10 Bad Money Habits That Are Robbing You Blind

Shocked couple in debt
Prostock-studio / Shutterstock.com

Developing good habits helps us focus on things that need our attention most.

But as you work to get your financial life on track, you’ll probably find old, counterproductive habits undermining your progress. Some of them worked once, but now they’re holding you back. Others have always been bad.

Dropping bad money habits makes it easier to power up your financial life. Following are some bad money habits and tips for ending them.

1. Carrying a credit card balance

Carrying a balance on a credit card is like walking down the street with a hole in your wallet and letting money leak out.

Here’s why: Suppose you are paying down a $5,000 balance on a card charging 15% interest. If you only pay the minimum amount each month, it’ll take decades to pay off the debt and cost you thousands of dollars in interest.

Build a better habit: Devote every spare penny to getting rid of credit card debt. If you have other pressing debts, make a plan for dealing with all of them. For more tips on avoiding debt, check out “7 Easy Ways to Stay Out of Debt.”

Keep the balance from building again by making a new habit of paying off the entire bill every month — no exceptions ever.

2. Failing to fund a retirement plan

There are compelling excuses for putting off saving for retirement. But none of those excuses will matter if you reach retirement age with little saved. And, if you don’t take advantage of your employer’s matching contributions to a retirement plan, you’re passing up free money every month.

Build a better habit: Start paying close attention to your retirement savings. If you can’t significantly increase the monthly contribution you make to your plan immediately, increase it by 1% a month. Once a year, check the performance of your investments and rebalance your portfolio.

3. Not shopping for monthly services

Hopefully, you comparison-shopped before signing up for insurance policies. And we trust you did the same thing with phone, internet and cable services.

But you might be missing savings if you’re not checking prices again every year.

Build a better habit: Put some energy into improving your financial life. Once a year, spend 30 to 60 minutes price shopping for monthly services. To make it easy, keep a list with each company’s name, your account number and your monthly payment amount.

If it seems you’ll never get around to doing this, consider contacting BillCutterz, a service that negotiates on your behalf to get discounts on your monthly bills. Here’s a report on how it works.

4. Paying for cable or a landline phone

Cable TV prices are going nowhere but up. Free and cheaper alternatives to cable make experimenting worthwhile. But will you get out of your rut and try something new?

Build a better habit: Before trying a change, record your viewing habits for a week or two to see how and if you’re using the services you currently have. If streaming seems like a legitimate option for you, check out “13 Streaming TV Services That Cost $20 a Month — or Less.”

Ditto for your landline telephone. If you’re able, drop the landline and use mobile phones only. If that seems too radical, refrain from using the service for one month — or even just a week — while you check out alternatives.

5. Ignoring coupons and deal sites

If you aren’t using coupons and checking daily deal sites, you’re spending too much. However, you still need to exercise discipline when bargain shopping, so you don’t sabotage good intentions with impulse buys.

Build a better habit: Tackle bad habits in small bites. Try just one deal or coupon site. Money Talks News’ deals page, for example, has new sales and coupons every day relating to clothes, shoes, electronics, tools and more.

6. Playing investing too safe

Safe investing is important. But there’s safe, and then there’s too safe. Keeping all your money in no-risk accounts means inflation will rob you of spending power slowly but surely.

Build a new habit: Don’t break all your bad habits at once. Pick one and focus. For instance, make managing your investments a priority. Money Talks News founder Stacy Johnson offers some tips for getting started in “Ask Stacy — How Do I Invest in a Mutual Fund?”

7. Getting hooked on lattes

That $4 latte is killing your budget. One such latte each workday adds up to $20 a week — potentially $1,040 a year. If you tip a dollar each time, you’re spending $1,300 a year. Surely, there’s something you would rather do with that $1,000.

Build a better habit: Substitute new habits you enjoy for the old ones. A latte is a way of treating yourself, so find treats that don’t bust your budget.

8. Living without an emergency fund

If you don’t have an emergency fund, your life is a high-wire act with no safety net. Emergencies are inevitable. Life is full of them.

Build a better habit: Make a commitment to change. Write down your pledge and put it where you’ll see it. This will allow it to reinforce your resolve.

Commit and watch your savings build. If necessary, take on a few hours of extra work each week, whether it’s overtime at work or watching a neighbor’s dogs. For more tips, check out “9 Tips for Starting an Emergency Fund Today.”

