By, Mitch and Cheryl Ekstrom

Half of all Boomers (and the upcoming Gen Xers) have done little-to-nothing to prepare for retirement. Many have given up on the hope of a reasonably comfortable retirement. Currently, around half of them begin taking Social Security at age 62. The current maximum Social Security benefit at age 62 is $2,209 (1) – or $26,508 per year. As an hourly wage, it would be $13.25.  Nationally, boomers estimate their average annual cost of living in retirement at about $46,000 a year (2). If they have the Social Security benefit listed above, where will they get the $19,492 needed to close the gap to $46,000? Working? Maybe.  But there are other steps you can take NOW for those who haven’t yet reached retirement age, and some ideas for everyone, even if they have.

Imagine if a few small changes, just different choices immediately, could add $175,000.00 to the nest egg. Let’s take the example of a 50 year old couple who decide to get a plan to remove all debt and start saving the money they could by making just a few different decisions until they are 67. What if they invested the money for those 17 years, with a good portfolio of mutual funds. They would:

1. Stop Eating Out all the Time. The average person will save about $37.00 per week by eating in. Our couple has saved $295 per month. If they invest this at a very reasonable 7% annual growth until age 67, they will have built $116,239.00!

2. Buy Nice Used Cars instead of New Cars. Let’s have them stop buying new cars every three years. The average new car loses at least 20% of its value in the first year and 10%-15% per year over the next four years. (3) Let’s also say our couple was only buying inexpensive new cars at $25,000. Applying the lowest loss rate on inexpensive new cars, their car would lose $10,000 in value in three years. If they cut that depreciation in half, with a gently used car 2-3 year old car, they could save $5,000 every three years. The resulting $1,667 per year, if invested at 7% until age 67, would produce another $60,311.

Just these two changes, eating in more and driving used cars, would add $176,550.00 in savings to their nest egg.

Next, Paying Off Debt is the biggest step Boomers and Gen Xers need to take to save for retirement.

3. Lose the Credit Cards. The interest charged by credit cards averages 19.24%. (4) The average boomer carries $7,041 in credit card debt (5) So let’s get a solid plan to pay them off and invest the annual $1,354 saved on interest payments at 7% until age 67 — adding another $48,971. That is just the interest! Think of the monthly payments that are no longer owed!

Three steps, and they’re at $225,521.

4. Get Rid of the Mortgage. Today’s Boomers are carrying the greatest amount of mortgage debt into their retirement in the history of our country. (5) We have a few ways to save here. If our sample couple has a 7% rate on an average mortgage and refinance to 4.125%, their payments drop about $6,000 per year. If invested over 17 years at 7% they will add another $216,947 to their nest egg. That is just interest savings. We haven’t discussed paying the mortgage off, and investing that former payment!

So, four steps. Small decision changes that can add $442,468.00 in total!

Let’s assume they did all the investing in a traditional IRA and it didn’t grow from age 67 to age 70 1/2. Their required minimum distribution at age 70 1/2 on that amount is $16,697 ($442,468 / 26.5). (f) This amount added to the maximum Social Security payout at age 62, puts their annual income at $43,205 — just $2,795 away from their estimated $46,000 of annual expenses in retirement.

Imagine how much more they would close the gap if they got serious enough to give up $5 lattes, stops at the local pub, took staycations instead of vacations, eliminated unnecessary drives, did serious meal planning, operated only one car — and any number of other cost cutting measures. And paid off their mortgage.

Of course we haven’t spoken about the increased expenses that come with aging. But we also haven’t addressed the myriad of ways our couple could have increased income over these 17 years. So it seems there is money to be saved, earned and invested; and even if they make only half of the adjustments cited above, they’ll be way ahead of the, “…done little-to nothing- to prepare…”, crowd. The reality is that once you give your money to another person, both it and it’s time value are gone forever.

Difficult? Yes! But not compared to waiting! Each month of delay makes it tougher. And doing these things of their own accord is highly preferable to spending 20 to 30 years living in poverty or relying on children or charity or some combination of the three.

So it’s time to get smart about our spending, saving and investing. Let’s get our money back and put it’s time value to work for us instead of the lenders!

So get after it, Boomers (and the rest of us) and let’s do it now! You don’t have to be broke in retirement. If you need help putting a complete plan together to get started and/or make up for lost time, consider hiring a Ramsey Preferred Financial Coach. These hi-octane professionals are loaded with information, tools, training and strategies to help you.

Eliminate debt. Build wealth. Gain financial speed going uphill.

