Retirement

Don’t Bank on Your Business to Fund Your Retirement

Posted on by Kelsey Sheehy

Retirement can loom like a dark cloud for small-business owners. Many invest blood, sweat and tears — and every penny — into building their business but never set cash aside for the future.

A huge number of entrepreneurs have reported putting aside no retirement savings at all. For some, selling the business is their only retirement plan.

That’s a risky bet, says Keith Hall, president and chief executive officer of the National Association for the Self-Employed.

“You’re putting all of your eggs in one basket. Not just your current lifestyle, but your future,” Hall says. “If something goes wrong, you sacrifice both.”

And the list of things that could go wrong is long: Your business could fail. Your health could fail. You may not find a buyer. You may have to sell for less than you need. You may not be able to retire fully.

Rather than gamble on everything going right, diversify your nest egg so it will last you well into your later years.

Make retirement planning a priority

Saving for retirement is often the last item on your budget and the first to get cut in favor of other priorities, Hall says. Instead, make it as important as paying your mortgage or running your business.

This won’t come naturally to most entrepreneurs, who are often hyper-focused on immediate needs and tend to plan in three- to five-year increments.

“It’s hard as an entrepreneur and small-business owner to think 20-plus years out,” says Mary Bell Carlson, owner of Carlson Consulting LLC. “I’m often figuring out what I need to do today for immediate cash and long-term profitability.”

But Carlson, a financial counselor and certified financial planner, makes a point to invest where she can. She and her husband contribute to his employer-provided retirement plan. They each also put money into individual retirement accounts, among other investments.

“My biggest lesson has been to start, no matter how small the amount; it’s just important to start,” she says.

Determine what you can afford, whether that’s 1%, 5% or 10% of your gross earnings, and commit to it, Hall says. Over a long enough window, even small, regular contributions will compound into something meaningful.

There are a number of retirement plans for small-business owners, each with requirements, stipulations and tax implications.

  • Traditional, Roth IRA: Individual retirement accounts are easy to open and available to virtually anyone. You can contribute up to $6,000 in 2022 (up to $7,000 if you’re 50 or older). The main difference between traditional and Roth IRAs is whether you want tax savings now or later. Traditional IRAs use pre-tax income, but you pay taxes when the money comes out. With Roths, it’s the other way around.
  • Solo 401(K): Available to business owners with no full-time employees (exception made for a spouse). The contribution limit is up to $61,000 for 2022, though that’s broken into two parts, each with limits. Similar to an employer-sponsored 401(k), contributions are pre-tax and withdrawals are taxed as income.
  • SEP IRA: A Simplified Employee Pension IRA, or SEP IRA, operates much like a traditional IRA, except you can contribute a lot more. Annual contributions are capped at $61,000 in 2022 versus $6,000 for a standard IRA. Another key difference: If you put money into your own SEP IRA, you must contribute an equal percentage to employees. This option is best for solopreneurs or those with few employees.
  • SIMPLE IRA: This option has a lower contribution limit, up to $14,000 in 2022 (for those under age 50), but it offers employee accounts and is easier for small companies to administer than a traditional 401(k). You must offer a 3% match or a blanket 2% contribution to all employees. You can deduct contributions made to your account and those made on your employees’ behalf.

Get input from a professional

Sure, you can try to decode which retirement plan is best for your business. Or you can work with a certified financial planner or registered investment advisor to determine the best path. Doing the latter can give you confidence in your strategy, help you avoid any costly penalties and ensure you don’t leave any money on the table.

If selling is still part of your retirement plan, the help of a professional is essential, says Norm Sherman, a certified mentor with SCORE, a national volunteer organization that offers free business mentorship. First, you need to know whether your business is sellable and what you can realistically expect to net in a sale.

An investment banker or business broker can evaluate your revenue, profit margins, business structure and market to give you an honest assessment and help you better position your business for a future sale.

“It costs you nothing to get answers to these questions,” Sherman says. “Don’t operate blindly; find experts who can help you.”

The content is for educational and informational purposes and does not constitute investment advice.

Kelsey Sheehy writes for NerdWallet.

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What to Do With Extra Money

Posted on by Alana Benson

This article provides information and education for investors. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

Despite the massive economic toll the coronavirus pandemic has wreaked on many people, others may have added some unexpected cash to their bank accounts. According to a Pew Research Center study, about 42% of Americans say they’ve been spending less money since the start of the pandemic. Decreased spending, tax refunds, relief checks and unused vacation funds may have given you a surplus of cash — and a pending decision about what to do with it.

If you’ve accrued some extra cash because of the pandemic or another reason, here are six ways to use it to help take your finances to the next level.