9. Buying retail

Paying retail markup is like setting a match to a pile of cash. Smart buyers find ways to avoid doing that.

For example, a new car’s value drops fast the minute you drive it off the dealer’s lot. So, buy one that’s gently used instead.

Build a better habit: If you feel pressured to keep up with your friends or neighbors, ask yourself what that’s costing you. Stay out of malls and brand-name stores except when researching products. Read up on prices online so you know a good price when you see it.

And check out this post: “41 Things You Should Never Buy.”

10. Using shopping as entertainment

Perhaps you know people with compulsive shopping habits. Maybe you are one of them. Spending creates a high that’s addictive, severely damaging your budget and the financial security of your family.

Build a better habit: Try a spending fast. Remove your name from catalog lists, stay out of stores and hang out with friends whose idea of fun doesn’t include shopping.

Check out “11 Tips and Tricks That Will Keep You From Overspending” for more tips.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

A Lower Credit Score Can Cost You A Lot of Money!

[dropcap]M[/dropcap]oney doesn’t grow on trees, so it’s important to have a good credit score. A low credit score hurts your ability to get loans and if approved, your going to pay a higher interest rates! Credit scores are also used for insurance rates, renting and even employment.

A poor credit score can cost you hundreds of thousands of dollars over your life. Enter in your estimated FICO score and a loan amount below to see how much a poor FICO score can cost you on your mortgage or any other loan. If you are a home owner or looking to buy, raising your FICO score is the most important thing for you to do. A better score not only means lower payments, but it can mean a bigger house, the chance to take out more money on a refinance, or even the difference between being able to buy.

Your Credit Score Affects

  • Homeowner’s Insurance
  • Car Insurance Payments
  • Car Loan Payments
  • Personal Loans
  • Mortgage Refinance
  • Job Opportunities

Comparison: Prime  vs. Subprime Loan Costs

FICO Term Principle Interest Rate Payment Total Paid Good Credit Saves You
Average Auto Loan
740-850 60 30,000 1.99% 525.70 31,542.09
680-739 60 30,000 4.79% 563.26 33,795.31 2,253.22
620-680 60 30,000 9.99% 637.26 38,235.82 6,693.73
580-619 60 30,000 15.99% 729.38 43,762.94 12,220.85
<618 60 30,000 23.99% 862.86 51,771.89 20,229.80
Best rates as of November 2012
FICO Term Principle Interest Rate Payment Total Paid Good Credit Saves You
Average Home Loan SD County, 30-yr fixed
760-850 360 350,000 3.016% 1,478.64 532,308.98
700-759 360 350,000 3.248% 1,522.84 548,221.66 15,912.69
680-699 360 350,000 3.433% 1,558.60 561,094.44 28,785.46
660-679 360 350,000 3.656% 1,602.29 576,825.34 44,516.36
640-659 360 350,000 4.105% 1,692.21 609,195.47 76,886.49
620-639 360 350,000 4.675% 1,809.98 651,591.66 119,282.69
< 619 360 350,000 9.900% 3,045.67 1,096,440.60 564,131.63

 How much is your credit costing you?

Source: creditabsolute.com

60/40 Stock & Bond Portfolio – Guide to Asset Allocations, Pros & Cons

The stock market is a system that tends to follow tradition. Traditionally, investors have been expected to start young, build a buy-and-hold portfolio, and be careful with asset allocation in order to avoid high levels of risk.

Much has changed in investing over the past couple of decades with robo-advisors making moves for many investors, access to the market widely available through discount brokers, and a rise in short-term trading.

Still, many people feel more comfortable investing in the traditional ways, which is what makes the highly traditional 60/40 portfolio so popular.

Read on to learn about the 60/40 portfolio model, how to build one for yourself, and its pros and cons.

What Is the 60/40 Portfolio?

The 60/40 portfolio has been around for decades and is more of an investment strategy than a defined portfolio because there are no assets set in stone that build up the portfolio.

The strategy is based on a safe asset allocation strategy that has been used in retirement accounts for so long that it’s hard to pin down where it started or who first developed it.

The 60/40 portfolio strategy suggests 60% of your investment assets should be invested in equities like stocks, exchange-traded funds (ETFs), and mutual funds.

The other 40% of the portfolio’s assets should be invested in fixed-income securities like U.S. Treasury bonds, corporate bonds, and other debt securities that produce income through interest rates or a discount on the price of the security.

