Turbo Charge Your Retirement

Q:Hey, Credit Union Guy, I'm in my 40s and haven't saved nearly enough to prepare for retirement. How can I 'turbo-charge' my retirement savings to catch up?

 A: The good news is that you still have a lot of peak earning years ahead of you. Many people don't hit their professional stride until they reach their 40s, 50s and 60s, and they have their best earning years, by far, late in life. If you qualify for a traditional pension, so much the better, because many systems use your highest-paying three or five years to calculate your benefits. These traditional pensions, however, are getting quite rare.

   

The bad news is this: Interest rates are at or near record lows. That's great for borrowers, but it makes things a lot harder on savers. Chances are, you will need to save a lot more money to generate a given level of retirement income than your forebears did a generation or two ago.

Here are some ideas: 

Rein in spending sharply. Learn to enjoy cooking, rather than eating out. Cut back on cable TV packages and take up exercise instead. The lower your monthly expenses, the more free cash flow you will have available to invest. All solutions to your problem start with this one step.

  

Pay down consumer debt and credit card debt. With credit card interest rates in the high 20s for some people, this is often the very best return on your investment you can get. Every dollar you pay down in credit card debt sooner or later nets you a return on investment equal to the interest rate on the card - with no risk, and no taxes due. Pay it off early and keep your future dollars.

  

Next, make sure you are making the most of your tax-advantaged retirement savings opportunities. Are you working for someone else? Increase your 401(k) contributions. Maximize your IRA or Roth IRA contributions if you are eligible.

Do you own your own business? Can you start one? If so, you have some additional options: You can form and contribute to a SEP IRA, or simplified employee pension plan. This plan allows you to contribute up to 25 percent of your income from the business into a SEP IRA, or up to $49,000 per year, tax deductible. No taxes are due until you take the money out. Some businesses may be better off forming a SIMPLE IRA or Solo 401(k), depending on the specifics. Consult a qualified financial advisor with experience in retirement planning to find out which alternative is most appropriate for you and which will enable you to maximize your contributions.

  

Want more ideas? If you are self-employed and have your own business, you have few or no employees and a steady stream of cash flow, you can make nearly unlimited tax deductible contributions to an insured pension fund, under Section 412(i) of the Internal Revenue Code. (Make sure you have an experienced advisor working with you on these. This might not be a job for your nephew who is just getting started in the life insurance business).

Have you spoken to your investment advisor about the growth in your account? How much risk can you honestly accept? The saying is the higher the risk the higher the yield. Is that risk and the stress worth the yield? A good advisor will set you up with some options that can mitigate or modify your risk. 

  

Are you renting? It might be time to buy. That may sound expensive now, but interest rates are extremely low as of this writing. Even if rates rise to five percent or more, it would still be historically low. If you're in your 40s, you will have that 30-year mortgage paid off in your 70s. At that time, you may want to convert the equity in your home to a stream of income via a reverse mortgage. It's not for everyone, but if you rent rather than buy, you won't have that option. You can make that decision when you get there.

  

Above all, save money. Squirrel money away every way you can. Cash is still king, and there's no substitute for healthy cash reserves in your credit union account, whether in checking, certificates or other conservative savings options. You might not get a great return, but it's safe, secure and steady. Most of your success is going to come from controlling spending decisions, rather than from making brilliant investment decisions. Set things up so you don't have to be brilliant to succeed, just prudent.

  

*             *             *

Meriwest’s Spring Pre-Owned Car Sale is this Weekend!
Sat-Sun: April 12th and 13th
Chesbro Financial Center, San Jose, CA

Sale Hours:

• Saturday, April 12th:
  9:00 a.m. - 6:00 p.m.
• Sunday, April 13th:
  10:00 a.m. - 5:00 p.m.

Event Location:

Chesbro Financial Center
5615 Chesbro Avenue
San Jose, CA 95123

Take advantage of this special event!

• Low auto loan rates
• Huge selection of over 200 quality vehicles
• Up to 100% financing available for qualified buyers*
• Fast and friendly service
• Trade-ins welcome

Plus PRIZES and more!

5 Behaviors of Highly Effective Savers

Today's blog is a guest blog from the team at Debt.Org. Special thanks to the writer, Alanna Ritchie.

Managing personal finances successfully requires more than understanding numbers and having good accounting skills. In order for debt management solutions to be effective in helping you get out of debt and stay that way, they must be supported by changes in behavior.

Adopting five behaviors of highly effective savers can help to ensure that once you gain control over your debt and finances, you'll be able to keep that control in the long-term. Try incorporating these behaviors into the way you operate your personal finances, as well as your life in general, and you'll be sure to see positive results:

Set Incremental Goals

Setting a huge, generalized goal may end up overwhelming you, rather than moving you forward. Take that big goal – to get out of debt, perhaps – and break it into smaller, very specific steps with a workable, realistic time schedule. For example, when preparing for an upcoming big expense, set a weekly goal for saving for it.

Be a Good Record Keeper

Keeping track of what comes in and what goes out assists you in understanding the effects of your financial choices. When you are working to regain control of your finances, being a good record keeper will show you the positive results of your efforts, supplying even more motivation to keep up the good work.

