Student loans are often top of mind for many of you in the early stages of a professional career. You’ve made an investment in yourself by getting a great education, and now you’ve got to make enough money to get that monkey off your back. You’ve made a bet on yourself that you’ll get enough return on the investment in your education to repay the loans. The main piece of advice we give most of our clients with student loans is not about numbers. It’s about overcoming the feeling that this debt is very heavy burden. So if you’re in that camp, we have some advice:
Own it – these student loans are your responsibility
Taking out these loans was ultimately your choice, so own it. You DID in fact have other options – you could have gone to a cheaper school, or stretched your education out as you worked your way through. Whatever the case, ultimately it is your signature on the loan form. Take responsibility.
Don’t let student loans...
A retirement plan sponsored by a non-profit
Most people are familiar with the 401k, but what’s a 403b? Basically a 403b is a retirement plan that is sponsored by a 501c3 organization, meaning a not-for-profit employer. A local school board or hospital are good examples. The employee invests in mutual funds or annuity contracts – the only choices available. If annuity contracts are the only investment choice, the plan is likely administered by an insurance company, and can also be known as a TSA, or tax-sheltered annuity.
Money can go into your account from two sources: deferrals from your paycheck (money that you could have taken in cash) and your employer can also make contributions. The employer’s contributions can be discretionary or according to a match formula. Say the employer will offer you 50 cents on the dollar of whatever you contribute, up to 6% of your earnings. That’s a fairly typical formula. We’ve seen some out there more generous, and...
The time value of money is a topic that should be understood by every serious about financial planning. We usually understand the time value of money in two contexts: the growth rate of an investment, and the inflation rate.
To conceptualize this, sketch out a timeline of your life. At the leftmost point is your date of birth. The rightmost point is your date of death. In between, mark your retirement date, and today’s date. If you are not yet retired, then the time value of an investment pertains to you in particular.
Time Value of Money: Investment Growth Rates
Let’s look at investment growth rates. Say you want to project out your IRA balance over the next 10 years, assuming an 8% annual rate of return, compounded monthly. Your current balance is $250,000, and you are depositing $300/month – less than what is permissible by law. I make the following entries on my HP12-C calculator:
Present value: -$250,000
Time (or number of...
In this blog post I want to go just a little bit beyond the basics of traditional IRAs and how they work. I’ve also done a video on the topic, which you can find below.
What are Traditional IRAs?
An IRA is an individual retirement account by definition, with the emphasis on individual. One IRA means one owner, so there can be no joint titling. In order to contribute to an IRA you must have earned income. That is, income from compensation defined as wages, salaries, tips, alimony, and separate maintenance payments. These are all earned income. Income from capital gains, dividends, and interest is not considered earned income by the IRS – they classify it as investment income.
How much can I invest?
Your contribution limit is $5500 per year. If you’re over 50 an additional $1000 catch up contribution is allowed, so that limit is $6500, but you cannot contribute past age 70 ½.
What’s the big deal?
The big deal about traditional IRAs is that you may be able...
Having great investment portfolio returns may not get you to your retirement goals. You could have (in theory) spectacular returns every year for 20 years and still not realize the retirement you want. Do we like strong investment performance? Sure. Should stellar performance be your goal? Not necessarily. Goals-based investing should be the approach. The investor starts from the endpoint and works backward toward today.
What is goals-based investing?
In doing retirement planning, first begin with the lifestyle you want to enjoy. Then figure out how much it’ll cost you. Then evaluate your current investments to see if they’ll do the job. Your portfolio return in this approach becomes the means, not the end. In other words, start with your goals, figure out how much it’s going to cost you, and determine how you should invest to accomplish those goals.
This approach is very different from performance-based investing, where you pick the top performing fund or funds for...
It was a rainy, early Sunday morning. I was at the entrance to the Homestead Air Force Base, approximately 30 miles south of Miami, FL. “I’m meeting with Sergeant L_________” I tell the armed guard at the gate. He motions me to pull over to the side. I get in contact with the Sergeant. She tells me over the phone, “I’m in a blue car. I’ll come out to meet you; look out for my vehicle and follow me onto the base.” Within minutes I see her car and pull out to follow. The armed guard at the gate stares at me and shakes his finger. I hesitate. The next second he laughs to himself and waves me on to proceed onto the base, amused that I took his grave expression seriously.
Visiting Homestead Air Force Base
That is a taste of my first experience at the Homestead Air Force Base last month. I was invited to give three financial planning presentations to military members there, which was an incredible honor. It was an especially amazing experience for...
With this blog post we’d like to share some thoughts with our readers about investment risk tolerance.
Generally, we think about risk as a bad thing – something we want to avoid. “I won’t drive faster and risk a speeding ticket”, and, “No, baby, that dress doesn’t make you look fat,” are two examples of conscious choices made to avoid unpleasant consequences.
The context for risk in this post is investment risk – I put money out there in some type of vehicle, and expect it to be returned to me, and then some. And then some can be interest, dividends, capital gains, and lottery winnings.
The risk return spectrum looks something like this:
Nobody plans for a disability. In our experience, people are more willing to incorporate life insurance into their financial plan than disability insurance. Why is this? Let’s first get into the differences between disability and life insurance.
Disability insurance vs. life insurance
Here are a few key differences between these two types of insurance:
Thinking about David Letterman retiring and all those Top Ten lists. I thought it might be fun to compile one of my own. To wit:
The Top Five Mistakes People Make With Their Money
This is a list compiled after about 20 years of experience. You’ll find a video version just below.
You eat out way too much. This is what your kitchen is for! If you get a sandwich and a coffee in Miami on a daily basis, you’ve spent ($10/day * 20 days) $200 in a month! How about all that fast food? I’m seeing families who spend several hundred dollars each month eating out, when a little planning and Publix time could save much of that money and everyone would be healthier and richer for it.
You don’t have enough life insurance. What happens if you get hit by a bus? Are your existing savings enough for your surviving spouse and children? Term insurance is relatively cheap and easy to obtain. No excuses. See Mistake #5.
You don’t have an emergency...
By early 2015, the amount of outstanding student loan debt in the U.S. exceeded $1.2 trillion. What a staggering number! Tens of millions of young professionals carry significant student debt balances. The payments may be stiff. It can take years to pay off many of these loans. Consequently, other financial priorities get postponed. Commonly we see saving for retirement pushed ahead into the future. Does this describe you?
The good news is, there are federal programs for income-based repayment and even loan forgiveness. Before you get too excited, though: only certain kinds of federal student loans qualify. These include Stafford and Grad PLUS loans. Each year, program participants verify their income and family size. The loan servicer then calculates a new required monthly payment amount. Loan payments go up or down as appropriate. The intent is to assist borrowers in making on-time payments. These payments, however, may not even cover the interest due on the loan. Consequently the...