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How Will I Ever Retire If They Keep Moving The Finish Line?

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What happens if you’ve made it to the day you thought you’d be retiring, but you’re simply not financially ready? Perhaps you passed your “Plan B” date. Maybe even “Plan C” has come and gone. You know you’ve been making the right moves, but a temperamental stock market, kids who stayed home longer than expected or an unlucky series of events keeps pushing back your time frame.  So, in exasperation, you ask … 

Question: “How will I ever retire? When will it be safe to stop working?“ 

Answer:  Well, hopefully very soon.  We’re going to show you some ways to put luck back on your side.  It’s going to be part planning, part faith and a good deal of ingenuity, but we can get your pictured future back within sight again. 

Question:  “OK, so how do I know when I’ll have enough money?” 

Answer:  The first thing you need to do is realize that enough money is possible.  It’s scary to read headlines about Boomers running out of money because they lived so long, especially when they’re coupled with stories about how the 4% rule isn’t enough.  If you take these articles at face value, you’ve got to come up with 40 years of savings, assuming you’ll be taking out as much as 10 percent of your nest egg every year.  Because it’s difficult (if possible at all) to get to that point, it’s easy to give up. 

Instead, go back to 4%.  Or, if you’re being conservative, make it 5%. That’s a 25% raise! That’s a lot! Then, remember the lessons of your working life: Anything that happens far in the future should be weighted far less, because you never know what might happen between now and then.  You might find you don’t care for fly fishing that much or you no longer need that annual trip across the country. Your neighborhood’s home values could rebound.  Maybe you’ll stumble onto a strong investment.  There’s too much uncertainty in life to freak out about what’s going to happen far away into the future. Take 5% out, per year, until you’re 85.  That’s plenty. Anything beyond that is too much. 

Question:  “How can I make sure I’ve got enough retirement income?“ 

Answer:  One of the easiest ways to produce panic is realizing that money only flows one way once you stop working. You’ve been conditioned to treat any month in which you spend more than you earn with revulsion, shame and guilt. Now, that’s going to happen every month – for the rest of your life.

A lot of retirees feel more comfortable with money coming in on a regular basis. You can accomplish this in a variety of ways.  First, try to put off Social Security as long as possible.  The higher payout will make retirement much easier. Second, try to create passive income using investment products.  In the same way that dividend-producing stocks pay out on a regular basis, you can create passive income that can be accessed any time by moving chunks of your retirement into high yield savings products like money market accounts.  That way, you can still budget the way you used to without having to sell your stocks (while hoping you guessed the right time to sell).

You can also create passive income by using your home equity to fund a business venture.  Right now, mortgage rates are low, but a lot of Boomers are missing out because they paid off their homes in order to retire.  You use a home equity line of credit to buy a rental property (which builds equity at the same time it gives you a paycheck) or start an online business built around your hobbies.  If you love to knit, sell handcrafted items on Etsy.  Do you like to fish? Start manufacturing lures with the equity in your home.  These ideas can generate a monthly income for you and also give you something else to leave to your children.  In a pinch, you can even sell the rental property or sell shares in the business for a quick cash infusion. 

Question:  What about my health?  That can be a big cost, even with Medicare. 

Answer:  One of the best places to put some money when you retire is into various forms of insurance. You probably already have life insurance, homeowners, and insurance on your other big purchases, but you also probably only have Medicare to cover the health side of your insurance portfolio.  What happens if you need something Medicare doesn’t cover?  Is it worth it to go on Healthcare.gov and try to find a supplemental plan?

One way to keep your options open is to try a “do-it-yourself” Health Savings Account (HSA).  While traditional HSAs gain their benefits from your employer paying into them, you can get a lot of the same benefits simply from putting some spare cash into one of our high-yield money market accounts.  That way, you’ve got money put aside for a health emergency, but you’re not spending on a premium you’ll only need very rarely.  As an added benefit, you can access that money if you need it for things that aren’t health-related if some other kind of emergency comes up.