The idea is that by diversifying your portfolio across asset classes that experience different levels of volatility and risk, you’ll be able to access the gains the stock market provides during bull markets while minimizing losses during downturns or all-out bear markets.

Pro tip: David and Tom Gardener are two of the best stock pickers. Their Motley Fool Stock Advisor recommendations have increased 597.6% compared to just 133.7% for the S&P 500. If you would have invested in Netflix when they first recommended the company, your investment would be up more than 21,000%. Learn more about Motley Fool Stock Advisor.


The Investment Thesis Behind the 60/40 Portfolio

The 60/40 portfolio is based on a strategy of diversification that many believe provides the perfect balance between risk and reward. The thesis is simple.

Most experts agree that it’s nearly impossible to time movements in the stock market, but they also agree that by avoiding stocks altogether, you’re robbing yourself of the opportunity to produce significant returns. Despite their inherent volatility, it’s important to maintain exposure to the stock market while working to balance the risk of those equities falling on hard times.

That’s where fixed-income securities come into play. These investments come with significantly lower risk. Once these securities mature, investors are paid back their entire initial investment amount.

The interest payments received throughout the life of the investment (or the difference between the price of buying the security and the price paid at maturity) acts as the return.


Who Should Take Advantage of the 60/40 Portfolio?

Because the 60/40 portfolio is highly customizable, it’s a great fit for just about any investor. As you’ll learn, the portfolio can be adjusted for different risk levels and investment strategies.

However, there is one concern with the portfolio. The strategy is based on a strict asset allocation of 60% equities and 40% fixed-income investments. However, many experts disagree on what an optimal asset allocation looks like.

Because your goals and appetite for risk are likely to change over time, many suggest using your age to determine the split between equities and fixed-income investments.

For example, instead of allocating 40% of your assets to bonds and other debt securities and 60% to equities in all cases, this variation on the strategy suggests if you’re 21 years old, you should allocate 21% to fixed-income securities and 79% to equities.

This variation involves adjusting your holdings as you age to include more fixed-income assets and fewer equities, becoming more conservative as you near retirement.

Ultimately, a 60/40 portfolio is a traditional, moderate-risk portfolio that could result in slower growth than other options. By following the 60/40 portfolio to the letter, your risk may be too heavily moderated or too aggressively accepted, depending on your age and investment goals.


Pros and Cons of the 60/40 Portfolio

As with any other portfolio strategy, there are pros and cons that should be considered before diving into the 60/40 portfolio.

60/40 Portfolio Pros

There are several reasons to consider following the 60/40 strategy in your own portfolio. Some of the most exciting aspects of the portfolio include:

  1. Diversified to the Max. The portfolio, although made up of only a few assets at most, is designed to be highly diversified, offering complete exposure to whichever sector of the market you prefer. The mix of underlying assets in each fund acts as an insurance policy against volatility.
  2. Fully Customizable. The portfolio doesn’t outline the exact funds you should invest in, just that 60% of your investments should be in equities and 40% should be in fixed-income assets. This leaves you the option to choose the investment strategy, level of risk, and asset exposure of the funds you buy within the predefined allocation. Few portfolios offer this level of customization.
  3. Evenly Balanced Risk. Through the strict asset allocation rule, risk is evenly balanced. While there are opponents to the idea of fixed allocation, this is a tried-and-true strategy that’s been used for decades.
  4. Easy Management. Finally, there are very few assets to keep track of here. This makes maintaining balance and managing your portfolio an extremely simple process.

60/40 Portfolio Cons

While there are plenty of reasons to be excited about deploying this portfolio strategy, there are also a few drawbacks that should be considered before diving in. They include:

  1. Fixed Allocation. Asset allocation is fixed at 60% stocks and 40% bonds, which is rather modest for younger investors and a bit risky for those nearing retirement. Most financial advisors suggest following a fluid allocation strategy that changes as your risk tolerance and goals change.
  2. Low Bond Yields. In recent years, the market has been experiencing historically low bond yields as a result of a low-interest-rate environment. By allocating such a large percentage of your portfolio to fixed-income investments, you could be missing out on much of the gains the bull market has to offer.

Pro tip: Before you add any stocks to your portfolio, make sure you’re choosing the best possible companies. Stock screeners like Stock Rover can help you narrow down the choices to companies that meet your individual requirements. Learn more about our favorite stock screeners.


How to Duplicate the 60/40 Portfolio

As mentioned above, the contents of a 60/40 portfolio aren’t set in stone. It’s more of a guide explaining how you may want to go about asset allocation that can be applied to several different investment strategies.