3.       Own Your Situation and Your Choices

If creditors are pressing you or your credit card interest rates have skyrocketed, the bottom line is that such things are a natural consequence of your past behavior. Accept it, own it and deal with it, rather than being angry at the people calling or your credit card company. It will reduce the stress in your life and help you to be more focused on what has to be done. Maybe think of joining a credit union. They normally have fewer fees, lower interest rates on loans, more services and higher dividends on deposits than banks.

4.       Prioritize Properly

Place long-term well-being over instant gratification. Expand your vision beyond what you want in the moment to what you hope for and really need in the future by putting money in savings before you spend any for pleasure. Apply this concept to credit card use. Make financial choices—like putting money in savings or making a credit card purchase only if you know you will be able to handle payments—with the future in 

mind.

5.       Evaluate and Adjust as Needed

Effective savers are good at evaluating their own behaviors and situations and making the necessary improvements. They strive to be honest about their weaknesses and work hard to improve them. That is because they keep their goals and the big picture clearly in mind.

When you make these behaviors a part of how you manage your life and your finances, you'll be able to make the most out of the opportunity that debt settlement or other debt-related solutions offer you. All the work you do to eliminate debt will be wasted if you don't supplement the effort by developing behaviors that will keep you from returning to that position again.

Alanna Ritchie is a content writer for Debt.org, where she writes about personal finance and little smart ways to spend (and save) money. Alanna has an English degree from Rollins College.

*   *   *

Our next Free Financial Education Workshop is this Wednesday. Credit Myths and Repair will explain the top ten myths of managing credit. We will address balances, payments, collections, and judgments.  The workshop is fun and informative. You will learn more about credit than you had ever imagined!

Credit Myths and Repair

6:30 PM - Wednesday, August 28th. 

5615 Chesbro Ave, San Jose CA 95123

To RSVP, please contact gmeyer@meriwest.com or call 408-365-6328

Borrowing from your 401(k)-Good idea? Bad idea?

Your 401k is a multifaceted financial tool. Not only can it save you money on taxes as it defers income tax on the money you save for your retirement, it can also play an important role in purchasing a home or even help you get out of debt. Believe it or not, if you are a first time homebuyer, you can draw money from your 401k or Traditional IRA without penalty. That does not mean you won’t pay taxes on what you draw out, it means you won’t have to pay the 10% IRS tax penalty if you draw the funds to purchase a first home.

Not only can you draw on it for a home purchase, you can borrow against it. You can borrow up to $50,000 or half of your 401k, depending on which is less. When you borrow for a home you get a longer pay back period, up to ten years. If for any other use, you will only have five years to repay. The bimonthly payment will be evenly spread out or “amortized” over the time period and will be taken after taxes from your check. The interest you pay gets reinvested in your account. Your money remains in the account working for you. Remember, this is a loan not a withdrawal.

There are advantages and some major disadvantages for borrowing against your 401k for a home purchase:

• Advantages: The money in your retirement account continues to work for you when you borrow against it. If you withdraw, you lose any shot at future market earnings.

• There are no tax penalties for taking a loan out on your 401k and repaying it.

• The interest you pay goes back into your 401k as a contribution for you and is added to your retirement funds.

• I have never seen a 401k loan show up on a credit report. You are borrowing your own money so it does not count against your FICO score. Borrowing from most consumer sources will have an affect on your credit report and score.

• Your monthly payment is taken automatically from your paycheck by your employer and credited against your loan by the 401k trustee.

Some Major Disadvantages

• If you leave your employer early, they will need to pay off your loan from the proceeds of your 401k retirement plan. It does not matter if you quit, are fired or laid off. The 401k trustee will debit the loan payoff amount from your retirement account and pay off the outstanding portion of your loan. This withdrawal will be subject to taxation and Federal IRS early retirement plan withdrawal penalties. You will pay a 10% tax penalty on the amount withdrawn and also be subject to ordinary income taxes on the pay off amount. Depending on where you live, there may also be state taxes and penalties on a withdrawal such as this.

• For some plans, when you take a loan against your 401k, you may not be able to make contributions for the time your loan is outstanding. Meaning that your retirement savings will stop until your loan is paid off. Check with your trustee for details.

• You are also repaying part of the loan with money that has already been taxed. As you know, one of the benefits of contributing to a 401k is the fact that the money is invested pre-tax. When you take a loan you aren’t taxed on the proceeds, but the money used to repay the loan has already been taxed so your additional interest going into the account will effectively be taxed twice–at the time of contribution and again when eventually withdrawn from the account in retirement. Ouch!

Most Human Resource professionals will counsel you not to take a loan on your 401k for the very reasons I described above. Not everyone stays at the same employer for 5-10 years. In the U.S., employees tend to last 4.4 years on the job according the Department of Labor Statistics. Younger employees last shorter amounts of time and older employees may stay on longer. The bottom line is that very few Americans remain on the job for the full ten years it takes for one of these loans to mature.  

You need to consider many variables when thinking of taking money from your 401k either as a withdrawal or as a loan. Some of the questions you need to ask are: How much do I need? What is the penalty if I withdraw it? How much are my taxes on that withdrawal? What is my advantage in taking out a 401k loan? How long do I plan to remain at this workplace?    

 *    *     *

Oct. 24th  - 6:30pm

Free Financial Workshop
Credit Myths and Repair
Sunnyvale Financial Center at Fair Oaks and El Camino Real in Sunnyvale. 
RSVP with Gmeyer@meriwest.com