Hopefully, you’ve gotten a better idea of how to tackle retirement.  You need to have faith and protect yourself at the same time.  The best way to do that is to put your money with someone you trust and give yourself access to it, just in case.  If you need any more info, want more guidance, or just need someone to talk to about taking the leap, give Destinations Credit Union a call at 410-663-2500.

The Government’s $3 Trillion Dollar Plan

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So, whatever happened to that interest rate hike?  It was supposed to happen all spring, then all summer, and now we’re supposed to be fully confident that the Federal Reserve is going to raise interest rates by the end of 2015.  But so far, it hasn’t.  On one hand, that’s great news: You still have time to lock in a fixed-rate mortgage or take out a low, fixed-rate home equity loan to pay off those credit cards before the rates go up. By the way, if you’re interested, that’s only a click away.  

On the other hand, it’s a little worrisome.  Raising the prime interest rate is how the Fed tells us that the economy is doing well and it’s time to save money.  So, why haven’t we seen an interest rate hike? The answer is more interesting than you might think, because it involves a multinational chain of events and a $3 trillion gamble with your tax dollars on an interesting new idea. It’s an idea that falls somewhere between efficiently practical and boringly immoral, just as many decisions often are when they’re made by folks who have spent too much time staring at spreadsheets and not enough time breathing fresh air.

To explain what’s going on, we need to flash back six years.  At the height of the financial crisis, the two biggest concerns for the long-term future of the American economy were the resiliency of the big banks and the incredible number of home foreclosures.  If the banks couldn’t get their balance sheets straight, they couldn’t loan money, which would mean that anyone who wanted to buy a home, start a business, or go to college would suddenly find themselves without a loan to do so. Meanwhile, those on the brink of foreclosure, trying to keep their businesses afloat or finishing their education might lose everything they’d worked to acquire.  Of particular concern to the government were American homes, because our homes represent the largest part of our wealth, are essential to our well-being and buoy our retirement accounts.  Unfortunately, investment products built on inadvisable home loans were the centerpiece of the financial crisis, making the protection of our mortgages a difficult task.

The government’s solution was to bail out the banks, but to do so in a way that we hadn’t tried before.  Normally, the Fed puts money into the economy by buying government bonds from banks by using money it creates on a computer in its offices.  Fed managers tap on their keyboards, change a few spreadsheets, and poof, money is created.  In the aftermath of the financial crisis, however, they decided to create money by buying mortgage bonds, which made it easier for government money to flow to beleaguered homeowners, thereby protecting Wall Street and Main Street at the same time.  

However, the Fed can’t just create money without enduring some repercussions. Usually, it has to either remove the money from the economy over time, which can slow down an economic recovery, or watch as inflation eats away at the value of the dollar, causing people to dip into their savings and work harder for less actual pay. Neither option is fantastic.
This time, the repercussions could be even worse.  Because the Fed has tied the $3 trillion it created over the last six years to mortgage bonds, removing the money could cause a spike in mortgage rates. After all, that $3 trillion has been paying part of your mortgage for the last six years; that’s a profit for your lender that’s been passed on to you.  If the Fed chose to remove the $3 trillion and raise interest rates, we could see a spike in mortgage rates that all but guarantees young people will rent their homes for their whole lives.  If you were planning on selling your house in time for retirement, it could cripple the value of your home, because the same buyer who had $250,000 wouldn’t have more money, but they would have to pay more to their lender.  Not fantastic.

All year, the Fed has been staring down this crisis, warning us that it would have to raise rates, all the time hoping that doing so wouldn’t kill the housing market. Then, a really odd set of circumstances kept it from having to do so.  Twin financial crises in Europe and China drove international investors to the dollar. As they sought to sell other currencies, they propped up the value of the dollar, delaying the effects of inflation and buying the Fed more time.  