As a result, there are several ways to go about building the portfolio — a task made easier by the abundance of low-cost ETFs on the market today.

Here are six popular ways to build a 60/40 portfolio for yourself based on your investing strategy and risk tolerance. The funds mentioned here are low-cost Vanguard index funds, but you can choose any fund you like that gives you exposure to the same types of assets.

The Low-Risk 60/40 Portfolio

For investors with a low risk tolerance who want access to the market as a whole, the build of the portfolio is best as follows:

  • 60% in Vanguard Total Stock Market Index Fund ETF (VTI). One of the most diversified ETFs on the market today, the VTI is designed to give investors exposure to the total United States stock market. The past performance of the fund has been stellar, beating others in its category relatively regularly over the past 10 years.
  • 40% in Vanguard Intermediate Term Treasury ETF (VGIT). The VGIT is focused solely on intermediate-term, high-quality U.S. Treasury securities. While these government bonds come with relatively low yields compared to longer-term options, their yields are stronger than short-term bonds and liquidity is reasonable.

The Moderate-Risk 60/40 Portfolio

While the low-risk 60/40 portfolio is a great option for many, investors know that the lower the risk associated with the investment, the lower the potential for gains.

One great way to slightly increase the risk while greatly expanding your earnings potential when using this portfolio strategy is to include international stocks in your equity holdings and swap out Treasury bonds for corporate bonds in the bond portion of the portfolio.

Here’s how that looks:

  • 60% in Vanguard Total World Stock ETF (VT). The VT ETF fund was designed to provide exposure to a highly diversified list of stocks, both in the U.S. and around the world. While the international side of the portfolio increases the risk, it also increases potential profitability, as emerging market growth tends to outpace growth in established markets like the United States.
  • 40% Vanguard Total Corporate Bond ETF (VTC). On the bond market, corporate bonds are known for paying higher yields than Treasury bonds but do come with increased risk. By investing in the VTC fund rather than VGIT, it’s possible to increase the earnings on the fixed-income side of your portfolio.

The High-Risk 60/40 Portfolio

Finally, if you’re willing to accept higher levels of risk, the potential returns of the 60/40 portfolio can be increased by including some different asset classes into both the equity and fixed-income sides of the equation.

Among your equities, consider mixing in some small-cap holdings. Small-cap stocks are known for high levels of volatility and risk, but they’re also known for the potential to outpace the returns of their large-cap counterparts.

On the fixed-income side, look into real estate investment trusts (REITs). These real estate investments are riskier than bonds but have much greater potential to increase your profitability while providing a source of predictable returns in the form of exceptional dividends.

Adjusting the portfolio for a high-risk investor is as simple as investing in the following funds:

  • 30% in Vanguard Total World Stock ETF (VT). The VT fund remains an anchor in this investing strategy, providing access to a diversified group of U.S. and international holdings. This fund should represent about 30% of your holdings in the high-risk rendition of the 60/40 portfolio, or half of your equity allocation.
  • 30% in Vanguard Small-Cap ETF (VB). The VB fund is made up of a diversified group of small-cap stocks, providing exposure to high-growth opportunities in smaller companies. This fund takes the other 30% allocation on the stocks side of the portfolio in this model.
  • 20% in Vanguard Total Corporate Bond ETF (VTC). About half of your fixed-income allocation, or 20% of the total portfolio, should be invested in the VTC fund to gain exposure to corporate bonds.
  • 20% in Vanguard Real Estate ETF (VNQ). Finally, the VNQ fund is an index made up of investable REITs, which gives you broad access to real estate investments while maintaining diversification within the asset class. This fund takes up the other half of your fixed income allocation, representing 20% of the portfolio.

The Growth 60/40 Portfolio

If you’d rather focus on a growth strategy than simply making bucket investments in diversified groups of equities, the growth 60/40 portfolio is the way to go. Here’s what it looks like:

  • 60% in Vanguard Growth Index Fund ETF (VUG). The VUG fund was designed to provide diversified exposure to U.S. large-cap growth stocks. These are companies that have a proven history of generating significant growth, but provide a level of safety in that they are all large-cap, established companies. In the growth rendition of the portfolio, this fund represents 60% of your investment allocation.
  • 40 % Vanguard Intermediate-Term Treasury ETF (VGIT). The other 40% of the portfolio would be invested in the VGIT, offering stability through intermediate-term Treasury securities.

