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How much do you really need to retire?

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NEW YORK (3/25/2014)--As many as 85% of respondents to a nationwide GfK Custom Research survey believe it's important to prepare for the future by sacrificing and saving today. Yet 44% worry that they aren't putting aside as much as they think they should. How do you know if you need to save more, are right on target, or perhaps are going overboard (The Street March 11)?
 
The rule-of-thumb formula is to plan to live on 70% to 80% of your preretirement income during your retirement years, while increasing your replacement income annually at the inflation rate for 30 years. This is a reasonable starting point.
 
But these assumptions can over- or underestimate the true cost of your retirement. David Blanchett, head of retirement research at Morningstar Investment Management, points out that one size does not fit all. Your actual replacement income requirements will more realistically range from 54% to close to 90% of pre-retirement income (MarketWatch 12/21/2013).
 
One important factor in determining a replacement rate is your proportion of pretax expenses (contributions to a 401(k), for example) to post-tax expenses (contributions to a Roth, mortgage payments, and so forth). The more you put aside in pretax retirement accounts before you retire, the lower your replacement requirements.
 
To help you evaluate other factors that affect your replacement rate, consider:
  • Some of today's expenses will decline or disappear when you retire, for example, Social Security and Medicare taxes, saving for retirement and work-related expenses.
     
  • As you progress through retirement, even if you take into account the inflation rate for retirees (3.15% compared with a general inflation rate of 3%), your expenses will decrease in real terms at first and then increase toward the end. That's because your consumption most likely will change over time.
     
  • Your life expectancy might be a lot less, or more, than 30 years. You can use SocialSecurityOnline's calculator (found on ssa.gov) to estimate your life expectancy.
     
  • If you have a low preretirement income, for example, $20,000 a year, your replacement rate likely will be higher than that of someone who makes $100,000 a year.
     
  • The relative amount you will spend on health care could increase significantly as you age.
     
  • After age 65, you stand a good chance (70%) of requiring long-term care and help with basic daily activities, even if only temporarily.
Blanchett's research suggests that many households would benefit from claiming Social Security as late as possible. Keep in mind that, by delaying, you'll get a higher inflation-adjusted benefit for life.
 
Meet with a certified financial planner to make sure the decisions you make are appropriate to your situation. For related information, read "Do You Need a Financial Plan?" and "Making Dollars and Sense of Financial Planner Designations" in the Home & Family Finance Resource Center.

Getting a tax refund? Savvy ways to spend it

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SAN FRANCISCO (3/18/14)--If you're getting a tax refund, you're one of more than 40 million Americans receiving one. Financial experts say the best thing to do with a refund is to pay down debt, build up emergency savings, or put it toward retirement savings (MarketWatch.com March 5).
 
But, if you plan to spend your refund, or part of it, here are some savvy ideas:
 
Prepay bills. Get ahead of monthly bills by paying some ahead of time, or double up on payments. Consider paying extra on your auto insurance premium or, if you know you have an expense coming up--say kids' sports--pay for it now instead of waiting. You'll get the best bang for your buck if paying ahead leads to a lower overall price tag, such as paying down a car loan to save on interest. On the other hand, buying new tires could save money down the road since you might be extending the car's life.
 
Pursue education for yourself or others. Take classes that might help you advance your career or that will help you pursue that new job you've dreamed of. If you're not interested in taking classes, deposit the refund in a 529 plan or other college savings plan for your kids.
 
Buy health insurance. Pay for extra health insurance costs. This year's tax season is the only one that will overlap the open enrollment period for the Affordable Care Act, which ends March 31. Future enrollment periods will end earlier. If you're signing up for private insurance, using your refund can help immensely. Say you're a 27-year-old paying about $310 a month, the average cost for a low-cost plan. The average $3,000 tax refund could cover about 10 months of premiums. Also, consider using your refund for deductibles or prescription costs before full insurance coverage kicks in.
 
Give your home a mini facelift. Consider replacing old appliances with energy-efficient ones, which may qualify you for a tax break. Or, put the money toward other home improvements such as remodeling a kitchen or bathroom.
 
Enjoying your refund is easy. Talk to the professionals at your credit union about getting your refund directly deposited into one or several accounts.
 
For related information, read "Eight Ways to Make the Most of Your Tax Return" in the Home & Family Finance Resource Center.

Spending too much? Plan and be mindful

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NEW YORK. (3/11/14)--Consumer spending in January climbed higher than predicted, swelled in part by the biggest increase in services outlays since 2001.
 
