Achieving Financial Security by Conquering Personal Debt

Posted on August 29, 2014 | Financial Planning

Overloading on debt is expensive. In addition, credit can be an important lifeline in the event of a crisis, and if you have used all your credit, you have removed a valuable cushion of security.

Debt is a major hindrance to achieving financial security for many Americans. Here are some tips on how to conquer debt.

Reduce Use of Credit Cards

Nearly three quarters of the people who use credit cards leave unpaid balances from month to month. Compounding monthly the unpaid balance on a credit card means you’re effectively paying an even higher interest rate than that stated.

If you need a credit card for convenience, pay it off each month. If you can’t control your charging, cut up your cards.

Debt experts find that people who pay cash instead of charging not only eliminate expensive interest charges, but also typically spend 25% to 30% less in the first place. The only tough part about spending cash is that it is more difficult to track when drawing up a spending diary.

Reduce Current Debt

If you currently are heavily burdened with debt, there are several steps to consider. First, of course, is to start paying off your debt, and two approaches are possible: You can pay off the highest-interest debt first, which would save you the most money; or you could pay off the lowest balance first.

You may want to consider consolidating your loans. Home equity loans, whose interest rates can be reasonable and whose interest payments are usually tax-deductible, are a popular avenue. But you may be putting your home at risk to pay off, say, a car loan, when in fact it might be better to sell the car and buy a cheaper one. Remember, too, to be cost-effective the interest rate on the consolidation loan needs to be less than the interest rate you were paying before on the multiple loans, or the payoff time needs to be stretched out to lower monthly payments. Also, if you consolidate your loans, but then spend the savings, you’re not coming out ahead.

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Lifetime Investment Strategy

Posted on August 8, 2014 | Financial Planning

While individuals invest more money in Treasury bills, bank accounts, bonds and real estate than in equities, there has always been a mystique and allure about the stock market. To many investors, it offers an irresistible challenge. While the historical returns are high, the volatility of the stock market creates risk.

Sometimes, this risk makes itself very apparent; other times it is more subtle. However, some risk is always present because it is the reason for the higher returns. Those who wish to earn more than the Treasury bill rate must assume risk. This booklet is designed to help you understand risk and its relationship to return. It will also provide guidelines for the long-term successful management of your stock portfolio.

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The 10 Myths of Retirement Planning

Posted on July 9, 2014 | Financial Planning

Retirement planning requires a clear-eyed analysis of future needs and income. Yet many individuals view retirement through rose-colored glasses.

Here are some of the most common myths and how you can bring reality into focus.

Myth #1: You will not need as much money during retirement as you do now.

The general rule of thumb says that you will need approximately 70% of your pre-retirement income in order to maintain a lifestyle similar to that which you currently have. This may be true if you live your current lifestyle. However, when you retire, you will have more free time for travel, leisure activities, hobbies, and other things you might like to do during your retirement years.

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Retirement Income: Repairing the Damage to Assure the Flow

Posted on May 28, 2014 | Financial Planning

Having suffered severe losses in their retirement nest eggs last year, many retirees living off of their savings are reviewing their investment and spending plans, searching for new plans of action to ensure their savings can sustain them throughout their lifetime.

There is no question that bear markets can be devastating—particularly for new retirees—if action is not taken to compensate for the loss. The sooner you adjust, the better.

But what is your best course of action?

While the instinct may be to flee the risk of equity markets, postpone retirement or go back to work, an alternative strategy would be to consider temporarily reducing annual withdrawals from your nest egg.

A new T. Rowe Price retirement income study compared various withdrawal adjustment strategies for new retirees who suffered a 30% decline in their portfolios in their first year of retirement, under two different assumptions of future stock market performance, and compared to a switch to a 100% bond portfolio.

Our study found retirees can boost their chances of not outliving their assets over a full 30-year retirement period by simply holding their withdrawals constant for the next five years. In fact, simply holding withdrawals steady over the next five years provides a much more secure solution than switching to a 100% bond portfolio allocation in the second year.

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What Graduates Need to Know About Making Financial Decisions

Posted on May 21, 2014 | Financial Planning

Today’s college graduates are usually enthusiastic and well-trained in their discipline.

But they are often clueless about financial matters.

Unfortunately, the fallback position is typically to do nothing. But these early-year “non-decisions” can have a detrimental effect on their financial well being throughout their working lives, and especially in retirement. If only they had known how important it is to make good decisions in these early-year financial matters!

This article is aimed directly at the younger generation, and it designed to help them avoid such financial mistakes.

