This past year will go down in history as the year in which the Wall Street financial crisis became a Main Street nightmare. Real estate values plunged; more than a fifth of all American homeowners now owe more than their home is worth.
Retirement plans for many investors in their 50s and 60s have been thrown into disarray, and a generation of younger investors has lost confidence in the financial markets. Out of necessity, many have lowered or stopped contributions to their retirement and 401(k) plans, and many employers have stopped matching contributions as well.
Yet investors in their 20s, 30s and even 40s still have time on their side. Some proactive strategies and a reassessment of investment and financial goals should be in order.
First, look to pay down debt. As credit card issuers face stricter regulation in 2010 and beyond, many are raising rates and minimum payments on existing customers, and in some cases canceling lines of credit. Since other assets have lost value, it makes sense to save on interest expense and lower these payments now. Money saved on credit card and other interest can go to increase your retirement savings.
Resist the understandable temptation to back off on 401(k) and retirement contributions. If your financial circumstances permit, the most likely to be a successful recovery strategy at this point is to contribute as much as possible to your 401(k)s, IRAs and Roth accounts, (and regular savings as well) and dollar cost average into an appropriate mix of stocks and bonds. Many in this age group have already fled the markets, and placed all their funds in super-safe money markets or fixed accounts. While understandable, this has caused many to miss the partial recovery of stocks since the spring of 2009.
There are good reasons to review your asset allocations and rebalance your portfolio now. Stock markets are still well below their highs of 2007; implementing a responsible asset allocation with an appropriate percentage in stocks or stock mutual funds can help turn these declines into opportunity.
For those in their 50s and 60s, approaching or already in retirement, there are other factors to consider. You may have made your retirement plans with assumptions for asset values and investment returns that are no longer valid. Along with helping to provide support for aging parents, many in this age group are now helping their adult children as well.
You need to have a written asset allocation and income plan to help you see clearly where you are now, regroup, and provide continuity and consistency to future investments.
Review your current allocation, especially the mix of stocks, bonds and cash in all your personal and retirement accounts. Calculate the income, both dividends and interest, that the portfolio provides, work out what your expected rate of withdrawal is, and determine whether those expectations are still realistic. If lowered values have driven your withdrawal rate up to 6 percent or higher, it may be time to reevaluate spending. There are many useful financial calculators available online to help you with this calculation, or you may want to consider working with a knowledgeable advisor of financial planner to review your options.
For many the best plan may be to defer retirement a few more years. Educate yourself about all your Social Security options. Waiting a few years to take Social Security may dramatically increase benefits. Taking Social Security as soon as you are eligible may no longer be the best option.
If you have a more serious shortfall, it may be necessary to make more significant changes. Despite a troubled real estate market, you may need to consider downsizing, or look into the options provided by a reverse mortgage. A second career, working during retirement or starting a retirement business, can provide rewards of its own, as well as providing additional financial benefits to bridge a future income gap.
When the economy went south, it didn’t discriminate.
Some people lost much of their retirement, some lost their jobs, others lost their homes or cars, and others have seen their credit slashed while interest rates have shot up on their credit cards.
It can all seem overwhelming. But there are ways to take control of your finances.
According to John Wills of the nonprofit Consumer Credit Counseling Service, which has offices in Savannah and Beaufort, people need to take several steps to make sure their financial house is in order. Here’s a step-by-step process:
1. Set goals.
“First, you need to know where you’re going and what you want to achieve,” said Wills. “Do you want to pay off debt? Do you want to save for a home? A vacation? Retirement? It really comes down to a question of needs versus wants.”
There are two things you can do to impact your budget: Pare back or increase your income, he said.
“On paring back, if you’re going to set goals, you need to know where your money is going. You need to be able to track expenses. You can’t adjust your rent or a car payment, but you can look at discretionary spending. Do you really need that pizza or that Starbucks?
“On increasing your income, if you’re getting a tax refund, take a look at changing how much is being taken out so you can get more in your paycheck. Take a look at everything coming out of your paycheck. For instance, donate time to charity rather than money if you can’t afford it.”