The spending on services was likely driven by the unusually cold weather and higher-than-normal heating costs, but household purchases, which account for about 70% of the economy, were also up by 0.04%, according to Commerce Department figures (Bloomberg March 3).
 
The financial forecast anticipates consumers will continue spending more on goods and services as hiring gains, climbing housing values, and a robust stock market drive an improving economy.
 
But, just a few years out from the Great Recession, are Americans already spending too much? Last month The Wall Street Journal reported that most financial planners would say, "Yes."
 
The reasons are varied--lack of a budget or a desire to maintain appearances--but, to better manage your spending, many financial advisers recommend tracking your cash flow and monitoring your emotional state.
 
Here's how:
 
Plan. It's not only big expenses that put you in debt. More likely it's "death by a thousand tiny cuts" eating up your income. Track your spending with a notebook or online app, shop with a list, consider using only cash for a couple of months, and set up monthly automatic deductions from your share draft/checking account into an emergency savings fund.
 
Be mindful. Try to understand why you're overspending. Maybe you're trying to keep pace with high-rolling friends or spending makes you feel better--temporarily. Regardless, when you feel compelled to buy something you maybe don't need, wait 24 hours and consider why you're buying it. Ask yourself, "How will I feel when the credit card bill comes?"
 
Set limits. Know what pleasures you can't live without and decide in advance how much you'll spend on them each month. Try to focus on the joys in your life that cost nothing--friends, family, a favorite public park--and for big-ticket items, set aside a little each paycheck until you can afford to buy it.
 
For more information, read "Everybody's Money Matters: Deciding How Much to Save" in the Home & Family Finance Resource Center.

Get house on the market--pronto

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ALEXANDRIA, Va. (3/4/14)--Time's a wasting if you plan to put your house on the market this spring. House hunters have been scoping out properties online for months and are poised to buy (Motley Fool Feb. 15).
 
January visits to online real estate websites were up 25% more than in December, to more than 360 million, according to Experian Marketing Services (Feb. 14). So, if you plan to sell but your house is not yet listed and online, you're missing lots of opportunities to show your house to potential buyers.
 
While spring is the traditional season for housing sales to pick up, other factors contribute to the lift in interested buyers.
 
Mortgage rates are lower in the past month and hovering near 4% for qualified loans. This is good news for buyers sensitive to affordability: A traditional 30-year, $150,000 mortgage at 4.5% would have a monthly payment of $760. If rates decline to 4.25%, the payment would change to $738.
 
That $22 savings each month could make the difference between getting a loan approval or not. And, over the life of the loan, that 0.25% difference saves the borrower nearly $8,000.
 
Get your house show-ready by making sure it is spotless and clutter-free. Low-cost cosmetic fixes such as fresh paint and carpet in neutral shades, new cabinet hardware and shower curtains, and basic landscape maintenance pay off. An investment in updated kitchen appliances makes more sense than a kitchen remodel at this stage.
 
For more information, read "Want Top Dollar for Your House? Apply Elbow Grease" in the Home & Family Finance Resource Center.

Consumer Protection Week prompts consumers to be proactive

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WASHINGTON (3/4/14)--This week is National Consumer Protection Week, and the National Foundation for Credit Counseling (NFCC) is offering five tips to better protect their financial position.
 
"By executing one of the following steps each day, consumers will put themselves into a much safer financial position in just one week," said Gail Cunningham, NFCC spokesperson.
  • Review credit reports. Credit reports are viewed by potential lenders as well as landlords, cell phone providers and utility companies. Because a credit report captures a person's financial track record, it can strongly influence a lending decision, Cunningham noted. Consumers can access a free copy of their credit report once every 12 months from each of the three bureaus, Experian, Equifax and TransUnion, by going to www.AnnualCreditReport.com.
  • Have an insurance review. Talk with the insurance agent about adequate coverage and appropriately priced premiums.
  • Get to know your credit card. Many people don't realize that certain protections are part of their credit card agreement such as return protection and extended warranties. The Fair Credit Billing Act allows consumers to seek a refund if a product purchased was unsatisfactory. For a list of credit protection laws, go to http://www.federalreserve.gov/creditcard/regs.html.
  • Know your rights. The Consumer Financial Protection Bureau was created to protect consumers by carrying out federal consumer laws.  It also restricts unfair, deceptive or abusive acts or practices, promotes financial education and accepts complaints. Consumers can submit issues with a financial product or service to the CFPB online at http://www.consumerfinance.gov/complaint/.
Consumers who are educated about the many rights and protections available have a greater peace of mind when making financial purchases or decisions, Cunningham said.