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  • Archive for February, 2016

    Be Smart When Giving Money to Kids

    Thursday, February 25th, 2016

    A cracked egg with money flying out the window.

     

    New research suggests that younger generations are increasingly relying on their parents and grandparents financially, and while it might seem like instinct to open up your wallet to your children or grandchildren, doing so without paying attention to how it might affect your retirement can cause financial trouble down the road.

    A recent study by Ameriprise Financial of adults in the baby boomer generation (in other words, those who are likely to have recently retired or are about to) found that a large majority (93%) provided financial support to their children.  This could include things like helping them pay for college (71%) or helping them buy a car (53%), but many also admit to helping fund unnecessary luxuries.

    While it may feel selfish to not share your money with your kids and grandkids, keep in mind the many years you worked to save for your retirement. It is important to be smart and cautious about how much you give, so that your generosity doesn’t affect your ability to live the lifestyle you need to be happy and healthy during retirement.

    Be Selective About How You Give

    There’s a big difference between dipping into your retirement savings to pay your son or daughter’s medical bills versus funding their move to a fancier new apartment.  Ask yourself if the money will go towards something they really need and if will help them be financially independent in the future. If the answer to both of those questions is no, it is probably best to not provide a monetary handout. The fact that your grandchild wants the coolest new video game isn’t enough—a new version will be out in a year.

    If you determine that the need is big enough to dip into your retirement savings, make sure that the gift will not push you above your safe withdrawal rate—defined by Kiplinger’s as “the annual spending amount that gives your portfolio good odds of lasting a lifetime”. Think about what you’re willing to give up in order to write that check. When something is framed not as what you are giving, but rather as what you are giving up, it is less likely that it will seem worth it.

    It is also a good idea to make direct payments whenever possible. Rather than writing a check that is meant to be used for school, pay the school directly. Making direct payments prevents the possibility that your child or grandchild will misuse the funds. Furthermore, if you pay medical or tuition bills directly, the money is not considered a taxable gift by the IRS.

    If you decide to offer your child a loan, create a promissory note, set a strict repayment schedule, and charge an interest rate. If you do not do these things, the IRS might consider the loan a gift, and determine that it has to be taxed as such.

    Find Ways to Help Beyond the Checkbook

    If you take an honest look at your finances and decide that you can’t give monetarily, think about how else you can help. There are many alternatives beyond writing a check. If your kid or grandkid is having trouble paying rent, offer to have them live at home (but still pay their share of the utilities). Offer to babysit while they work extra shifts at work, or help them in their job search. If managing money is an issue, help your kids or grandkids create a budget and find ways to adjust their spending.  This will not only help them in the short-term but you will also be helping them develop an important life skill.

    The internet is filled with stories of parents who gave too much money to their kids and ended up bankrupt, struggling or having to sell their home during retirement. An outcome like that is not beneficial to anyone, and a little monetary gift in the present isn’t worth the long-term hit it can cause to retirement security. All to say: be smart and careful about how you give.

    Taking the First Step towards a Secure Financial Future

    Monday, February 1st, 2016

    CalculatorNow that the confetti has settled from New Year’s Eve celebrations, tax season is upon us, and you may have noticed a familiar document in your mailbox: your W2s.  Although preparing taxes can be an extra strain on what is an already busy schedule, it also presents an annual opportunity to evaluate your finances and think about long-term financial planning.

    Unlike not paying your taxes, nobody will come after you if you’re not planning for retirement—but that doesn’t make it any less essential. Failing to think about how you will continue to finance your lifestyle once you are no longer working can spell disaster in the final stages of life. The I’ll worry about it later attitude can mean putting off planning until it is too late.

    Facing retirement planning head-on can be daunting, but taking the process step-by-step can ease the intimidation factor. The first step in long-term financial planning is figuring out, based on your current financial picture, the difference between your expected retirement income and need. If this figure is calculated early, there will be plenty of time to take steps to close that gap. Research by EBRI shows that those who take the time to calculate that number- regardless of its size- feel more confident in their ability to afford a comfortable retirement.

    If you are married or have a partner, do this exercise together. However, women are likely to live longer than their spousesso keep in mind how your retirement income might change if your spouse passes away.

    The first step in calculating your expected retirement gap is totaling your expected sources of retirement income. There are usually three sources of retirement income, often referred to as the three legged stool: Social Security, employer-provided pensions or retirement plans, and personal savings and investments.

              1. Social Security: Social Security is an important source of retirement income, especially for women. To find out your Social Security benefit, sign up for an account at www.ssa.gov/myaccount.

              2. Pensions and Retirement Plans: Traditional employer-provided pension plans offer you a set amount each month after your retirement based on your salary and how many years you worked. 401(k) and 403(b)-type plans allow you to invest money in a fund that you will have access to when you retire.

              3. Personal Savings and Investments: Personal savings and investments may be spread throughout a number of accounts. This could include your home, however, since it is not a liquid asset, be careful how you calculate it, and consider whether you plan to rent or sell it after retirement.

    Refer to page 11 of WISER’s Financial Steps for Caregivers booklet for a worksheet that will help you add up your sources of retirement income.

    The second step in calculating your expected retirement gap is figuring out how much you will need in retirement. Many experts recommend expecting to need at least 85% of your pre-tax income in order to maintain your current living standard. WISER instead recommends 100% to take into account the longer life spans of women and to safeguard for unexpected healthcare costs.

    Calculate the difference between the numbers you found in steps one and two to find the gap between your retirement income and need. The good news is there are many easy-to-use online calculators that can help you with these steps. Check out the calculators tab at www.retireonyourterms.org for a variety of retirement planning tools. Once you have that number, you can begin to take steps to close the gap, such as prioritizing investing and finding more ways to save.

    Whether you feel you are over-prepared or woefully unprepared for retirement, acknowledging the current state of your finances is a crucial first step towards achieving security during your later years of life.

     

    WISER

    About Us

    WISER is a nonprofit organization that works to help women, educators and policymakers understand the important issues surrounding women's retirement income. WISER creates a variety of consumer publications including fact sheets, booklets and a quarterly newsletter that explain in easy-to-understand language the complex issues surrounding Social Security, divorce, pay equity, pensions, savings and investments, banking, home-ownership, long-term care and disability insurance.

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