Top Personal Finance Blogs
Tuesday September 26th 2017

What is a Thrift Savings Plan?

A thrift savings plan is part of the retirement package offered to federal government employees. The plan is offered by the Federal Retirement Thrift Investment Board, and is basically a federal version of the 401(k) plans that private businesses offer their employees. The contributions that employees make toward a thrift savings plan can be applied before taxes, and taxes are deferred on the payouts from the plan if they are paid out after retirement age. Anyone who is eligible for the Federal Employees Retirement System or the Civil Service Retirement System can take advantage of a thrift savings plan.

Additional Savings Option

The thrift savings plan is a retirement plan option that is separate from the package already offered through the Federal Employees Retirement System or the Civil Service Retirement System. The contributions that employees put toward a thrift savings plan are not considered as a normal part of their annuity contributions toward the Federal Employees Retirement System or the Civil Service Retirement System. Federal employees are allowed to contribute up to 11% of their salary toward the thrift savings plan, and they are eligible to begin saving as soon as they begin employment.

Required for Some, Supplemental for Others

Employees who are using the Civil Service Retirement System are not required to participate in the thrift savings plan program. They can use a thrift savings plan as a supplement to their regular retirement plan. Those who use the Federal Employees Retirement System are required to utilize the thrift savings plan option as part of their standard retirement package, along with the basic annuity and social security plans. Both types of plan participants can enjoy the privilege of immediate contributions toward retirement, without any waiting periods or deferment of payments.

Contributions Drive the Savings

The way the thrift savings plan works is that the amount of money saved toward retirement is based entirely on the amount of money that the employee contributes to the plan. Employers may also contribute to the plans with matching funds or other savings program options. Earnings accumulate as employees continue to contribute during their standard working years. Federal Employees Retirement System members also enjoy agency matching contributions and immediate vesting in the contribution as soon as they begin employment. Civil Service Retirement System members are allowed to contribute up to 6% of their salary toward a thrift savings plan, but they are not eligible for any matching contributions or immediate vestment plans.

Range of Investment Opportunities

The federal government offers five different investment funds for federal employees to choose from for the thrift savings plans. The Government Securities Investment Fund, Common Stock Index Investment Fund, Fixed Income Index Investment Fund, International Stock Index Investment Fund, and Small Capitalization Stock Index Investment Fund are all solidly performing funds that provide reasonable returns on investments. Thrift savings plan members are offered high quality investment opportunities with low administrative and investment costs. Before tax savings and tax-deferred earnings also provide a better return on a federal employee’s retirement earnings.


Watch Out for these Newbie Investment Mistakes

While investing is a means of growing money for the future, the business of investing is not a get rich quick scheme. Having little knowledge, but a willingness to gain financial freedom, many newbie investors make mistakes. Individuals should gain as much knowledge as possible before entering any investment choice. The greater the knowledge base, the fewer the pitfalls faced by investors.

Fee Impact

Whether playing the stock market online, employing the expertise of a stockbroker, financial adviser or merely investing in mutual funds, there are many fees involved. Trading fees run around $500 yearly.
These fees do not include expenses charged monthly for managing the accounts. Mutual funds also carry management fees. Shop around; compare rates charged by various brokerage firms and financial experts. Get quotes for investing in different types of long-term funds. Always know the fees involved.

Understand the Difference between IRA Accounts

While some IRA accounts save on current tax expenses, consider the tax burden involved when liquidating or withdrawing money from these accounts in 20, 30 or more years from now. Taxes will more than likely increase at exponential rates. Individuals put taxed money into a Roth IRA account. Down the road when liquidating the account or making withdrawals, the money is tax-free.

A Diversified Portfolio

“Don’t put all your eggs in one basket,” almost certainly typifies investing. Diversification does not mean investing in two dozen different stocks. If the market fails, most these investments would probably crumble. Rather, invest in various choices including bonds, index funds, IRA accounts, and stocks. This way, if one dips, others continue to grow.