Mitch and Cheryl Ekstrom are Ramsey Preferred Coaches and Financial Peace University Coordinators. They lead financial wellness courses to help people of all generations get debt free and save for retirement. Mitch and Cheryl turned their own finances around 10 years ago  and have witnessed first hand the financial knowledge now pass to five generations. They celebrated their 41st anniversary in December and their first great-grandbaby is on the way; due July 7th. Mitch spent more than 30 years of active duty in the U.S. Coast Guard and is now an IT professional on the largest financial system of its kind in the world. Cheryl manages money for the Physics Department at the University of Maryland. Prior to that, she managed multiple bank branches. They can be reached at:

Mitch and Cheryl Ekstrom, Dollar$ense, LLC, 301-466-7194, mecaekstrom@aim.com 

(1) https://www.fool.com/retirement/2018/10/21/heres-the-maximum-social-security-benefit-in-2019.aspx

(2) Bureau of Labor Statistics as cited by https://finance.zacks.com/average-cost-retirement-4951.html

(3) https://www.finance101.com/new-cars-lose-value/

(4) https://wallethub.com/edu/cc/average-credit-card-interest-rate/50841/

(5) The Stanford Center on Longevity report, Seeing Our Way to Financial Security in the Age of Increased Longevity, points to an increase in mortgage debt among older homeowners as a concern, noting that in 2012, one-third of homeowners over 65 were still paying off a mortgage – up from less than a quarter of homeowners in 1998. And, the amount owed on a mortgage has nearly doubled from $44,000 to $82,000 (as cited in https://www.housingwire.com/articles/47364-stanford-boomersare-entering-retirement-with-less-savings-greater-mortgage-debt).

(6) https://www.irs.gov/publications/p590b 

 

We are in spring! As we make the transition from winter into the new season, I want to invite you to take on a personal goal to find and save as much money as you can in April. Think of it as the “grown up” Easter Egg Hunt. We all tend to have several places we spend money without really counting the cost. Once we really pay attention to our money and write down where it goes often we are surprised on how much “runs away” after the bills are paid. So, for the savings challenge, there are three basic steps that if you commit to for 30 days, you will surprise yourself by how much you get to keep in your pocket.

Step One: Make a grocery budget and a list. Then take cash and leave the debit card at home

This can seem very scary if you don’t normally give yourself a budget. We start at the grocery store because those guys are the GREATEST marketers and woo money away from us on a consistent basis with “Red Hot Buys” or those end caps with items on sale that aren’t on the list. Even if you use the item on sale, if you aren’t out, and it isn’t on the list, you will pick it up later. Save that $2.99 now. Do that for three items, and you have saved just about nine bucks. Skip the sale items you don’t need and watch the savings grow!

Another tip: When you shop the sales and the “buy one, get one free” (BOGO), the bottom of the receipt will indicate what you have saved. That is money you would have spent if you had not been a super shopper. Transfer that amount to savings for additional motivation.

Step Two: Give yourself a weekly budget for gas, lunches, kiddo, etc., and withdraw exactly that amount of cash once a week. Again, leave the debit at home”

If you know your family has a drive through dinner on Wednesday between sports and scouts, budget for it and pay cash. You will not be as tempted to add on an item or “up-size” anything when you order. And if you don’t have the debit card with you and make a commitment to stick to your budget of cash for that one week, you are likely to be more aware when you must give up your paper money, and not overspend. Even better? The rest of your money stays in the bank!

Step Three: Save your change. When you are out spending only cash, you will get change as you purchase stuff. Save your change for the month.

I have a few mugs around the house to collect change. One is by the front door, so you take the keys out and see the mug, you put the change in there. The one that actually gets the most coin is on the washer (right?). Once a week, collect the mugs and empty them into a centralized place, perhaps a jar, or a piggy bank. At the end of the month, count the booty.

If you are already doing the steps above to your money, here are a few additional tips that you may try for 30 days and get in to the savings challenge as well!

Challenge yourself to save a specific amount each week

Mike and I try to squeeze at least $8.00 off the budget each week, just on various things. Seems silly, but when we are successful, we are saving a little over $30.00/month, $360.00/year. We aren’t always able to do it, but we have a goal for that money.

Withdraw your cash for envelopes only once a week, instead of per paycheck

Withdrawing money only once a week means more stays in the bank, and if we have money left over from the previous week, we can take out less. Also, this ensures we don’t keep a lot of cash around for temptation. If it’s in the bank, we are less likely to use it mindlessly!

Save your singles

The next step after saving your change is to save your singles. Mike will break a five before he gives up his dollar. It adds up! Doing that each week for the month of April may accelerate your savings!

Calculate your savings weekly to really see the impact of implementing a few changes this month. Every dime you save is a win. No amount too big or too small. I’m in. If you want to see how we are doing, and let me know what YOU have saved, just like my Facebook page: dawnkennedylaw. Game on!!!

