in the US equity markets, investors may be feeling a bit like a victorious Roman general, congratulating themselves on last year’s investment success. In fact, advisors to such investors may now have their hands full in keeping expectations of the coming year in check.

Last year’s advance in the stock market was probably beyond nearly all expectations and while such gains are welcomed, ‘caution’ should be everyone’s watchword going forward. There are many variables on the horizon that could make for a volatile year.

Have questions? Wealth Management Resources, Inc. is a Registered Investment Advisor and a Registered Broker/Dealer, Member FINRA/SIPC. The resources used for this article are deemed to be reliable, but cannot be guaranteed. Contact us with questions at (401) 356-1400 or by email.

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Market Forecasts Most Likely Wrong, Not Right

For those in the financial world, the holiday season ushers in the appearance of market forecasts for the upcoming year. On occasion, a market forecaster may actually come close to hitting the bulls-eye on where the S&P 500 ends up year-end. That lucky guess (what these forecasts really are) may end up as a marketing tool for the forecaster to promote themselves for the next decade to future investors or subscribers.

For the most part though, forecasters end up being dead-wrong and remarkably so. In a recent blog post by commentator and money manager, Barry Ritholz, a circulated tally of fourteen major US financial institution forecasts for 2013 revealed year-to-date results that ranged from 11% to almost 30% off-the-mark. The average margin of error for all of these predictions was 16%. And this is not just a one-off year either. Financial author David Dreman made a detailed analysis of historical market and stock price forecasting in his book, Contrarian Investment Strategies”, noting that forecasts of market and stock analysts are more likely to be wrong than right.

Why all the forecasts? Probably for the same reason people spend thousands of dollars on newsletters and “Special Investment” reports; that infallible but misguided belief that someone, somewhere has the Holy Grail system or the predictive ability to unlock investment riches for the lucky few who have the wisdom to plunk down their $39/month to gain access to supposed ‘secrets’. P.T. Barnum was a keen observer of human nature and his quip was well-placed about the perpetual, by-the-minute, renewal of candidates to feed this gullibility mill.

So just like the din of other white noise emanating from Money-vision and other media, such precise-sounding forecasts should be ignored. In the long-run, while some strategic asset allocation may be a good idea, market forecasts usually have little or nothing to do with sound financial planning and achieving one’s long-term objectives.

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A Simple Method for Creating a Financial Plan

In a July 2012 report released by Consumer Federal of America and the Certified Financial Board of Standards, only 31% of the 1500 respondents to a May 2012 telephone survey said they had a comprehensive financial plan. Why so few?

The answer may lie in the misconception that a financial plan involves massive document-gathering, meetings, introspection, and time commitment. The task may seem so overwhelming that people are afraid to begin.

Beginning writers often face the same fear when starting a 350 page novel book. One technique used by seasoned pros is called the “Foolscap Method”. (‘Foolscap’ refers to ‘legal-sized’ paper measuring 8.5” x about 14”. Its name is derived from the imprinted watermark in 18th century England). The method is to get the structure and outline sketched out on one single sheet of foolscap, normally in three-four “acts” or sections. Once done, the rest is filling in the details. Instead thinking about the whole project, the writer breaks it down into manageable sections.

The core benefits are: 1) Getting the structure down on one page removes the excuse of “It’s too much”, 2) You see the project as a whole, from beginning to end on one sheet and 3) You boil down the goals into the essentials and avoid drowning in the details at the start.

For your financial plan, you break up the different areas into Acts 1, 2 and 3. Within each section, make three solid objectives you’d like to achieve. Why three? Because three seems doable and having just a few objectives helps with focus. Apple founder Steve Jobs used to ask his senior management team for 10 goals, then cross out all but three, stating it was better to focus doing three well, rather than many less-than-well.

If you’re having trouble starting a financial plan or getting your finances in order, try using a single-sheet of paper to get your thoughts, dreams and ideas down and keep it simple. Often, simpler is better.