Playing Follow the Leader

Investing in the stock market because of the advice gained by someone else might be risky business. Potential investors must find out how much knowledge the other person has, with how much experience he or she has with stock market investments. Why does this person believe the stock is a good investment? Beware of possible scams. Often, individuals provide tips to increase sales of a particular stock and then the tipster sells his or her shares when the market price increases.

Investing Borrowed Money

Borrowing money for investment purposes poses many risks. Getting loans in hopes of getting a quick return on a stock investment is a recipe for disaster. Have a plan in mind for loan repayment if the investment bombs. Some gain large amounts of money for long-term investments. However, consider the interest rate involved with a loan and the rates applied to investment growth. Decide if this method costs more money in the end.

Timing the Market

This tactic involves buying and selling stocks based on predicting market turning points. Experts claim these types of investors must be accurate 82% of the time just to match returns. Wealthy men, the likes of Peter Lynch and Warren Buffett prefer to invest and sit tight method, which follows the advice presented by many. Timing the market does not produce returns, but what matters is the time individuals spend in the market that makes the difference.


Seven Steps – Retirement Planning Simplified

Planning for retirement is like setting any goal. In order to meet any goal, individuals must determine what required steps will achieve the result. The process may seem tedious, but breaking it down into seven steps will simplify retirement planning.

Determine Net Worth

The first step in retirement planning requires calculating net worth. How much cash accumulates if one sold everything of value? Consider a home, vehicles, recreation vehicles, a business, jewelry, precious metals, collections, etc. Homes are more than likely the most valuable asset people own. Property has multiple means of supplying income.

Besides selling a home, individuals might consider renting a room, renting the basement, buildings on the property, or the entire residence. Use the property to obtain a home equity loan or a reverse mortgage. Consider how anything of value could increase financial status.

Evaluate Hazard Coverage

Individuals should take stock of various insurance policies including homeowner’s, automobile, health, disability and life insurance policies. It is not a pleasant thought to consider, but in the event of illness or disability are there enough assets to cover the costs of medical expenses or long-term care?

Experts suggest individuals accumulating over $2 million dollars will have enough cash flow to afford these expenses. However, persons with a net worth of $200,000 or less, must eliminate assets in order to qualify for government assistance, or individuals could consider long-term care insurance.

Calculate Expenses against Income

Determine the monthly or annual amount of money necessary to live. Usually, persons have eliminated mortgage expenses by retirement, but calculate taxes, insurance and upkeep. Consider food, vehicle upkeep, health insurance and recreational or other out of pocket expenses.

Evaluate the amount of guaranteed income including annuities, pension, social security, and investment accounts. Now look at other sources of income, which may include capital gains, dividends, interest, rentals, and wages.

Compare Amounts Acquired with Amounts Required

Persons desiring retirement at age 65 need enough money to live for 20 to 30 years. Individuals must compare the amount of accumulated assets with the amount of money necessary to sustain living. At this point persons may decide to postpone retirement, continue working full-time or consider working part time. Decide what expenses can be eliminated or devise methods of acquiring other sources of income.

Categorize Income

Divide all the sources of income into three categories: early, middle and late retirement. Early retirement includes immediate liquefied assets or the money individuals can use right away. Middle retirement income should be comprised of assets continuing to grow, which may include bonds, TIPS and various annuities. Likewise, late phase retirement funds might include life insurance, balanced and growth portfolios, and various annuities.

Investments

When considering investing, determine the capacity and size of the portfolio. Implement the assistance of an advisor. Never take unnecessary financial risks for quick, large dividends. Avoid venturing into territories unknown or beyond the skill of an advisor.

Maintain a Current Plan

Experts suggest reevaluating a retirement plan annually. Various life-changing experiences may necessitate adjustments or revisions. Unexpectedly caring for dependents, divorce or death of a spouse, economic changes, and illness or injury, may all be reasons to revise retirement goals.


How the Recession Has Changed America

No matter where you go and what you do in America, there is a good chance someone is talking about the recession. Nearly everything you hear in the news is centered on the recession. Whatever the topic, it’s skewed to talk about how it has been affected by downturn. Not only has the conversation changed, but Americans are behaving differently as well.