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The Portfolio Review: Why It Is Important and How to Do It

Posted on May 16, 2014 | Financial Planning

The start of a new year is the perfect time to review your portfolio. If you have not been monitoring your portfolio on a regular basis, now is the time to resolve to do so in the future.

Doing your own review periodically (quarterly or at least yearly) will help you understand whether you are on course to meeting your goals, or whether you need to change your strategy or tactics. The objective of such a review is to catch mistakes and to correct your course on a timely basis, with the ultimate goal of improving your results.

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Retirement Income: Repairing the Damage to Assure the Flow

Posted on April 4, 2014 | Financial Planning

Having suffered severe losses in their retirement nest eggs last year, many retirees living off of their savings are reviewing their investment and spending plans, searching for new plans of action to ensure their savings can sustain them throughout their lifetime.

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Strategies for Married Couples: How to Coordinate Your Plans

Posted on September 11, 2013 | Financial Planning

Many employees think of their 401(k) plan allocations in isolation. But if you are married and your spouse works, you are both likely contributing to employee-sponsored plans. And if that is indeed the case, your allocation approaches should be “married” as well. After all, when you retire, you will be living off of both retirement plans as a couple, and following two separate approaches and two separate goals may result in neither goal being met. In addition, some 401(k) plans may offer better investment options than others.

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Immediate or Income Annuities

Posted on May 21, 2013 | Financial Planning

An annuity is a contract, purchased from a life insurance company, that provides for a set stream of payments or income for a set length of time, usually until the death of the annuity holder.

The concept of an annuity can be confusing because life insurance companies use the term to describe two different types of contracts: deferred annuities and immediate annuities.

Deferred annuities allow investors to put away money on a tax-deferred basis so that a lump sum can be accumulated at a later date; that lump sum can then be used to fund an annuity (the stream of payments), although many investors choose to simply withdraw the accumulated amount as a lump sum rather than use the annuity feature.

An immediate annuity has no accumulation period—an investor simply pays the insurance company a lump sum, and then receives the stream of payments for the set time period.

Annuities are primarily used as a means of securing a steady cash flow during retirement.

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Diversification: A Failure of Fact or Expectation?

Posted on January 10, 2013 | Financial Planning

The bear market of October 9, 2007, through March 9, 2009, witnessed not only a 57% decline in U.S. equity prices, but also the demise of many investors’ faith in the volatility-reducing effects of diversification. Fortunes were wiped away in this 17-month mega-meltdown that was triggered by the simultaneous popping of the commodity, credit, real estate and emerging equity market bubbles.

During this most recent bear market, which was the second-deepest in the past 80 years, but only the ninth longest of 15, nearly all asset classes—be they U.S. or foreign equities, real estate or commodities—exhibited the glide path of a crowbar, slumping in unison, particularly during the final six months of the bear. Today, as a result, many wonder if traditional “buy-and-hold” investing should be replaced with “run and rotate.” They also question if previously uncorrelated asset classes will now forever move in lockstep. Other investors, however, believe that during periods of financial crises, it is typical that equity-oriented or economically sensitive assets will experience positive correlations during these market downturns, only to revert to previous appreciation trajectories once the crisis has passed and they are able to relax once again.

Today, one can unemotionally sift through portfolio embers for clues to seemingly unprecedented asset class performances. We at Standard & Poor’s (S&P) conclude that diversification didn’t fail investors. Rather, allocation did do its job—a typically balanced portfolio’s (60% U.S. large-cap equities and 40% long-term government bonds) 13.1% decline in 2008 was less than the 14.8% fall seen in 1974 and much better than the results of 1931 (–22.2%) and 1937 (–19%).

However, investors’ expectations or memories failed. We also believe that many investors simply went too far out on the risk curve, embracing inappropriate equity exposures for their age groups, risk tolerances, or trading acumen. Hopefully, these errors in memory and expectation have been adjusted.

Investor Misjudgments of History

Why did investors hold on so long?

During this sixth “mega-meltdown,” or bear market in excess of 40%, in the past 80 years, many investors simply closed their eyes to the financial carnage and maintained their equity exposure as the S&P 500 eventually fell 57%. Allocations were never adjusted, just net worth. We at S&P believe one reason investors—as well as their advisors—chose to do nothing is because many advisors were ardent students of stock market history and, as a result, trained their clients too well, encouraging a “buy-on-the-dip” mentality during all types of market declines.

Yet two mistakes were made along the way. First, we assumed that the financial carnage that occurred prior to World War II was an anomaly and would never be repeated in our lifetime. Second, many believed that “black swan” events, like 100-year floods, occurred so infrequently that they wouldn’t happen again. Unfortunately, 100-year clocks don’t get reset annually.

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