Articles tagged with: credit card

Mid-Life Money Errors

If you are between 40 & 60, beware of these financial blunders & assumptions.

Between the ages of 40 and 60, many people increase their commitment to investing and retirement saving. At the same time, many fall prey to some common money blunders and harbor financial assumptions that may be inaccurate.

These errors and suppositions are worth examining, as you do not want to succumb to them. See if you notice any of these behaviors or assumptions creeping into your financial life.

Do you think you need to invest with more risk? If you are behind on retirement saving, you may find yourself wishing for a “silver bullet” investment or wishing you could allocate more of your portfolio to today’s hottest sectors or asset classes so you can catch up. This impulse could backfire. The closer you get to retirement age, the fewer years you have to recoup investment losses. As you age, the argument for diversification and dialing down risk in your portfolio gets stronger and stronger. In the long run, the consistency of your retirement saving effort should help your nest egg grow more than any other factor.

Are you only focusing on building wealth rather than protecting it? Many people begin investing in their twenties or thirties with the idea of making money and a tendency to play the market in one direction – up. As taxes lurk and markets suffer occasional downturns, moving from mere investing to an actual strategy is crucial. At this point, you need to play defense as well as offense.

Have you made saving for retirement a secondary priority? It should be a top priority, even if it becomes secondary for a while due to fate or bad luck. Some families put saving for college first, saving for mom and dad’s retirement second. Remember that college students can apply for financial aid, but retirees cannot. Building college savings ahead of your own retirement savings may leave your young adult children well-funded for the near future, but they may end up taking you in later in life if you outlive your money.

Has paying off your home loan taken precedence over paying off other debts? Owning your home free and clear is a great goal, but if that is what being debt-free means to you, you may end up saddled with crippling consumer debt on the way toward that long-term objective. In June 2015, the average American household carried more than $15,000 in credit card debt alone. It is usually better to attack credit card debt first, thereby freeing up money you can use to invest, save for retirement, build a rainy day fund – and yes, pay the mortgage.1

Have you taken a loan from your workplace retirement plan? Hopefully not, for this is a bad idea for several reasons. One, you are drawing down your retirement savings – invested assets that would otherwise have the capability to grow and compound. Two, you will probably repay the loan via deductions from your paycheck, cutting into your take-home pay. Three, you will probably have to repay the full amount within five years – a term that may not be long as you would like. Four, if you are fired or quit the entire loan amount will likely have to be paid back within 90 days. Five, if you cannot pay the entire amount back and you are younger than 59½, the IRS will characterize the unsettled portion of the loan as a premature distribution from a qualified retirement plan – fully taxable income subject to early withdrawal penalties.2

Do you assume that your peak earning years are straight ahead? Conventional wisdom says that your yearly earnings reach a peak sometime in your mid-fifties or late fifties, but this is not always the case. Those who work in physically rigorous occupations may see their earnings plateau after age 50 – or even age 40. In addition, some industries are shrinking and offer middle-aged workers much less job security than other career fields.

Is your emergency fund now too small? It should be growing gradually to suit your household, and your household may need much greater cash reserves today in a crisis than it once did. If you have no real emergency fund, do what you can now to build one so you don’t have to turn to some predatory lender for expensive money.

Insurance could also give your household some financial stability in an emergency. Disability insurance can help you out if you find yourself unable to work. Life insurance – all the way from a simple final expense policy to a permanent policy that builds cash value – offers another form of financial support in trying times. Keep in mind; insurance policies contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your financial professional can provide you with costs and complete details.

Watch out for these mid-life money errors & assumptions. Some are all too casually made. A review of your investment and retirement savings effort may help you recognize or steer clear of them.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to affect some of the strategies. Investing involves risk including possible loss of principal.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/ [6/25/15]

2 – tinyurl.com/oalk4fx [9/14/14]

 

 

The Difference Between Good & Bad Debt

Some debts are worth assuming, but others exert a drag on retirement saving.

Who will retire with substantial debt? It seems many baby boomers will – too many. In a 2014 Employee Benefit Research Institute survey, 44% of boomers reported that they were concerned about the size of their household debt. While many are carrying mortgages, paying with plastic also exerts a drag on their finances. According to credit reporting agency Experian, boomers are the generation holding the most credit cards (an average of 2.66 per person) and the biggest average per-person credit card balance ($5,347).1,2

Indebtedness plagues all generations – and that is why the distinction between good debt and bad debt should be recognized.

What distinguishes a good debt from a bad one? A good debt is purposeful – the borrower assumes it in pursuit of an important life or financial objective, such as homeownership or a college degree. A good debt also gives a borrower long-term potential to make money exceeding the money borrowed. Good debts commonly have both of these characteristics.

In contrast, bad debts are taken on for comparatively trivial reasons, and are usually arranged through credit cards that may charge the borrower double-digit interest (not a small factor in the $5,347 average credit card balance cited above).

Some people break it down further. Thomas Anderson – an executive director of wealth management at Morgan Stanley and the author of the best-selling The Value of Debt in Retirement – identifies three kinds of indebtedness. Oppressive debt is debt at 10% or greater interest, a payday loan being a classic example. Working debt comes with much less interest and may be tax-deductible (think mortgage payments), so it may be worth carrying.3

Taking a page from corporate finance, Anderson also introduces the concept of enriching debt –strategic debt assumed with the certainty than it can be erased at any time. In the enriching debt model, an individual “captures the spread” – he or she borrows from an investment portfolio to pay off student loans, or pays little or nothing down on a home and invests the lump sum saved into equity investments whose rate of return may exceed the mortgage interest. This is not exactly a mainstream approach, but Anderson has argued that it is a wise one, telling the Washington Post that “the second you pay down your house, it’s a one-way liquidity trap, especially for retirees.”3,4

Mortgage debt is the largest debt for most new retirees. According to the American College, the average new retiree carries $100,000 in home loan debt. That certainly amounts to good debt for most people.3

Student loans usually amount to good debt, but not necessarily for the increasing numbers of retiring baby boomers who carry them. Education loans have become the second-largest debt for this demographic, and in some cases retirees are paying off loans taken out for their children or grandchildren.3

Credit card and auto loan debt also factor into the picture. Some contend that an auto loan is actually a good debt because borrower has purchased a durable good, but the interest rates and minimal odds of appreciation for cars and trucks suggest otherwise.

Some households lack budgets. In others, the budget is reliant on everything is going well. Either case opens a door for the accumulation of bad debts.

The fifties are crucial years for debt management. The years from 50-59 may represent the peak earning years for an individual, yet they may also bring peak indebtedness with money going out for everything from mortgage payments to eldercare to child support. As many baby boomers will retire with debt, the reality is that their retirement income will need to be large enough to cover those obligations.

How much debt are you carrying today? Whether you want to retire debt-free or live with some debt after you sell your business or end your career, you need to maintain the financial capacity to address it and/or eradicate it. Speak with a financial professional about your options.

Mike Moffitt may be reached at  ph# 641-782-5577 or email:  mikem@cfgiowa.com

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.  

Citations.

1 – foxbusiness.com/personal-finance/2015/03/26/strategic-debt-can-help-in-retirement/ [3/26/15]

2 – gobankingrates.com/personal-finance/19-easy-ways-baby-boomers-can-build-credit/ [4/23/15]

3 – usatoday.com/story/money/columnist/brooks/2015/04/22/retirement-401k-debt-mortgage/25837369/ [4/22/15]

4 – washingtonpost.com/news/get-there/wp/2015/03/26/the-case-for-not-paying-off-your-mortgage-by-retirement/ [3/26/15]