Spending Less

If you were to visit a car dealership, you would probably see a huge inventory of SUVs for sale. People are becoming more conscious of the amount of money they spend. They are also becoming very creative in their methods to save money.

With most of America still feeling the effects of the recession, topped with high gas prices, few people see the value in purchasing a SUV with low gas mileage. Buyers are opting instead for fuel-efficient cars. The recession has subtly curbed the appetite for lavish, expensive luxuries for many of Americans.

Saving More

Since the beginning of the recession, Americans have become thriftier. Savings rates have increased substantially. More individuals are placing their money in savings accounts, hoping to save enough for a possible rainy day.

A large number of people polled by Pew Research admitted to now buying less expensive brands. Over half of the people polled stated that they have canceled vacations. In addition, 33% said that they have cut back on alcohol and tobacco products. Substantial portions (28%) of adults from the ages of 18 to 29 have moved back in with their parents. Individuals are using whatever feasible methods possible to cut back on spending.

Lower Wages

The recession has not only made individuals fearful of losing their jobs, but nearly 35% of Americans earn less than they once did. Many older individuals with decades of work experience have come to the realization that they will never earn the of amount wages they previously earned.

Back to Basics

The recession has created a desire to have a simpler life for many people. There is a change in how people define the American Dream. Fewer people are dreaming of big houses, multiple vehicles, and vacations every year. The recession has curbed the expectations of many people. Families and individuals are becoming more content with living in apartments, riding bicycles, and planning local festivities for their families.

Risk Aversion

Investors who once took on risks in the hopes of earning high returns are becoming more risk averse. Many investors were terrified as they watched their retirement plans and investment portfolios shrink to record lows. The volatility in the stock market has caused investors to put their money in safer investments.

Bond funds and money market accounts are now attracting the majority of new money. The Investment Company Institute reported that poll numbers showed that only 30% of investors were willing to take on substantial risks to earn higher possible returns.

Economists and financial experts say investors will remain risk averse for quite some time. A long-term bull market would need to occur for investors to have enough confidence to invest more money in stocks. The increase in bond investments is also due to Baby Boomers making a transition from stocks to bonds to protect their investment portfolio.

How Long Will it Last?

Some economists believe that the changes in Americans are only temporary. They believe consumers will start spending as that once did when the economy starts improving. Others believe that the recession has permanently changed the mindset of Americans, and spending habits will never return to what they were in the past.

Whether things will continue as is or return to what they once were, it is safe to say that the recession has drastically changed how Americans see the world, their own lives, and their money.


Dividend Investing versus High-Yield Savings

Dividend investing is one of the easiest ways to build long-term wealth. When companies pay out dividends, they are essentially sharing the profits they have earned with shareholders. Investors, especially those who are interested in income investing, tend to favor companies that pay high dividends. But stocks can be risky and some prefer to put their money into High-Yield Savings. Which is right for you?

What is Dividend Investing?

Dividend investing is the process of taking the dividend payments received from the company you own shares of and using them to buy more shares of the company’s stock. One way of automating this process is to enroll in a Dividend Reinvestment Plan (DRIP). A Dividend Reinvestment Plan is a plan in which shareholders have cash dividends automatically reinvested into additional shares of the firm’s common stock.

What is High-Yield Savings?

As the economy struggles through a recession, more people are looking to place their money in savings accounts. A high-yield savings account is an account opened at a bank or credit union that yields a higher than average rate of interest.

As the name suggest, these accounts have a higher Annual Percentage Yield (APY) than regular savings accounts. The advantages of having a high-yield savings account is that your money is highly liquid, it is FDIC insured, and you can get started with a low minimum balance in most cases. Depending on the bank, some accounts may come with other perks.

Rates of Return

The rate of return on dividend investing varies depending on the stock. It is common for dividend investors to only invest in a company’s stock that has a dividend yield of at least 4%. The yield of 4% gives investors the assurance that they will earn more than the average rate of inflation. Investors want to make sure they maintain purchasing power.