The Value 60/40 Portfolio

If you’re following a value investing strategy, the best way to take advantage of this portfolio is to invest the stock portion of your assets into a value-centric fund like the Vanguard Value Index Fund ETF (VTV).

This fund provides diversified exposure to large-cap value stocks, meaning these are large-cap companies with valuation metrics that suggest they’re trading at a discount.

You can then invest the remaining 40% of your assets using the VGIT for your bond holdings.

The Income 60/40 Portfolio

Finally, those focused on income investing can also take advantage of this portfolio with one small tweak. As with the traditional 60/40 portfolio, 40% of your assets should be allocated to the VGIT, providing safety through investments in intermediate-term Treasury securities.

The other 60% of the portfolio should be invested in the Vanguard High Dividend Yield ETF (VYM). The VYM is made up of a wide range of stocks known for paying high dividend yields.

By investing in the fund, you’ll gain diversified exposure to stocks of all sizes in various sectors that all have one thing in common — they all have a history of offering investors a high dividend yield. That’s music to an income investor’s ears.

Pro Tip. M1 Finance offers expert pies designed around several portfolio strategies, including the 60/40 portfolio. If you’re not interested in building your own, use a prebuilt expert pie on M1 Finance to add the portfolio to your holdings.


Keep Your Portfolio Balanced

Regardless of which rendition of the 60/40 portfolio you choose to go with, it’s important to make sure to maintain balance. The entire thesis behind the portfolio is to provide meaningful returns while creating a safety net by balancing higher-risk equities with lower-risk fixed-income investments.

As time passes, some investments will rise in value and others may fall. As a result, your investment portfolio will fall out of balance. If the balance becomes too skewed, the portfolio may fail to meet your investment objectives.

The good news is that the 60/40 portfolio strategy is a buy-and-hold strategy, meaning you won’t be required to rebalance your portfolio monthly. However, it is best to take a look at your portfolio on at least a quarterly basis.

Moreover, with so few assets, maintaining balance is a relatively simple process. When one asset grows to take up more than its allotted percentage, simply sell a little of it and buy more of its counterpart to bring the portfolio back to the 60/40 balance.


Final Word

There’s a reason the 60/40 portfolio is one of the most talked-about strategies on Wall Street. For decades, investors have been deploying this strategy, which has worked to build wealth over time.

However, as times change, the traditional investing models are being replaced with newer, more fluid options. While the traditional 60/40 concept has been a go-to for some time, it’s not the best fit for all investors, nor is it optimized for investing during a bull market where bond yields are chronically low and stocks are on the rise.

Nonetheless, when markets are flat or falling bearish, and you feel a safer approach is best, the portfolio is a great fit. Moreover, if you’re willing to take the time to customize and are interested in REITs rather than heavy bond allocation, the portfolio can be adjusted to fit your needs.

Source: moneycrashers.com

The Top 5 Reasons Seniors Stay Frugal in Retirement

Accountant
Dragon Images / Shutterstock.com

Countless workers scrimp and save for years with the goal of enjoying a comfortable retirement. Many of those folks do not abandon their penny-pinching ways once their golden years finally arrive.

Surprisingly, fear of running out of money is not the No. 1 factor that drives retirees to stay frugal, according to the Employee Benefit Research Institute’s (EBRI’s) Spending in Retirement Survey.

Instead, the survey — which asked 2,000 individuals ages 62 to 75 about their spending habits and their situation at and during retirement — found four more-common reasons that retirees keep their wallets shut.

The five reasons the retirees most often cited for not spending down assets are:

  1. Saving assets for an unforeseen cost later in retirement — 38%
  2. Feeling that spending down assets is unnecessary — 37%
  3. Wanting to leave as much as possible to heirs — 33%
  4. Simply feeling better when account balances remain high — 31%
  5. Fear of running out of money — 27%

Among these retirees, the average amount of current financial assets was $200,000, with a median of $75,000. More than two-thirds — 69% — said their standard of living is the same or higher than it was when they were working, and 61% believe their spending is appropriate for what they can afford.

The power of a fat nest egg should not be underestimated. Among survey respondents, 64% said saving as much as possible leaves them feeling happy and fulfilled. That finding seems to support recent research that has revealed that — contrary to common folk wisdom — having more money does indeed make people happier.

In fact, the retirees in the EBRI survey said they wish they had saved more for retirement. Just 18% said they saved more than was needed, while 46% reported saving less than they needed in retirement.