In many states, the driver’s license and car registration expire on your birthday. The not so gentle reminder that you are a year older, and they want money. When you stop and really think about it, there are probably a few things that are renewed annually. My Microsoft 365 for example, some insurance types, etc. These are not necessarily discretionary items- many of us need computer programs and certain insurances to work and protect our property. So, because I am a nerd, I started to think about the annual fees we pay, and when they are due.

Lawyering bar fees and practice related fees aside (which are also annual) our family pays roughly $468.00 a year for various things. Our computer programs, including virus and malware stuff, state registration renewal on two vehicles, and yes, I have Amazon Prime (I can explain, but I don’t want to). The due dates are sprinkled throughout the year, with some due in November, March, July… you get the idea. Since we know these fees are coming every year, we should plan for them. Lots of people plan for Christmas, birthdays, holidays and may save a bit aside, but not for our expected, routine, boring annual commitments.

If we round up our annual commitments to $500.00 a year, and divide that by twelve, I have to save roughly $42.00 a month to cover these fees. If I receive 26 paychecks a year (paid bi-weekly) I have to save about $19.25 each payday to meet our commitments. This is the basic idea of a “sinking fund,” aptly named because businesses deposit money into these accounts to “sink the debt” (fun fact)**.

Placing the estimated amount of money into a “holding” type account or reserving them separately in your checking account will allow you to have the funds available when the payments are due. Here are a few things to consider when you decide to start a sinking fund, and save a little each payday for your expected annual expenses:

1. Make sure IF you open a separate CHECKING account at the bank, you have a FREE account. Service fees will eat up what you put aside and cause you to go a bit backwards. I recommend a small(ish) regional bank or credit union for these accounts.

2. Do NOT open a SAVINGS type account if you will make frequent withdrawals to pay these bills as they come due. “Regulation D” is a federal rule that limits the amount to free transfers or withdrawals to six, afterward, you can be charged a fee for each additional .

3. Have that baby emergency fund,$500-$1000.00 saved, BEFORE you start a sinking fund. Those pesky little emergencies, such as the need to buy a tire or repair a leaking faucet, can quickly eat up the money you allocated for other expenses.

4. In the beginning, you may have a bit of overlap with what’s due and what is saved, so you may have to pay a bit more and continue saving. I know if you are living paycheck to paycheck this doesn’t always allow much room, but if you don’t start soon enough before the next expense, you may have to stretch. Example: You have $85.00 due in three months. You typically put away $21.00/ month. In three months, you have $63.00 saved, but are $21.00 short. Pay the $85.00, but still try to put away the $21.00 so you are on track for the next expense due.

It’s so easy to get frustrated we forget when the annual bills come due, and of course they still come due. Consider the sinking fund as a way to put a little away each check to cover what you will need. The stress is really reduced when the amount you need for an expected expense isn’t squeezed 100% from the same paycheck.

**And for all of you bond asset types, yes, there is a sinking fund term meaning to pay a trustee an amount to retire bond debts before they come due… though most of us have no idea what that even means. I just don’t want angry email.

 

This post is primarily for rising seniors and their parents. First and foremost, congratulations, you are almost done! This is that big year with lots to do and lots to plan. This is THAT year of Senior Prom, Yearbook quote, and ditch day (but not by YOU of course.) You have worked hard, and graduation is right around the corner. With school starting again in a few, it’s getting real. This fall you will likely start the application process for your next step. But before you race off to the exotic out of state private school, I want to talk a moment about the one thing often overlooked at this time in your life: College is a business decision.

Every investment requires thoughtful consideration, and education is an investment. With the student loan debt in America approaching $1.5 Trillion, and graduates being saddled with college debts as long as 25 years, your selection should take some real cost-benefit examination. A quality education does not only come from the expensive private schools. I hear all about the “College Experience” students “should” have,however, student loan debt is currently being blamed for 1 in 8 divorces in the United States. Turns out high student loan debt gets in the way of buying cars, homes, and starting families.

Know the Cost of Attendance Vs the Cost of Tuition (per Credit Hour)

The high education figures we all see thrown around in the news are typically the amounts published in the estimated Cost of Attendance. Each school publishes the cost estimate per year for parents and students, but primarily because, “This estimation may also be used by financial aid offices and loan companies to evaluate how much money they should loan a prospective student based on how much money they will actually need to attend. Each year, the average cost of attendance typically increases.” The cost of attendance estimates room and board, fees, transportation, tuition, and books and materials.