The Federal Reserve is keeping target interest rates low, which means that the yield on savings accounts are relatively low as well. Currently, there are some community banks that are offering interest rates as high as 5%. Investors that earn rates this high will be able to accumulate great wealth over the long-term. This yield is not very common. Most banks are offering interest rates of 1.5% to 3% on high-yield savings accounts.

Risks

There are also unique risks associated with dividend investing. A dividend stock still has some of the same risk as non-dividend stocks. Companies can experience periods where they are not earning profits, and therefore are not paying dividends.

High-yield savings accounts are FDIC insured, which means that they have zero principle risk. However, there is an inflation risk that is associated with high-yield savings accounts. When the inflation rate, which is usually around 3%, is higher than the yield you are receiving from the savings account, you lose purchasing power. Dividend investing also has inflation risk. The dividend return can be less than the inflation rate as well.

Tax Implications

There are specific tax implications related to dividend investing. Dividend payments are taxed as capital gains and not ordinary income. The current capital gain tax rate is 15% for those in the 25% of higher tax bracket. It is 0% for individuals who are in a lower tax bracket than 25%.

When considering taxes, dividend investing has an advantage over high-yield savings accounts. The interest earned from high-yield savings accounts are treated as ordinary income and taxed at your ordinary federal income tax rate.

Dividend investing and high-yield savings accounts both have their advantages and disadvantages. As with all investments, it is important to research them thoroughly. Investors typically choose investments that offer them the highest possible returns for their risk preferences


The Bucket Strategy for Retirement

Do you have enough money to live on without sacrificing a comfortable lifestyle once your working days are done? Have you started thinking about it yet? As retirement looms, it brings along a suitcase loaded with questions, such as: how long are you going to live, how much of the money you have managed to save up to this point will be gobbled up by inflation, and just what is the money you’ve already got in your various investments doing?

The 4% Rule Doesn’t Work Anymore

Since you can’t just go out and work for a long enough period of time to make up the deficit if you miscalculate, it’s important to estimate right the first time. For a long time, people who gave advice on financial matters suggested something called the “4 percent rule.” This strategy advises you to take out an amount equal to 4 percent of the total invested during the first year that you are no longer working; then the next year, withdraw the same amount as the previous year, and add enough to account for inflation. This method, experts previously suggested, provided most people with better than average odds of making it through at least 30 years at their current lifestyle.

Get a Bucket

In light of the recent stock market roller coaster, however, those in the fiscal know have decided that this method is a bit too oversimplified. Currently, more than half of those who provide investment advice are now recommending that their customers divide their rainy day cache into sections, or buckets, to carry them through with funds they can count on to remain stable.

Filling Your Bucket

Here’s how it works: first, you need to decide on a safe amount of money to remove during your first retired year, then, multiply your designated figure by however long you want a definite amount of income- the average is usually between five and seven years, including a secured amount that takes inflation into account. Once that is done, the funds are placed into a money market account, in order to make sure that you always have a pull-from rate that will sustain you during those years.

When your vat gets close to being empty, or every year, depending on what happens with the stock market, refill it with other prudent investments that will provide enough money to live on throughout the next cycle. This process is then repeated for the remainder of your retirement.

Try Two Buckets, or Even Three

There are two suggested types of bucket strategy: 2-bucket and 3-bucket. The 2-bucket model encourages golden-agers to squirrel away roughly five years of savings in bonds issued by the Treasury Department. Every year, take a set amount from the bonds to live on and then use the remaining funds to invest in stocks. When the year ends, any income earned from the stock growth gets shifted into the bonds for a little boost to next year’s income. If the stocks don’t earn money, the money should be left in the investment, giving it a chance to bounce back. The withdrawals can be adjusted as needed, in case of unforeseen shortfalls or poor stock performance.