Saving for a great retirement

In life, it’s smart to learn from the wisdom of those who are in the place today that you are headed toward tomorrow. If many of today’s retirees wish they had saved more, chances are good you will feel the same way when you retire.

So, now is the time to begin building your retirement nest egg. The Money Talks News course The Only Retirement Guide You’ll Ever Need can get you off to a great start.

This 14-week boot camp offers everything you need to plan the rest of your life, know you’ll have enough money and make your retirement dreams a reality.

The course, intended for those who are 45 or older, can teach you everything from “Social Security secrets” to how to time your retirement.

For more tips on how to build and maintain a nest egg, check out “Your Top 5 Retirement Questions, Answered.”

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

How a Bad Credit Score Can Hurt You

While a credit score may seem like an arbitrary number, calculated by an invisible credit agency with no real bearing on your life. However, bad credit can cost you real money. To get an idea of just how much money you can lose due to bad credit, take a look at the following examples.

Credit Cards

If you have a low credit score, you will not be eligible for prime credit cards. These cards have the best interest rates, payment terms and credit limits, making it easier for you to maintain good payment history, thus further establishing good credit. Consumers with less than stellar credit “qualify” for less attractive credit cards or “sub-prime” cards. These cards often require exorbitant fees, monthly fees, low credit lines, or cash deposits. In most cases, these cards are difficult to maintain a positive payment record with and often fail to report your positive credit activity to the credit bureaus. A sub-prime credit card cannot only cost you money but can also make it very difficult for you to improve your credit score.

Car Buying

When trying to buy a car with bad credit, you will not qualify for the lowest interest rates available. This often translates to $3000 to $6000 more in interest payments. This additional interest will take the form of slightly higher monthly payments. While it may not seem like a lot on a month by month basis, when calculated over the life of the loan, it will be a sizable amount.

For example: A loan for $25000 to be repaid over 5 years:

Credit Status Interest Rate Monthly Payment Extra Interest Paid
Excellent 8% $507 $0
Poor 12% $556 $2,952
Bad 16% $608 6,062

Home Buying

As you might imagine, the effects of bad credit are most evident the larger the purchase, such as when you are trying to purchase a home. For most people, a home is the largest purchase they will ever make. If you have a poor or bad credit score, you may end up paying between $2000 and $3000 of interest a year over the course of the loan, which can amount to $60000 and $100000 more in interest than if you had an excellent score.

For example: A $200,000 mortgage to be repaid over 30 years:

Credit Status Interest Rate Monthly Payment Extra Interest Paid
Excellent 7% $1,331 $0
Poor 9% $1,609 $66,140
Bad 12% $2,057 $99,019

Learn how to improve your credit

Source: creditabsolute.com

Learn from the experts: TPG ’s card team reveals what’s in their wallet – The Points Guy


The Points Guy’s cards team share their own credit card game plan – The Points Guy


Advertiser Disclosure


Many of the credit card offers that appear on the website are from credit card companies from which ThePointsGuy.com receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This site does not include all credit card companies or all available credit card offers. Please view our advertising policy page for more information.

Editorial Note: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

Source: thepointsguy.com

What is a credit card product change and when does it make sense? – The Points Guy


What is a credit card product change and when does it make sense? – The Points Guy


Advertiser Disclosure


Many of the credit card offers that appear on the website are from credit card companies from which ThePointsGuy.com receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This site does not include all credit card companies or all available credit card offers. Please view our advertising policy page for more information.

Editorial Note: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

Source: thepointsguy.com

7 Reasons Not to Claim Social Security Early

Older woman working at a florist shop
pikselstock / Shutterstock.com

Some people believe in starting to collect Social Security as early as possible, which is generally at age 62.

“Live while it is yet possible to live!” the early birds cry. “After all, I could die tomorrow, and then the government will keep my money.”

What’s more likely is that you’ll live a lot longer than 62.

According to the Social Security Administration (SSA), the average woman reaching the age of 65 today will live until nearly 87. The average man who is 65 today can expect to live until about 84.

One way to help ensure you don’t run out of money before then is to postpone claiming your Social Security retirement benefits. There are advantages to waiting as late as 70 years old.

While waiting until age 70 isn’t for everyone, following are some reasons that claiming sooner than later can be a bad idea.

1. Claiming early reduces your benefit

Some people think that taking Social Security at age 62 means more money overall. That’s not necessarily true.