1. Create or build up an emergency fund

If 2020 taught us anything, it’s that the unexpected can happen, and it pays to be ready for it. The first step you may want to take with any extra money is to ensure you have a financial cushion for when those unexpected events come around. To make this money extra effective, you can put your emergency fund into a high-yield savings account. That way, your cash may benefit from a higher interest rate, but you’ll still have quick access to it.

2. Get your 401(k) match

If you’ve been holding off on investing in your 401(k), now is the time to start — especially if your employer offers a match. Say your employer offers a full 3% match on your contributions and you make $50,000 a year. If you contribute 3% of your salary, or $1,500, your employer will also kick in $1,500, upping your total annual 401(k) contributions to $3,000. If you don’t have access to a 401(k), don’t worry. There are still plenty of ways to invest for your future.

3. Pay down high-interest debt

If you’ve got extra money lying around, you might as well use it to save yourself money in the future. If you carry a balance on a credit card or loan and have a high interest rate, your best investment may be to pay off that balance. Generally speaking, if your interest rate is higher than you can expect to earn in the stock market or any other investment, you may get a better return on your money by paying off that debt.

4. Start funding an IRA

If you don’t have a 401(k) or you’ve already contributed enough to get your employer’s matching contribution, consider investing through either a traditional or Roth IRA. Individual retirement accounts aren’t investments; they’re specific types of retirement accounts that come with tax advantages, which you can use to buy investments. Contributions to traditional IRAs are often tax-deductible, and Roth IRAs allow you to take out qualified distributions tax-free in retirement, which means you don’t pay taxes on your investment earnings. Once you fund an IRA at an online broker, you can start filling it with investments. It’s often considered a good idea to primarily invest in diversified funds such as mutual funds. Funds are made up of many different stocks or bonds, so if one company doesn’t perform well, your portfolio is buffered by the other companies you’re also invested in.

Both traditional and Roth IRAs have contribution limits, so you can contribute only a certain amount each year. For 2021, that amount is up to $6,000 (or $7,000 if you’re 50 or older). IRAs also have limitations on who can contribute. For both types of IRAs, you must have taxable compensation, and for Roth IRAs, you can contribute only if your modified adjusted gross income is below certain thresholds.

If you don’t want to choose your own investments, you can open an IRA with a robo-advisor. Robo-advisors use computer algorithms to build and manage an investment portfolio for you, usually for a fee of between 0.25% and 0.50% of your assets under management.

5. Save for your other money goals

According to the Pew Research Center, about half of nonretired Americans say that the economic impacts of the coronavirus pandemic will make it harder for them to achieve their financial goals.

Retirement isn’t the only thing in your future — take some time to outline what you want your money to do for you. Do you want to save for a down payment on a house, or start a college fund for your kids? Goals that are at least five years away can typically involve investing at least a portion of your savings so that money grows. For short-term goals, it’s often wise to keep the money close at hand in a savings account where you won’t risk losing your principal.

6. Explore additional investment options

Once you have investments that set you up for the long term, you may want to start expanding your repertoire.

If you’re looking to buy individual stocks, you can research companies you’re excited about and believe will perform well in the future. If you’re interested in real estate, you could explore investing in real estate investment trusts. REITs are companies that own or finance income-producing real estate. Many REITs trade on stock exchanges, so you can buy them within your IRA or a taxable brokerage account.

To have your investment dollars go toward causes you care about, you can look into sustainable ESG investments. If you’re intrigued by the constantly evolving space of alternative investments, you could consider cryptocurrency.

While these investments may be more exciting than your other investments, they should generally make up only a small percentage of your portfolio — they often carry a higher degree of risk than more diversified investments like mutual funds.

Alana Benson writes for NerdWallet. Email: abenson@nerdwallet.com.

The article What to Do With Extra Money originally appeared on NerdWallet.

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3 Ways Millennials Are Getting Money Right

Posted on by Kelsey Sheehy

Read almost any article about millennials and you’ll come away with the distinct impression that this generation is royally screwing up.

That they’re suffocated by student debt. That they spend frivolously. And that they’re behind on everything from owning a home to starting a family.

Don’t buy into all the gloom and doom. Millennials are killing it in some areas, thanks in part to the turbulent financial times in which they came of age.

“Millennials were given a front-row seat to the financial crisis,” says Hallie Kraus, a financial advisor with the Humphreys Group, a financial planning firm in San Francisco.

“Many of us witnessed our parents struggle to pay the bills after getting laid off or suddenly finding their home underwater,” Kraus says. “Through these experiences, we were taught a unique set of lessons about money that are actually serving us well.”

Here are just a few ways millennials — a group that today reaches from their mid-20s to nearly 40 — are getting it right when it comes to their finances.

They know their worth

Millennials are making money moves. A 2018 report from Bank of America found that millennials were far more likely to ask for a raise than those in other generations. And when millennials made the ask, they got paid.

A whopping 46% of millennials had asked for a raise in the past two years, and 80% of those who asked for a raise got one, according to the report.