Now, a new plan has emerged, which is where a really interesting idea comes into play.  What if the Fed didn’t take the money out? Instead, it’s started paying the banks to keep savings with Washington, just like your savings account (except thousands of times larger).  The idea is that, as long as inflation is being kept under control through foreign investment, our central bank can pay about $30 billion a year in interest for financial institutions to store money. That money makes the banks want to save, which takes money out of the economy, which they pass on to some customers in the form of higher savings rates and making them want to save as well. Suddenly, the money has come out of the economy, inflation isn’t a risk, and everyone along the way is getting paid for doing so, especially big banks and their shareholders.  

Reminder: that’s your $30 billion per year.  Another reminder:  $30 billion was the budget request to keep Pell grants in line with inflation … over the next 10 years.  You’re paying the mega-banks 10 times what you’re paying to keep college funding from shrinking.

It’s a short-term solution, obviously.  Voters don’t love their tax dollars being spent to reward the same banks that caused the financial crisis, and those banks, by definition, are the ones being let off the hook.  Europe and China won’t buy dollars forever, particularly if it doesn’t look like the Fed is raising rates (which would help foreign investors who are saving their greenbacks).  At some point, the money is coming out of the economy.  Ten years from now, the Fed says, it will all be gone.  The only question is, how fast it will come out, which means we’re still waiting to hear when the prime interest rate is going up.

And that brings us back to today.  We’ve been told to expect a rate hike by the end of the year, and when it comes, it’ll cost you more to pay off your credit cards.  If you’re in a variable rate mortgage, your monthly payment will eventually go up.  The best move today is the simplest one, which is transferring over to fixed-rate loans.  Do it today, so you can save thousands of dollars.  Then, once you’ve locked in your rate, let your congressperson know that you don’t love your tax dollars continuing to bail out the mega-banks six years later.  

Sources:
http://www.nytimes.com/interactive/2015/business/economy/fed-interest-rates.html?_r=0
http://www2.ed.gov/about/overview/budget/budget16/budget-factsheet.pdf
http://www.nytimes.com/2015/10/27/us/politics/congress-and-white-house-near-deal-on-budget.html
http://budget.house.gov/fy2016/
http://www.npr.org/sections/money/2015/10/23/451228005/episode-659-how-to-make-3-trillion-disappear
http://www.theatlantic.com/business/archive/2011/04/the-destruction-of-money-who-does-it-why-when-and-how/236990/  

It’s Almost Halloween, So Let’s Talk Christmas

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Football has begun, the leaves are changing and the kids are back in school. Clearly, it’s time to start thinking about Christmas.  Some of you are reading this on your phone while waiting in line at Starbucks, preparing to buy your first Pumpkin Spice Latte of the season, but it’s time to start thinking of peppermint mochas instead.  Even if you’re the “Bah, Humbug” type of person who regularly posts Facebook rants about the neighbors putting up their lights before Thanksgiving, making financial plans for the holiday is still a really good idea.  It might be too early to hang a stocking, but it’s never too early to sock money away.

Question: How much will I be spending on the holidays this year?

Answer:  Recent studies have pegged the price of the holidays at roughly $300 per child, while one in 10 shoppers admit to spending over $500 on gifts for their children.  Overall, Americans spent about $600 billion on Christmas last year, which comes out to around $2,000 per person. This includes decorations, hams, ugly sweaters, and whatever else you tend to buy.  That’s a lot of money.

Question:  Ugh.  Why are we even talking about that money now? It’s not even Halloween!

Answer:  Halloween is exactly why we should make plans now.  Since 2005, American spending on Halloween has spiked.  Last year, we spent about $7 billion on Halloween, including $350 million on costumes for our pets!  It’s easy to overspend in October, let that lead into an indulgent Thanksgiving in November, and then find ourselves putting all our Christmas spending onto a high-interest-rate credit card.  Planning ahead is a necessary step to prevent you from a holiday hangover in the New Year.

Question:  How bad is it to put Christmas on a credit card?