The amount of your monthly benefit is based on a formula that’s meant to be actuarially neutral. That basically means you should get the same total amount of benefits over the course of your retirement regardless of the age at which you first claim benefits.

Your monthly benefit will be reduced if you claim before reaching what the SSA calls your “full retirement age,” an age set by the SSA that depends on the year you were born. For example, full retirement age for a person born in 1955 is 66 years and 2 months, while full retirement age for anyone born in 1960 or later is 67.

If you delay claiming until after your full retirement age, you will receive an even bigger monthly benefit once you do claim. For every year you hold off past full retirement age, your benefit will grow by as much as 8%.

The SSA’s “Quick Calculator” can give you a rough idea of your own benefit amount based on when you plan to retire.

A custom analysis of your claiming options, offered by specialized companies like Social Security Choices, can further help you determine when the best time is for you to claim your benefits.

Money Talks News founder Stacy Johnson himself got an analysis from Social Security Choices. To learn more about such a report — including how to land a discount on the cost of your report — check out “Maximize Your Social Security.”

2. You might outlive your other retirement income

If there’s a chance that you could use up your retirement funds before you die, a higher Social Security benefit could be crucial.

Getting every last dollar you can in your monthly benefit is important, especially if you don’t have a partner who’s also receiving benefits.

3. Working longer can increase your benefit

Your monthly benefit amount is based on the amount of income you earned during each of your 35 highest-earning working years. However, not everyone is able or willing to work for 35 years, often due to health or family issues.

When that’s the case, the government will substitute zeroes for the missing years in its calculation, which can significantly lower your monthly benefit amount.

Low-earning years also bring down the total, says Emily Guy Birken, author of “Making Social Security Work for You.”

As tempting as early retirement can be, think big-picture and look for ways to bring in more bucks before claiming.

“Anything you can do to replace those zeroes and anything you can do to replace those low-earning years will help beef up your retirement,” Birken tells Money Talks News.

4. COLAs will not boost your benefit as much

A lower monthly benefit means that each cost-of-living adjustment (COLA) — the inflation-based regular increase to your monthly benefit amount — will result in less money than it would have if you had postponed claiming Social Security.

Why? COLAs are a percentage of your monthly benefit. So, the smaller your benefit amount, the smaller your COLA dollar amount.

A 2% COLA, for example, would increase a $2,000 benefit by around $40 a month, or $480 per year. But it would increase a $2,480 benefit by about $49.60, or $595.20 per year.

5. You might stiff your spouse

Working at least until your full retirement age gives your husband or wife a better chance at a reasonably comfortable retirement if you die first.

That’s because widows and widowers often can benefit from Social Security survivors benefits, which are based on their spouse’s benefit amount.

Using the same benefit amounts as above, say a man gets a $2,000 benefit, while his wife’s check will be $1,700 upon her own retirement. If he dies first, she could be eligible for up to $2,000 in monthly benefits. But if he’d waited a few years to claim Social Security, and let his benefit amount grow, she could have been eligible for up to $2,480.

6. You might be hit by a ‘tax torpedo’

Some people want to let their portfolios grow, so they take Social Security early and live on it until they’re forced to withdraw required minimum distributions (RMDs) from their retirement accounts.

This plan can backfire, though, because of how Social Security benefits are taxed.

The extent to which your benefits are taxable is based on what the SSA calls your “combined income.” It includes taxable income, such as withdrawals from tax-deferred retirement accounts like traditional 401(k) plans and traditional individual retirement accounts (IRAs).

Depending on the amount of your combined income, up to 85% of your Social Security benefit could be taxed.

One way to dodge such a tax torpedo is to withdraw less money from your tax-deferred retirement account each year. And delaying claiming Social Security can help you do that because you’ll get a bigger monthly benefit.

In turn, Birken explains:

“You won’t need to take as much from your taxable retirement [plan] to make up the amount you need to live on.”

Some people don’t realize they might have to pay taxes on their benefits. Birken calls it “one of the really nasty surprises about Social Security.”

For more ways to keep Uncle Sam from taking part of your benefits, check out “5 Ways to Avoid Taxes on Social Security Income.”

7. You still like your job

Just because you’re old enough to retire doesn’t mean you have to retire.

Even a part-time salary — plus any other retirement benefits — could cover expenses until you hit age 70, at which point your Social Security benefit would be maximized.

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Source: moneytalksnews.com