Those seeking a bit more cushion might prefer to split their funds among 3 kettles. Into the first vat would go sufficient resources for the first seven years of retired life, including enough extra to account for any economic intensification, which is then placed in a secure investment such as a Treasury bond. The second container would account for the next eight years, from 8 to 15, and would consist of either annuities that would provide secure assets, or a mixture of stocks and bonds. The final bucket, which would cover the remaining years, would hold the most high-risk items, such as real estate. A full year’s worth of income is moved among the buckets annually, depending on what the stock market does. Obviously, this is an intricate set of plans, but it will certainly make your retirement funds safer.


Women: Is Your Financial Planner Giving You the Right Advice?

Many women are finding themselves solely in control of their financial planning after a divorce or after the death of a spouse. Unfortunately, the majority of financial planners are used to dealing with men. Research shows that most women have investment accounts that are only two-thirds the size of a typical man’s account.

Add to that the longer average lifespan of women and you have many ill prepared for retirement. If you are a woman who needs to handle her own investments through a financial planner, there are some things you should keep in mind about the service you receive.

Sexual Discrimination Problems

The fact that men have been the traditional financial agents for most marriages means that investment planning has become very male-oriented. Most of the financial planners are men who are used to working with other men. It is very easy for a male financial planner to slip into the habit of doing what they believe is best for their female clients without regard to what the client really wants or needs. Investors tend to guide women toward more narrow investment plans because they feel that women are not prepared to handle riskier options. Some planners can be outright disrespectful of female clients because they do not believe women understand the intricacies of investments.

Life Expectancy and Income Differences

The problem with this unfair treatment of women in the financial world is that women are more likely to need to handle their own investments sooner or later. Most women in the United States will outlive men by an average of 10 to 20 years. Since women tend to earn lower incomes than men, it is much more important for women to invest their money wisely so that they will be able to live comfortably once their spouses have passed. When a financial planner gives a woman bad advice, it can have a serious detrimental impact on her future.

Communication Challenges

Sometimes the perceived discrimination is really a problem in communication. Since the financial world has always been primarily male, it can be challenging for a financial planner to deal effectively with a female client. Men process their thoughts and plans differently than women do.

Many veteran financial advisers are used to working in a fast-paced environment with men who want to cut to the bottom line quickly. Women tend to want their advisers to explain all of their options in more detail and discuss what would be the best choice. It can be difficult for an adviser to change his communication style to accommodate a female client.

Cookie Cutter Investment Plans

Another problem for women in the investment world is that the most commonly used investment plans were created with male investors in mind. Women have different financial needs because of several factors, which means that a male-oriented plan may not be the best option.

Financial planners need to break free from the investment models they are comfortable with in order to offer more effective options for their female clients. If you are a woman receiving financial advice through an established financial planner, you need to take an active part in making sure that your portfolio is unique to your specific situation. If you aren’t getting the answers you need, or if you don’t fully understand your portfolio and investment strategy, it’s time for a different financial planner.


Five Financial Imperatives for Young Adults

The way you handle your money when you are younger can have a dramatic impact on your quality of life as you get older. Here are five financial lessons you must learn if you are to maintain your financial security in the future.

Write it All Down

The first step in organizing your finances is to write everything out. Make a list of the things that you spend money on. Include everything that you know you will buy during a normal month, such as your utility bills, car payments, house payments or rent, groceries, gasoline, and entertainment.

Don’t forget to include special expenditures that happen on an irregular basis, like car tag renewals or birthday presents. Once you have a complete list of what you spend, you can compare that to the amount of money that you earn.

Recognizing What You Want versus What You Need

If your spending habits exceed your earnings, you will need to make some changes to your budget. Look at the items you usually buy and determine if those items are things you really need or things you really want.

Keep the necessities, but cut back on the things that are not vital. You should always allow yourself a certain amount of money for entertainment, but make sure that it is an amount that you can comfortably afford.

Control Your Credit

Credit will be an important part of your financial life. A good credit rating can lead to better interest rates on loans for cars or mortgages, as well as better rates on auto and health insurance. Make sure you check your credit rating at least once every year to make sure it is accurate. You can keep your rating positive by paying debts in a timely manner.