2. Take a close look at debts, particularly credit cards. Almost everyone has them and most people are carrying balances.
“If you have credit cards and are paying the minimum, take a look at the interest rate and call the credit card company and try to negotiate or barter on an interest rate,” said Wills. “Let them know that you might consolidate your credit card debts with a different credit card company. Let them know you have other offers. And sometimes if one person turns you down, you might get a different response by talking to someone else.”
Wills also emphasized that people should not treat credit cards as supplemental income. “If it’s not in your budget, don’t spend it,” he said.
He also advises to always try to pay more than the minimum due and to look for reward cards that have incentives, like frequent flier miles or reward points.
3. Take a look at your mortgage.
Many of the problems that brought about so many foreclosures are based on ARMs or balloon mortgages, said Wills. But, there are options to make sure you hold onto your home, such as working with the mortgage company; elongating the terms of mortgages; or going from an ARM to a fixed mortgage. Wills also said people should never buy a house that is more than 2.5 times the owner’s annual gross income.
4. Make sure you know what’s on your credit report.
There are often mistakes that can be fixed, said Wills. Only one web site is authorized to fill orders for a free annual credit report, which you are entitled to under law: annualcreditreport.com (or call 1-877-322-8228), according to the Federal Trade Commission. Other web sites that claim to offer “free credit reports,” “free credit scores,” or “free credit monitoring” are not part of the legally mandated free annual credit report program. In some cases, the “free” product comes with strings attached. For example, some sites sign you up for a supposedly “free” service that converts to one you have to pay for after a trial period. If you don’t cancel during the trial period, you may be unwittingly agreeing to let the company start charging fees to your credit card, says the FTC. In other words, those annoying TV commercials for a free credit report are a scam.
5. Avoid credit repair clinics.
“Don’t buy into those debt settlement commercials,” said Wills. “They are very deceptive and they can actually hurt your credit. Also, car title loan and check cashing businesses will charge exorbitant fees and when the client wants out, they can’t get out without paying more fees.”
Beware of: a lender who isn’t interested in your credit history; fees that are not disclosed clearly; a loan that is offered by phone; a lender who is not registered in South Carolina; or a lender who asks you to wire money or pay an individual.
6. Remember, it’s always better to pay your bills than file bankruptcy.
Many people have fallen on hard times or are over their heads in debt. That’s when an agency like Consumer Credit Counseling Services can really help. The nonprofit can work with creditors, help get interest rates down, help stop late and over-limit fees, and, according to Wills, help some people get out of debt in four to five years.
Call 1-800-821-4040 or visit www.cccssavannah.org.
Here are some tips as you look at your finances in the coming year:
- Go through your financial files and toss what you don’t need. In general, you should keep your tax returns forever, but you can get rid of supporting documents after three years (six years if you have self-employment income). You can get rid of monthly investment statements after everything matches with your year-end summaries. You can also toss ATM receipts as soon as the transactions appear on your monthly bank statement.
- Invest in a shredder to protect your identity from being stolen.
- Be aware of the amount you owe and payment due date on credit cards. Check statements for unauthorized charges, which could indicate ID theft, rate changes, credit limit changes, and any additional fees that may have been added on.
- Review your insurance with your insurance agent. Most people have homeowners or renter’s insurance as well as auto. But life, long-term care and disability insurance are important, too.
- Protect your loved ones and write or update your will.
- Evaluate your budget against your needs. Even among people who have a budget, most assume that last year's spending is the benchmark against which they need to compare. Instead, www.wisebread.com/a-better-way-to-create-a-budget start each budget category at zero. Then, evaluate what you actually need and find the cheapest way to fill that need.
- Signing up to have your bills paid automatically from your bank account saves you monthly check-writing hassles and mail-delivery worries; it also protects you from costly missed deadlines. After one late payment, some credit-card companies boost interest rates beyond 31 percent and charge late fees of nearly $40. And some card companies raise your rate if you miss a deadline on another card, even if you have a spotless record with them.
Sources: www.wisebread.com; CCCS of the Savannah Area; monster.com