Those in other generations were far less likely to say they had asked for a raise:

  • Generation Z: 19%
  • Generation X: 36%
  • Baby boomers: 39%

Advocating for better pay is an important habit to build early in your career. Not only will you increase your immediate income, but you also could boost your lifetime earning potential exponentially.

They’re saving for retirement, early

While saving for retirement is a win on its own, millennials are going a few steps further by starting early and setting aside a larger portion of their paychecks.

Among millennials who are saving (73%), 3 of 4 are putting money away for retirement, according to a 2020 report from Bank of America. Those who are saving for retirement started at age 24, on average — earlier than boomers and Gen Xers, who started at ages 33 and 30, respectively, on average — giving them a much-needed head start on their future.

“Despite common stereotypes about this generation, significantly more millennials are saving for the future,” says Andrew Plepler, global head of environmental, social and governance at Bank of America. “These habits are encouraging and build on positive trends we’ve seen in recent years.”

Millennial parents are particularly diligent about saving for retirement, contributing a median of 10% of their annual income, according to a 2017 survey conducted online by The Harris Poll on behalf of NerdWallet.

The survey found that millennial parents who were saving for retirement contributed a median of 10% of their annual income to that goal, compared with 8% for Gen X parents and just 5% for boomer parents (all respondents to this question were employed). That seemingly small difference in savings rates can have a significant impact over time.

All that good news is soured by the fact that less than half (46.5%) of millennial households have access to a 401(k) or other work-based retirement plan, according to the most recent data from the Federal Reserve.

They’re focused on credit

Tracking expenses and keeping their eyes on financial goals is helping millennials gain ground in the credit game.

Nearly 40% of millennials improved their credit score in the past year, according to Bank of America’s 2020 survey. Other generations were less likely to claim a credit boost, Plepler says, noting the figures were 29% for Gen Z, 36% for Gen X and 31% for baby boomers.

“Millennials are practicing positive money habits day-to-day, and they’re moving closer to their goals because of it,” Plepler says. “[They] are also being practical and reserved when it comes to their financial choices. They’re willing to make lifestyle sacrifices and trade-offs in the present to achieve future goals.”

These gains are important, as the average millennial’s FICO score still falls in the “good” range at 668, according to credit reporting agency Experian; that’s on par with Gen Z and X, but far behind the older boomer generation (which boasts an average score of 731).

This article was written by NerdWallet and was originally published by The Associated Press.

Kelsey Sheehy is a writer at NerdWallet. Email: ksheehy@nerdwallet.com.

The article 3 Ways Millennials Are Getting Money Right originally appeared on NerdWallet.

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5 Financial Tasks You Should Tackle by Year-End

Posted on by Liz Weston

A task without a deadline is just wishful thinking.

Sometimes, you can get away with procrastinating. If you never get around to alphabetizing your spices, no one’s life will change. But putting off some tasks could have a huge impact on loved ones.

The close of the year is a good time to set some firm deadlines to make sure you won’t leave a financial mess for people you love if you unexpectedly die or become incapacitated. Consider putting these items on your to-do list with a Dec. 31 due date:

1. Check your beneficiaries

If you need convincing that updating beneficiaries is important, consider the case of David Egelhoff, a Washington state man who died two months after his divorce was final in 1994. Because he had not changed his beneficiaries, his life insurance proceeds and pension plan were paid to his ex-wife rather than his children from a previous marriage. The children sued, and the case went all the way to the U.S. Supreme Court, which ruled in 2001 that the beneficiary designations had to be honored.

You’re typically prompted to name beneficiaries when you sign up for a 401(k) or other retirement account. Beneficiaries also are usually required when you buy annuities or life insurance. You often can check and change beneficiaries online, or you may need to call the company to request the appropriate form.

2. Review pay-on-death resignations

You may not have been required to name beneficiaries when you opened your checking account or a non-retirement investment account. Instead, financial institutions may offer a “pay on death” option. This allows you to name a beneficiary who can receive the money directly. Otherwise, the account typically has to go through probate, the legal procedure to distribute your property after you die.

Some states also have “transfer on death” options for vehicles and even real estate. Like pay-on-death accounts, these options allow you to pass property directly to heirs without the potential delays and costs of probate.

Beneficiaries can be added to vehicle registrations in Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Illinois, Indiana, Kansas, Maryland, Missouri, Nebraska, Nevada, Ohio, Oklahoma, Texas, Vermont and Virginia, according to self-help legal site Nolo. To add or change a beneficiary, you apply for a certificate of car ownership with the beneficiary form.

Transfer-on-death deeds for real estate are available in Alaska, Arizona, Arkansas, California, Colorado, District of Columbia, Hawaii, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Montana, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Virginia, Washington, West Virginia, Wisconsin and Wyoming, according to legal site RocketLawyer. To add or change a beneficiary, the deed must be submitted to the appropriate county recorder.