The actual cost of your education, the Cost of Tuition, can be determined by looking at the cost per credit hour, which is a very different number. Published in an article by Student Loan Hero last January, here are the current national averages of costs per credit hour:

• Four-year, public: $324.70
• Two-year, public: $135.09
• Less than two years, public: $281.17
• Four Year Private: $1039.00

Keep in mind, these are the national average, and your state or private school credit hour cost may be higher or lower. But let’s do a little math here. A four-year bachelor’s degree is around 120 hours or so. A four-year public school at $324.70 is about $38,964.00 for all four years. That’s under $10,000.00 per year. Compare that to the four-year private school average, the same 120 hours will run approximately $124,680.00. Before you buy a book, get a sandwich, or go to your science lab. In many parts of the country, that is the cost of a starter home. Still, $10,000 a year for a four-year public school is a lot of money.

Another option is to get your pre-requisites, such as English, Social Sciences, Western Civ and Math courses done at a two-year college. Let’s math again. If you complete 60 hours at Community college, you’ll pay an average of $135.09 a credit and $8,105.40 total. A little over $4,000.00 a year, and a savings of 60% off the four-year public university option. For many families, this is a wise decision.

Even more wise, is to “cash flow” or pay for tuition in cash each semester. With a full-load averaging 15-16 credits, each semester would cost about $2,161.44. Add books and fees, and you are still probably coming in at about $2,800.00 a semester or $5,600.00 a year. If you start working this fall, you need to save about $467.00 a month to fund your first full year at a two-year public school.

So, Why Cash?

Using Loans increases that cost per credit once interest is added! Looking again at the cost per credit hour, each credit costs more, when you take out a loan to pay for it. As of the article published in January 2018, the Department of Education has interest on federal Direct Loans at 3.76% APR. That is an effective rate of about 20 percent over 10 years. Adding that interest to each credit changes the cost:

• A two-year public-school credit at $135.09 would cost $162 over 10 years ($27 in interest)
• A four-year public-school credit at $324.70 would cost $390 over 10 years ($65 in interest)

Mathing again, the 60 hours at Community College can grow to $9,720.00. An increase of $1,614.60, then interest is also added on the books and fees if you have a loan for each semester to cover those as well! Think how great it would be to finish college without debt. To make that investment in yourself in cash, it takes planning. A combination of work and saving, living cheaply or at home, and getting any shortfall through scholarships (try My Scholly) should all be part of your smart education investment. Enjoy your senior year!

 

The federal government stopped mailing annual Social Security statements to everyone back in 2011. They are still available, but you have to use the internet.  I don’t mention this earnings statement because I believe the Social Security program is solvent, or have a prediction whether it will be fixed, or even necessarily believe any “projected benefits” will ever be received by the time I am ready to retire. What the statement will tell you is how much you have earned each year, as reported to the Social Security Administration, since you started working and reporting income to the SSA.

We can go back (waaaay back) to 1990 and look at the average net income earned by average Americans over the last 26 years. The SSA reports $20,172.11 in 1990 and $46,640.94 in 2016. Meaning that for average Americans, we take home more than double each year now than we did in 1990. On the bottom of the SSA statement there is a number- your total earnings to date. In other words what you have earned over your working life.

If you worked and earned an average income from 1990-1999 you would have brought home about $209,056.00. From 2000-2009 about $351,192.00. And from 2010-2016 about $304,037.00.  So, if we added the average net income earned and taken home by average Americans from 1990-2016, we get a mind blowing $864,289.00.  Well over three quarters of a million dollars. And many people earn well above that annual average.

So, what do we KEEP? According to the latest statistics? Not much. Some of us have a 401k with auto withdrawal and a match at work. But, around 20% of those with a 401k have loans against the accounts taken to cover financial emergencies!  Savings accounts are in bad shape as well, in 2017 about 57% of Americans have less than $1,000.00 in savings.

Where is it all going? To service debt. At various interest rates, for various reasons. Average Americans are paying their dollars to cars, homes, student loans, credit cards and personal loans. Excluding a mortgage payment, we send creditors a whopping $1181.00 per MONTH or $14,172.00 a year. Many Americans send much more than that to others.

It’s eye-opening, or at least it was for us. Debt is taking our income, payments that we can do other things with. Like save. Or pay cash for cool things. Or support organizations we feel strongly about. If you are ready to take back your income, you can start anytime. Even if you are still paying oodles of interest and have $1.87 in an IRA right now, its never too late to start. Its never too late to grab a hold of your hard-earned income with a plan to take back your earnings from the current situation.

If your income is flying away the moment after payday, it’s time to make it behave. Make a monthly budget and write down where each dollar goes. Give it a job. Be the smart boss over your hard-working money. Your money likes to have a job. “This month you little dollar, yes YOU, will pay the water bill! YAY!”. If you want an easy to use, free online budgeting tool, I recommend Every Dollar.  Money stress really begins when you run out of dollars before you run out of jobs for them to do. Run out of jobs and reassign your money where you want it to work!

graphic from www.indianapublicmedia.org