Answer:  It might be worse than you think.  It’ll cost you about $200 per month to pay off an average Christmas debt in time for next year if using a typical high-interest credit card. And if you don’t pay it off by next year, you’re suddenly trying to pay off two holidays at once. That’s bad news.  Even if you think you can handle the extra debt load, remember that the Fed just raised rates, and it may do so again. Whenever it does, you can expect your credit card bill to go up.  On top of all that, paying around $400 in interest charges and fees over the course of the year is still $400.  That’s probably enough money to turn your average Christmas into something worthy of a televised Christmas special.  If you have to use a credit card, make sure it’s a low rate card like your Destinations MasterCard.

Question:  Is it too late to get ahead for this year?

Answer:  Not at all.  You have a lot of options to save yourself from your own spending.  You can sign up for a Holiday Club account, a High Yield Account or a variety of other plans.  But that’s not the only approach.  You can also get ahead of the rate hikes by moving all of your credit card debt into a home equity loan (check out our rates) or signing up for one of our low-interest credit cards.

But even all those options don’t represent all the various ways to save money. Remember that Christmas spending doesn’t have to be an all-or-nothing proposition.  You can combine savings, credit cards and budgeting to attack the holiday from several angles.  Start now, and by Christmas you’ll have a well-stocked war chest, or in this case, toy chest, to give you a variety of options.

Question:  What about the holidays between now and then?

Answer:  Between Halloween and Thanksgiving, Americans spend around $150 per person on average, which is far more affordable than Christmas. But that can still add up quickly, especially in larger families.  It can also be difficult to tighten the belt at this time of year, because it can mean less candy and less family time for the kids.  If you’re worried about this spending, one way to rein it in is to make a combined holiday budget you pay into every month.  Figure out how much you plan to spend on birthdays, holidays, anniversaries and the like, then divide that by 12.  That’s how much you need to put away every month.  Does that sound like a lot of money?  Then you can cut down all year long.  Maybe you don’t need to send birthday gifts to as many people or your anniversary can be a smaller occasion this year. The bottom line: If you start planning ahead, you can keep your holiday spending from being an obstacle to your financial future.

Sources:

http://www.bankrate.com/calculators/credit-cards/credit-card-payoff-calculator.aspx?MSA=&&&&

http://theeconomiccollapseblog.com/archives/guess-how-much-americans-plan-to-spend-on-christmas-and-halloween-this-year
http://www.today.com/parents/yes-we-spoil-our-kids-6-000-moms-come-clean-1C7397939
http://www.theatlantic.com/business/archive/2011/10/the-halloween-economy-2-billion-in-candy-300-million-in-pet-costumes/247531/
http://abcnews.go.com/WN/mailform?id=14998335

It’s Not Time To Panic

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It’s time to be calm, but you know that already.  The market has had a crazy week, filled with ups and downs flowing at a quick enough pace to ensure – if you were going into a meeting to discuss market forecasts – you really couldn’t write up an actionable plan.  You could have just as easily relied on an iPhone and a Magic 8 Ball.


Analysts don’t like that kind of uncertainty, so if you feel like the advice you’re getting on TV is aimed at making you panic, you’re probably right. However, don’t let other people’s panic make you panic.  In fact, when everyone else is panicking, it’s the calm person who can actually get something done.  


But the markets will open tomorrow and something could happen. Who knows? And if that something does happen, how do you keep from entering into a panic mode?  How can you resist the urge to pull all your money out of savings or rethink your entire retirement?  We’re going to explain why staying calm is the most important thing you can do, but let’s first play a game.  It’s really quick and it simulates the market using actual history.  