3. Update insurers — and your heirs

Insurers usually don’t pay out life insurance proceeds until someone files a claim. But far too often, heirs are unaware that the money exists. A Consumer Reports investigation in 2013 found about $1 billion in life insurance proceeds waiting to be claimed.

Updating your contact information with your insurer also may help prevent policies from lapsing. I just heard from a reader who lost her long-term care coverage because she’d moved, forgotten to tell her insurer and failed to notice she hadn’t been billed. Many insurers will allow you to name someone who can be notified if a payment is overdue or they can’t find you. You’ll want to keep the contact information for those back-up people updated with the company, as well.

4. Visit your safe deposit box

If you forget to pay your annual fee and your bank can’t find you, after a few years your safe deposit box will be drilled and the contents turned over to the state. Photos and documents could be destroyed and family heirlooms sold at auction. Visit your box once a year to make sure your payments and contact details are current. Leave clear instructions with your executor or your heirs about where to find the box and its keys.

5. Create or revise powers of attorney

Powers of attorney allow others to make financial and health care decisions for you if you become incapacitated. If you don’t have these documents, or the designated people have died or are otherwise unavailable, your loved ones may have to go to court to take over. The expense and delay can add trauma at an already difficult time. Spare everyone that pain by naming a backup person or two and reviewing the documents every year to make sure the people named can still serve.

This article was written by NerdWallet and was originally published by The Associated Press.

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The article 5 Financial Tasks You Should Tackle by Year-End originally appeared on NerdWallet.

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Vanquish 5 Common Financial Fears

Posted on by Sean Pyles

Fear can consume you. The anxiety of the unknown can drive you to pull the blanket over your head, whether you’re worried about a rustling sound outside your bedroom window or that you won’t have enough retirement savings.

Financial fears — not wanting to check your credit, confront your debt or even discuss your student loans — can feel especially shameful. But facing those fears can empower you to take action.

1. Student loan stress

Student loans topped the list of most-feared financial topics among U.S. adults, according to a 2019 survey of 1,006 consumers by TD Ameritrade. Student loan debt, at 36%, outranked even living paycheck to paycheck (26%) and credit card debt (20%).

How to conquer it: Understand your loans in detail — that’s key to knowing whether you’re on the best repayment plan. Know each loan’s term, balance, interest rate and whether it’s a federal or private loan.

For unaffordable federal loans, look into income-driven repayment plans. For private loans, you may be able to refinance for a lower monthly payment (but it may cost more overall).

2. Recession anxiety

Indicators like slowing global economic growth hint that a recession might be coming, raising fears of job loss and asset depletion.

How to conquer it: Shore up your savings and diversify your skills. Build up at least $500 in savings to cover an emergency, advises Boston-based financial coach Kimberly Zimmerman Rand. After that, work toward having a few months’ worth of expenses saved in case of job loss. Make saving easier with direct deposits from your paycheck or automatic transfers from checking to savings.

“On the professional side, since we’re not in a recession right now, see how you can improve your job skills, your network, your resume, so if the unfortunate does happen, you’ve already laid the foundation to transition to a new position,” Zimmerman Rand says.

3. Credit card debt concerns

Paying off credit card debt can feel like a never-ending task, but there are ways to get it done.

“I’ve had clients who come to us for debt counseling that have the fear that they’re the worst situation we’ve ever seen financially, and that’s never the case,” says Maura Attardi, director of financial wellness at Money Management International, a nonprofit credit counseling agency.

This fear can be a self-fulfilling prophecy: You’re afraid to check your overall debt because of how high it might be, but while you’re not looking, you keep accruing interest.

How to conquer it: List each account, interest rate and balance. Then choose a payoff strategy. One popular option is the debt snowball, where you pay off your smallest debts first then roll those payments toward your bigger debts.

4. Credit crisis

Ever been afraid to undergo a credit check or apply for credit because you thought your credit profile wasn’t up to snuff? You’re not alone: 46% of 1,503 U.S. adults surveyed by the financial service company Finicity found themselves in just that situation.

How to conquer it: Check your own credit score at your favorite personal finance website or bank website, and access your credit reports for free by using AnnualCreditReport.com. Looking at your score and reports will help you understand your options for improving your credit.

“Go through your credit report with a fine-tooth comb and contest any untrue information,” Zimmerman Rand says.

“For bringing up your score, start on positive financial behaviors, like making on-time payments,” she says. If you use credit cards, keeping the percentage of your credit limit you use below 30% on all cards will help too.

5. Broke retirement blues

“Among my clients, there’s a kind of feeling of hopelessness when it comes to the idea of retiring,” Zimmerman Rand says. But starting early is most important, not waiting until you can put away a lot.