Try to use credit cards sparingly. Remember that a credit card is really just a convenient bank loan. When you make a purchase using credit, make sure it is an amount that you can pay in full when your next credit card bill comes. Carrying a balance over several months accrues expensive interest payments that make your purchase much more expensive than it was originally.

Begin Retirement Investments Early

The earlier you begin saving money toward your retirement, the better your later years of life will be. It can seem strange to put money away for your senior years when you are just starting out in life, but you need all of that time to create a nest egg that will allow you to do what you want to do when you retire.

Remember that you are planning for a time when you will not work at all, which means that your savings will have to cover all of your expenses. On average, people are living 20 – 30 years after they retire, which means you need to save enough to pay for up to 30 years of life without a regular income.

Create a Safety Net

Unexpected things happen to everyone. Make sure you always keep some money in a savings account to help cover expenses when your car breaks down or you need to replace an appliance. Emergencies can cut deeply into your regular budget if you do not have any savings to help cover the costs.


Learn to Recognize a Financial Bubble Before it Bursts

In monitoring your finances, it can be both shocking and disappointing to realize that one of your investments has existed in a bubble, and that it’s too late for you to do anything about it. You’re facing a large loss and a bruised ego. There’s nothing like a sharp sting to make you avoid a bee, but buzzing insects are much easier to spot than financial bubbles. Here’s some advice for the wary investor.

Avoid Hasty Decisions

When considering an investment for long-term profit potential, be sure to take the time for a general overview that includes sound management, market share, and dividend payments. If your “due diligence” reveals that although the price keeps rising, the investment seems to be on shaky ground, it may be the time for you to bow out, and avoid being trapped when the bubble bursts.

An essentially sound investment rises at a rate that keeps pace with the remainder of the market and may decline during an economic down cycle. But bubbles are a bit different. They rocket in value and tend to drop just as quickly. Remember that if the price of an investment rises too quickly, it is virtually impossible to maintain that pace, and this usually causes the bubble to burst.

Be on Guard

If the mainstream media resorts to hyperbole and presents an investment as some sort of economic miracle, this is a sign that the investment may have a problematic future. They hype and excitement tends to overwhelm otherwise shrew individuals. They may fail to investigate an opportunity properly before investing, being swept up in the high earnings they see being made by others.

Still, the old but true cliché about being on your guard when something seems “too good to be true” definitely applies here. You may see those around you being enticed to invest, anticipating they will make “some serious money.” They may boast about the investment and seem overly confident. Don’t jump in on a wave of enthusiasm. Remember that there are professional investors out there doing a great job at boosting the price of an investment, knowing that the amateurs will take the bait.

In most cases, by the time an investment opportunity makes it onto television as an infomercial or 30-second segment on the news, those who were going to profit already have. Those jumping in during the hype are the most vulnerable to sharp declines as the market collapses under the weight of the investment frenzy.

What for the Dip

When the bubble busts, the following things tend to happen:

  • Buyers begin to lose interest, resulting in a price dip
  • Sellers panic and start selling off as quickly as possible, causing a sharp drop in price
  • Those who fail to recognize the dip as the first sign of a bursting bubble will be left holding a severely depreciated investment.
  • As time passes the slow down becomes more apparent and more investors begin jumping ship, dropping the value of investments still in the hands of others.

If you bought into an investment that has skyrocketed, try not to be caught up in the excitement. Do your research. If you see that market forces may no longer support the success of the investment, don’t get greedy trying to hold onto every penny of gain. Instead, quietly sell off your investment when you see the telltale dip. While others begin crying foul around you, your money will be in a safer investment.


Start your ROTH… Now!

If you are in your twenties, you should be thinking now about your retirement nest-egg. Why? Simply, the earlier you start the more you get to benefit from the power of compound interest? If you invest $1 when you are 25, that dollar may be worth as much as $21. If, however, you wait until you are 35, to save that dollar, it will be worth around $10, or less than half of the total amount (calculations assume 8% annual return). Every dollar you save when you are 25 is worth two dollars when you are 35.

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