The rules: Start with $10,000.  You can sell once, you can buy once, and then it tells you how much you made or lost.  Open this link in a new tab by either copying and pasting or right clicking on the link (options will vary depending upon your web browser):

http://qz.com/487013/this-game-will-show-you-just-how-foolish-it-is-to-sell-stocks-right-now/
 

How did you do?  Did you play it a few times?  Did it go better when you sold your investments when the price dipped?  That game is based on market trends for the last 35 years or so, and the only real way to win is to just not sell.  Your money will go up and up and up.  The market rewards calm. Here’s why you should relax:


The Fed knows what it’s doing.  The new administration at the Fed has kept interest rates low, and many analysts have been expecting a rate hike throughout 2015, with some of them even predicting two increases.  A rate hike would be bad news for Wall Street, and the same market prognosticators who claim the sky is falling are pointing to an impending rate hike as “Exhibit A” that your retirement is doomed.  First of all, there’s no guarantee that a rate hike is coming. Even if the Fed raises the prime interest rate, it may be good for your stocks, because uncertainty over interest rates is part of the reason the market has taken a hit.  A rate hike, particularly a modest one, could calm fears about the uncertainty of interest rates in the future.


A rate hike also helps your savings.  Every dollar in your savings accounts – from money markets to IRAs – will get stronger when there is a higher prime interest rate.  So, if you’re convinced interest rates are going to take a bite out of your investments, your best move is to simply decrease the portion of your portfolio in stocks and put more of it into various savings products at Destinations Credit Union.  We’ve always had very competitive dividend rates on our savings accounts.  If the Fed raises interest rates, that usually means good news for savers.


China’s problems won’t hurt us.  While their currency is in crisis, and that has spilled over into other market sectors, it’s premature to panic over market instability at the world’s largest manufacturer.  The economic interconnection between the US and China, the world’s two largest economies, is not the kind that allowed the 2008 financial crisis to spread so quickly. In fact, it’s the kind that prevents that type of spillover.  In general, they manufacture goods and we market/buy them.  The stronger our currency is relative to other countries, the cheaper we can find consumer products.

For example, if Walmart were an independent nation, it would be China’s fourth largest trading partner.  Our largest brick-and-mortar retailer stands to profit, as do their customers.  In other words, if you leave your retirement funds in your savings and trust your credit union to take care of you, you can probably find everything you were going to buy for less, so you don’t need as much cash to live on while you wait for the market to recover.  You can spend less without making sacrifices.


The other benefit to the US economy stemming from China’s hiccup is that it likely means durable goods will sell well. Families that have “made do” with a lukewarm refrigerator or the world’s slowest dishwasher can find replacement appliances at more affordable prices. To put it in simpler terms:  You’re finally going to replace that stove you hate, and so will your neighbors.  You’ll save money on it, and the American businesses that design and sell that stove are going to enjoy the profits.  Those companies will turn the profits into increased manufacturing, which will help stabilize the Chinese economy.  The durable goods sector is going to help buoy the stock market, which will help the overall economy in the process.


If you want to take advantage of this temporary window, talk to us about a home improvement loan. Remember, if you want to make these kinds of household investments or take advantage of cheaper prices on the parts and supplies that go into other home improvement projects like patios and even driveways, lock in a fixed-rate loan now, before the Fed hikes interest rates.


In the end, market forces are driven by consumer confidence, and your household economy is no different.  Think back to that game you just played. Waiting out temporary market downturns or moving your money to safe savings programs are the only way to consistently grow your money in the long-term. Put your money with someone you trust, take a deep breath, and stay calm.

If you need a calming mantra, try this:  “New washer.  New dryer.  New washer.  New dryer.”
Sources:

http://www.forbes.com/sites/greatspeculations/2015/01/30/wal-mart-and-china-a-story-of-missing-customer-trust/

http://money.cnn.com/2015/08/26/news/economy/china-economy-stock-market-fears/

http://www.thestreet.com/story/13264176/1/what-me-worry-why-you-shouldnt-panic-amid-market-crash.html

How To Take Advantage Of An Interest Rate Hike

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The last time the Federal Reserve raised interest rates, Barack Obama was a U.S. senator, but many prognosticators who watch the Fed say that a number of factors suggest we’re due for a rate hike sometime within the next few months.  If the Fed raises interest rates, it will mean a raise in the price of any new loan you take in the future as well as an increase in how much you pay every month on the adjustable-rate loans you already have.  So, even if the discussion leaves you yawning, it’s important to act quickly if you think the Fed will raise interest rates. That’s because taking the right actions before a rate hike can save you thousands of dollars in interest payments after the rate hike.  Here are some tips to protect yourself, save money and maybe even make a profit if interest rates go up this year:

If you have a high credit card balance, move it to a loan with a low, fixed rate.