How to conquer it: Choose a retirement plan. If you have a workplace retirement plan that offers an employer match, contribute enough to get it. An individual retirement account is a good alternative if you don’t have a workplace plan. Set yourself up for success by automating contributions and bumping up how much you’re saving every time you get a raise.

Avoid withdrawing money from your retirement account to get the maximum benefit from compound interest, where you earn interest on your interest.

“The magic of compound interest is truly magic — and it works,” Zimmerman Rand says. “After you’ve been saving for years, your investment begins to double a lot faster. For millennials, now is the time to start investing.”

This article was written by NerdWallet and was originally published by The Associated Press. 

The article Vanquish 5 Common Financial Fears originally appeared on NerdWallet.

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What Millennials Get Wrong About Social Security

Posted on by Liz Weston

Few issues unite millennials like the future of Social Security. Overwhelmingly, they’re convinced it doesn’t have one.

A recent Transamerica survey found that 80% of millennials, defined in the survey as people born between 1979 and 2000, worry that Social Security won’t be around when they need it. That’s not surprising — for years, they’ve heard that Social Security is about to “run out of money.”

The language doesn’t match the reality. Social Security benefits come from two sources: taxes collected from current workers’ paychecks and a trust fund of specially issued U.S. Treasury securities. This trust fund is scheduled to be depleted in 2034, but the system will still collect hundreds of billions in payroll taxes and send out hundreds of billions in benefit checks. If Congress doesn’t intervene, the system can still pay 77% of projected benefits.

In any case, chances are good Congress will intervene, as it did in 1977 and 1983, to strengthen Social Security’s finances. Social Security is an enormously popular program with bipartisan support and influential lobbies, including the immensely powerful AARP, looking out for it.

Still, millennials who believe Social Security won’t be there for them could make bad choices about their retirement savings. The worst outcome would be if they didn’t save at all, convinced retirement was hopeless. But any of the following myths could cause problems.

‘I can save enough to retire even without Social Security’

Good luck with that.

Currently, the average Social Security benefit is just under $1,500 a month. You would need to save $400,000 to generate a similar amount. (That’s assuming you use the financial planners’ “4% rule,” which recommends taking no more than 4% of the portfolio in the first year of retirement and adjusting it for inflation after that.)

And that may be underestimating the value of Social Security. The Urban Institute estimates that many average-income single adults retiring between 2015 and 2020 will receive about $500,000 in benefits from the system while couples will receive roughly $1 million. Millennials, meanwhile, are projected to receive twice as much: about $1 million for an average-income single adult and $2 million for a couple.

Trying to save enough to replace 100% of your expected Social Security benefit might well be impossible, and could cause you to stint on other important goals such as saving for a child’s education or even having a little fun once in a while.

A more realistic yet still cautious approach would be to assume you’ll get 70% to 80% of what your Social Security statement projects, says Bill Meyer, founder of Social Security Solutions, a software tool for Social Security claiming strategies.

“Somewhere between a 20% to 30% reduction seems like the worst-case scenario to me,” Meyer says.

‘I can ignore my Social Security account’

Your future Social Security check will be based on your 35 highest-earning years. To get what you’re owed, however, your earnings need to be reported accurately and that doesn’t always happen. Employers may not report the correct information to Social Security, or may not report your earnings at all. You can correct those errors if you catch them in time. Fixes could be difficult decades from now, when the employer may have gone out of business and needed documents may be unavailable.

Millennials may be more exposed to errors than previous generations because they tend to change jobs more, Meyer says. That makes it important for them to check their earnings records, which they can do by creating an account on the Social Security Administration’s website.

“Every two to three years, you should log on and make sure that your earnings are reflected correctly,” Hayes says.

‘If it’s still around, I should grab it as soon as possible’

Millions of Americans make this mistake every year, locking in permanently reduced payments and potentially costing themselves up to $250,000 in lost benefits by claiming too early. But Congress is highly unlikely to cut benefits for those in retirement or close to retirement age, Meyer notes.

Instead, there likely will continue to be incentives for delaying your Social Security claim. Currently, benefits increase by about 7% to 8% for each year you wait to apply after age 62 until benefits max out at 70.

Working an additional few years also can compensate for low- or no-earning years earlier in millennials’ careers, when incomes may have been depressed by recession or gig-to-gig work.

“A higher-earnings year can replace a lower one,” Meyer says. “You can fill in those gaps.”

This article was written by NerdWallet and was originally published by The Associated Press.

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The article What Millennials Get Wrong About Social Security originally appeared on NerdWallet.

Will You Be a Scam Artist’s Next Target?

Posted on by Liz Weston

Believing that fraud can’t happen to us — because we’re too smart, logical or informed — may make us more vulnerable. Successful scam artists skillfully overcome our defenses and get us into emotional states that override logical thinking, says Kathy Stokes, AARP’s director of fraud prevention programs.

“Scammers call it getting the victim under the ether,” she says.

Various studies have tried to identify characteristics that make people more susceptible to fraud. But that can create a “blame the victim” mentality and give the rest of us a false sense of security, she says.

“I’d say the majority of people are unwittingly deceived through no other reason than the criminals are good at what they do,” Stokes says.

Scam artists go where the money is

Research is mixed on whether older people are more likely to be defrauded than younger ones. One thing is certain, though: Older people are more likely to have money. People 50 and older control 83% of the wealth in the U.S.

One way to protect that money is to cut down on our exposure to sales pitches, fraud experts say. AARP studies have found investment fraud victims were more likely than other investors to respond to sales pitches delivered by phone, email or television. They also were more likely to send away for free promotional materials, enter drawings, attend free lunch seminars and read all their mail, including advertisements.

To reduce your exposure to potential scams, consider the following steps:

  • Put yourself on the federal Do Not Call list.
  • Sign up for a telephone call blocking system, such as NoMoRobo, and let unknown callers go to voicemail.
  • If you give out personal information, be sure you know who you are giving it to, and why they need it.
  • Don’t make investment decisions based solely on a phone or email pitch or an ad.

Overconfidence increases our risk

Overconfidence can lead people to trade too aggressively (convinced that they can beat the market), put off saving for retirement (convinced they can catch up later) and ignore warning signs of fraud (convinced that they can’t be victimized).

The risk may increase with age. Studies have found that our financial decision-making abilities peak by our early 50s and decline, sometimes precipitously, after that. But our confidence in our abilities doesn’t drop — in fact, many of us become more self-assured.

“So as we age, this gap grows between actual and perceived ability to make good decisions,”  says Chris Heye, co-founder of Whealthcare Planning, a site that helps older adults and financial advisors plan for age-related changes.

Seniors who got answers wrong on a financial literacy quiz, but who were the most confident they answered correctly, were more likely to be victims of fraud, according to a study by researchers at DePaul University and the Rush University Medical Center.

People of any age can combat overconfidence by getting a second opinion on financial decisions from a trusted advisor or money-smart friend. As we get older, it can also make sense to consolidate our accounts so there are fewer to monitor and switch to investments that require less hands-on management, such as target date mutual funds.

Loneliness can be expensive

The Federal Trade Commission says romance scams cost people more money than any other type of consumer fraud in 2018. Reports of these scams more than doubled between 2015 and 2018, while reported losses more than quadrupled to $143 million.

The scams often start via dating apps, social media or email. The con artists pretend to have a lot in common with their victims, then build trust over many weeks or even months before asking their targets to reveal personal data or send money for an “emergency.”

Once again, the young and old alike can be defrauded. One 90-year-old victim met a man via email who, many months later, told her he needed help with a business deal. She sent him eight infusions of cash, draining her $500,000 life savings.

“She sent all that money, and the only reason she knew that it was a scam was that he didn’t show up on Christmas Day like he said he would,” Stokes says.

A reverse-image search using TinEye or Google Images may show if an imposter is using someone else’s photo, while sites such as Romancescams.org keep track of known scammers’ email addresses.

But perhaps the best inoculation against being defrauded is to talk to someone you trust about the situation before you send any money. That could be enough to bring you out from under the romantic ether.

This article was written by NerdWallet and was originally published by The Associated Press.

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The article Will You Be a Scam Artist’s Next Target? originally appeared on NerdWallet.

Stressed to Pick the Best? Try ‘Good Enough’ Money Decisions Instead

Posted on by Gregory Karp

Sometimes good enough is good enough.

In a world of information overload, it’s common to feel angst when making choices. You never know whether you’re making the best one.

Call it optimizer guilt. And it can be especially prominent in choosing financial products, which can be opaque and confusing: Do I have the best credit card? What 401(k) investment will give me the best return? Where should I open an account to save for my kid’s college expenses?

Besides adding stress, optimizer guilt can keep you from making important money decisions that need action now.

The solution may be the theory of “good enough,” or what academics have called “satisficing.” Make a decision based on the best information you can reasonably gather at the time, and then get on with your life. In many cases, you can revisit the decision later, if necessary — refinance your mortgage, move your retirement funds or choose a different 529 college savings plan.

“The truly great thing about ‘good enough’ — and the reason it is so powerful — is that it allows you to get to the starting line in a way that waiting for the ultimate, best possible result does not,” writes financial expert Jean Chatzky in her book “Make Money, Not Excuses.”

How simplifying can help

You may have heard the same problem called “paralysis by analysis” and the solution as, “Don’t make perfect the enemy of the good,” or the acronym KISS: “Keep it simple, stupid.”

“Good enough” is not just a financial well-being thing, it’s a happiness thing.

Having more choices is good only up to a point because of the accompanying pressure to optimize, argues psychologist Barry Schwartz in his book “The Paradox of Choice: Why More is Less.”

“As the number of choices grows further, the negatives escalate until, ultimately, choice no longer liberates, but debilitates,” he wrote in a research paper with Andrew Ward, a fellow professor at Swarthmore College. “Learning to accept ‘good enough’ will simplify decision-making and increase satisfaction.”

If you get an adrenaline rush from plotting your credit card points on spreadsheets and poring over price-to-earnings ratios of individual stocks, this concept may not be for you. You’re a die-hard optimizer who crunches numbers for sport.

The theory of good enough is for those who feel overwhelmed, thinking they should optimize their money life but feeling shame because they don’t have the time or desire. If that’s you, consider decluttering your finances. Simplify by combining financial accounts, save with automatic deposits, and skip low-value retail loyalty programs and coupons.

Here are a few specific examples of good enough.

Retirement investing

Too many choices in a company-sponsored retirement plan, like a 401(k), can lead to making no selection at all. If that sounds familiar, a good-enough decision would be to contribute enough to get all of your employer’s matching contribution and invest the money in a target-date index fund, a fund that invests based on what date you expect to retire. Is that optimal? Maybe not. But it gets you started. You can raise your contribution percentage and research other funds later. Meanwhile, your nest egg has started growing.

Rewards credit cards

If you pay your credit card balance in full every month, you’re a candidate for a rewards credit card, but how to choose among the thousands available? To get started, a good-enough choice is a flat-rate cash-back credit card that pays 1.5% or higher. It gives you a fixed amount of cash back no matter what you buy. You can always get a complicated points or miles card later. Until then, you’ll be earning rewards on everything you charge to the card in the best rewards currency: cash.

College savings

You gain tax advantages by squirreling college savings in certain types of accounts, but it can be dizzying trying to choose among them all. A good-enough option is to invest in your own state’s 529 savings plan and potentially reap a state tax break, too, depending on the state. Choose a target-date fund, based on when your child is likely to attend college. Later, you might move the money to a different state’s plan or start a different account. The point is, you started saving.

For big-money decisions or unusual circumstances, you might want to put more effort into making an ideal choice, or you might seek professional advice. But for many other decisions, settling for “good enough” can end up being optimal.

This article was written by NerdWallet and was originally published by The Associated Press.

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The article Stressed to Pick the Best? Try ‘Good Enough’ Money Decisions Instead originally appeared on NerdWallet.

Yes, You Should Ask Your Parents About Their Financial Plans

Posted on by Kelsey Sheehy

Parents are often more than happy to offer financial advice to their kids. They like to feel needed and want to make sure you’re on solid financial ground. But it’s important to turn the tables and ask about their financial plans, too.

Are they saving for retirement? Have they updated their will? What’s their plan for long-term care, should they need it?

It doesn’t matter if you’re living on ramen or running your own business, asking your parents about their financial future can feel odd. But life moves fast. And your parents’ financial plans can and will affect your own, eventually. So it’s important to talk early and often about how they’re planning for retirement and the often high cost of aging.

“It’s never too soon to have this conversation,” says Greg Young, owner of Ahead Full Wealth Management LLC in Rhode Island. “If something happens to your parents, not only there goes your safety net and a key part of your support network, but their affairs will likely pile onto you.”

Tact is everything when talking about money. Show them you want to learn and you want to help. Use your own life events, like a new job, a new house or an expanding family, as an opening to talk about their plans.

Retirement

It’s important to know if your parents are saving, but this conversation isn’t just about money. It’s also about their dreams for retirement.

The talk

Your first real job (or any new job) is a good chance to ease into the conversation. Ask your parents for advice as you navigate 401(k) contributions. A simple “What did you do?” gives you insight without being invasive.

House hunting? That’s another opportunity to check in with your folks about their retirement plans. You know, in case you need to add “in-law suite” to your wish list.

Long-term care insurance

The cost of extended care is staggering — assisted living carries a median price tag of $48,000 per year, while the annual median cost for a nursing home is nearly $90,000 for a semi-private room, according to an annual survey by Genworth, an insurance company. In-home care can be just as costly, depending on the services needed.

Long-term care insurance helps offset the cost of nursing care and help with routine activities like eating, bathing and dressing, whether at home or in an assisted living or nursing home.

The talk

Long-term care insurance gets more expensive with age, so most people who buy it do so in their 50s or 60s. It’s good to start the conversation early to have the topic on your family’s radar.

“‘Do you have long-term health care insurance?’ That’s a specific question that is pretty palatable,” says Thayer Willis, a wealth counselor. “If they say yes, the follow-up question is: ‘How does it work exactly?’”

If the direct approach doesn’t jibe, try backing into the conversation. Use someone else’s experience as an example and ask whether your parents have considered assisted living in the future and how they would pay for it.

Estate planning

Sorting through an estate without clear directives can tear families apart. That’s the last thing your parents want. Talking openly about things like wills and trusts, life insurance and advance medical directives can help you understand what they have in place, and give you insight into their intentions, Young says.

“Knowing what to expect from them, or that they’ve done some planning, will certainly make an emotional eventuality a little easier,” he says.

The talk

Starting your own family, and setting up your own estate plan, is a great opportunity to ask your parents what they have in place. You can also use someone else’s experience to start the conversation.

“Ask questions like: ‘A friend from work had a parent pass and they could not find any paperwork. … Do you and Mom have all your paperwork together in one place? If you were to pass, who has access to it?’” says Mark Struthers, owner of Sona Financial, a wealth management firm.

Your folks might not be comfortable talking about their finances. That’s OK. Don’t push them. Instead, make it clear that you’re ready and willing to talk another time, Willis says.

“You might need to take the approach of planting a seed, and that’s all you do in the first discussion,” she says. “Which is another reason for beginning early.”

This article was written by NerdWallet and was originally published by The Associated Press. 

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The article Yes, You Should Ask Your Parents About Their Financial Plans originally appeared on NerdWallet.

If You’re Expecting a Tax Refund, Make a Plan to Grow It

Posted on by Elizabeth Renter

Hiding your income tax refund in your sock drawer may feel handy, and locking it in your safe may feel secure, but putting it in the right savings or investment vehicle will make it grow.

Americans expecting a refund on their 2018 federal income taxes anticipate they’ll get $1,861 back, on average, according to a new report from NerdWallet. More than any other goal, they’re earmarking that extra cash for savings — 46% plan on stashing the money away. But not all savings methods are created equal.

“It’s really good news that such a high percentage of people are looking to save their tax refund,” says NerdWallet tax specialist Andrea Coombes. “The next step is to make sure you’re saving in the best possible place. That will depend on your goals, but the choice of account can mean a difference of hundreds or even thousands of dollars over the years.”

The bottom line: You have several options for this annual windfall. Using as an example that $1,861 average anticipated refund, here are four five-year scenarios that show how you could make the most of any refund you receive.

1. Traditional savings account

Potential return: $8 after five years.

Traditional savings accounts — those you find at big banks with a lot of branches — aren’t known for earning a ton of interest. Right now, the national average is 0.09%. If you squirrel away your refund and manage to leave it alone for five years, it could earn $8.39 in an account like this — not enough to write home about, but it may be appropriate if you want quick access to your funds and value visiting the bank branch in your neighborhood.

With just over $8, you could take a friend out for coffee.

2. High-interest savings account

Potential return: $196 after five years.

Online banks are known for higher-interest savings accounts, and it’s not unusual to find one offering 2%. Opt for a high-interest savings account like this and you’re looking at a return of $195.55 after five years. If seeing a teller isn’t a top priority for you but you still want your money readily available, an online high-interest savings account is generally a step up from a traditional savings account.

With an extra $196, you could cover one year of a premium streaming music plan for your entire family or just over two weeks of groceries, according to spending data from the Bureau of Labor Statistics.

3. Certificate of deposit

Potential return: $301 after five years.

As with savings accounts, how much you can earn with a certificate of deposit depends on the bank you do business with. And like savings accounts, online banks typically offer better CD rates than traditional institutions. Putting your income tax return into a five-year CD with an online bank could reap you $301 in interest, assuming the current 3% interest rate. You risk paying a penalty if you need to withdraw from your CD before its maturity date. If you have an emergency fund elsewhere and know you won’t need these additional funds, a CD is a solid option for growing your money at a moderate rate.

Just over $300 is nearly enough to pay the average monthly utility costs, according to the BLS.

4. Individual retirement account

Potential return: $630 after five years.

If you are without credit card debt and have an emergency fund in place, putting money toward your retirement is perhaps the savviest move you can make. Opening an IRA with $1,861 and letting it grow for five years could earn you $630, assuming a 6% average rate of return. But there’s a good chance you won’t be retiring in five years. Leave it in for 10 and you could earn $1,472; in 20, it could grow by more than $4,108. And with any luck, you’ll be able to add to that account — as you contribute more, you earn more for your golden years.

Today, an extra $630 might afford you a year’s worth of high-speed internet. In retirement, you might prefer to spend it on plane tickets to see the grandkids.

“It can be tough to focus on something that’s maybe 20 years or more down the road,” Coombes says, “but investing your money rather than simply saving it — assuming that makes sense for your financial situation — can make a really big difference in lifestyle for you when you’re ready to stop working.”

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The article If You’re Expecting a Tax Refund, Make a Plan to Grow It originally appeared on NerdWallet.

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