Credit card rates have remained around 13 percent, on average, for several years, but a Fed hike would raise those rates.  To make matters worse for people with sizable credit card debt, those rates compound quite quickly on a revolving account like your credit card.  

One way to deal with your credit card debt is to move your balances from the cards you have now to a single high-limit card with a 0% introductory rate and pay it off in full before the introductory rate expires. However, using a credit card to pay off a credit card can be a dangerous strategy, because if you don’t pay off the principle by the end of the introductory period, whatever you have left will start charging interest again, and perhaps at a high rate (pay attention to the fine print).  You also run the risk of falling back into bad habits and filling your new card up to its limit again.  

You can also look for the lowest fixed rate card that you can find and come up with a plan to pay it off.  Destinations Credit Union offers a low-rate MasterCard with lots of benefits (ScoreCard rewards, no annual fee, no balance transfer fees, etc.).

If you want an even lower rate, you might consider a home equity loan or line of credit.  Home Equity Lines of Credit (HELOCs) generally offer lower rates than Home Equity Loans, but the rate is variable so it may go up.  Destinations Credit Union offers its HELOC at Prime minus 1% with a floor rate of 4%.  Prime would need to increase by more than 1 3/4% before the rate on your HELOC will go up.  Home equity loans have a low, fixed rate, so you can avoid an interest rate hike and save money in interest payments every month.  While it might seem a little scary to borrow against your home equity, if you have accumulated significant credit card debt, your home might be the only source of wealth you can borrow against to cover it.  The loan payments should be less than you’re paying your credit card companies every month, so you’ll find it much easier to make your payments and get out of debt.  

If you’re interested in using your home equity to get out of credit card debt, you can find out more by calling a loan officer at 410-663-2500.

If you were planning on buying a house (or refinancing) soon, it’s time to make your move.

Fixed-rate mortgages will be unaffected by any interest rate hikes the Fed might employ, so if you think a rate hike is coming, get your mortgage now.  The difference of a few percentage points in the federal rate could mean mortgage payments increasing by as much as hundreds of dollars per month for some homeowners. Avoiding that fee is as simple as getting the paperwork for a new home loan finished before a rate hike occurs.  

If you wanted the extra few months to bulk out your down payment, or you weren’t sure about refinancing this summer, it’s time to sit down with a professional who can take you through the numbers and find out how much that indecision might cost.  You can speak to a mortgage specialist with our underwriting partner, Financial Security Consultants, or follow this link to get pre-approved right now.

If you’re investing, it’s time to look at conservative options.

As long as the Fed kept interest rates low, it was a good idea to invest more heavily in stocks than investment products offered by financial institutions.  Low rates meant easy loans to businesses and expansion was easy, so it was driving up stock prices.  As rates go up, credit markets slow down, and expansion becomes less profitable for all those corporations in which you own shares.  

At the same time, as the prime interest rate goes up, so does the return you’ll enjoy on your money market account, savings certificates, or any of a variety of investment products you may have.  Find out what we can do to put your money to work by checking out our insured deposit accounts, and if you’re trying to get some money put together for retirement, don’t forget about our IRA accounts.

No one knows for sure what Janet Yellen is going to do.  Predicting the Fed’s rates is a big-money business for a lot of powerful institutions.  In the end, you’re going to have to decide if you want to leave your money in places where a rate hike could increase your costs, or put it into more stable products.  If you aren’t sure what to do and want guidance, feel free to call or come by, we’d love to help you understand your options.

Sources: