Financially Get a Jump Start on 2017

office pictures may 2012 002The beginning of a new year is a good time to evaluate your finances and take steps to improve your financial situation.  Start by reviewing your living expenses and comparing them to your income.  Are you living within your means and spending money in areas that are important to you?  Look for opportunities to prioritize your spending where you will get the most benefit and joy.

This is also a good time to calculate your net worth to see if it has increased over the previous year and evaluate progress toward your goals.  To calculate your net worth, add up the value of all of your assets including real estate, bank accounts, vehicles and investment accounts and subtract all outstanding debts including mortgages, credit card balances, car loans and student loans.

With a better understanding of your net worth and cash flow you are ready to set some financial goals.  Start with the low hanging fruit including paying off outstanding credit card balances and establishing an emergency fund.  Maintain an emergency fund equal to at least three months of expenses.   Once your credit cards are paid off you may want to focus on paying off other high interest debt.

After paying off debt and creating an emergency fund, it’s advisable to get in the habit of saving at least 10% of your income.   Saving 20% may be a better goal if you are running behind on saving for retirement.

Take advantage of opportunities to defer taxes by contributing to your company’s 401k.  If you are self- employed create a retirement plan or contribute to an IRA.  Take advantage of any match that your employer may provide for contributing to your retirement plan.  If you are already making retirement contributions, evaluate your ability to increase your contributions.  If you have recently turned 50 you may want to increase your contribution to take advantage catch-up provisions that raise the contribution limits for individuals over 50.

As the new year begins you also may want to evaluate your career situation.  Saving and investing is just part of the equation, your financial security is largely dependent on career choices.  Look for opportunities to enhance your career that may result in a higher salary or improved job satisfaction.  It may be time to ask for a raise or a promotion or to explore opportunities in a new field.  Consider taking some classes to sharpen your skills for your current job or to prepare you for a new more exciting career.

You may have additional goals such as buying a new home, contributing to your children’s college fund, remodeling your house, or taking a big vacation.  Strategically think about your priorities and what will bring you satisfaction.  Start the year with intention, identify some impactful financial goals and create a plan.  Formulate an action plan with specific steps to help you meet your goals.

Working Part Time in Retirement Becoming the Norm

Jane Young, CFP, EA

Jane Young, CFP, EA

With the possibility of living another 20 to 30 years in retirement, many baby boomers are considering part time work in retirement.  According to a report by the Transamerica Center for Retirement studies, 82% of people in their 60’s either expect to work past 65, already are doing so or don’t plan to retire.   Likewise, a 2013 Gallop poll found that 61% of people currently employed said they plan to work part time in retirement.  While many seek part time work for financial reasons, working in retirement can also provide tremendous psychological and health benefits.

With the loss of traditional pension benefits many retirees need an extra cushion to cover retirement expenses.   Working part time can provide many financial benefits including the reduction of distributions from your retirement account.  Part time work can also help you avoid drawing from your portfolio when the market is down and the additional income can make you more comfortable increasing the risk in your portfolio, with the potential for higher returns.   Another benefit of working part time is the opportunity to delay Social Security benefits till age 70, when you can earn a larger benefit.  Additionally, part time earnings can be used to improve your future cash flow by paying off your mortgage, credit card debt, vehicle loans, and proactively address household maintenance and repairs.

Aside from the financial benefits, numerous studies have found that people who work in retirement are happier and healthier.  Part time work can give you a sense of purpose, identity and relevance.   It can also replace the social interaction that is lost when you retire.  A 2009 study in the Journal of occupational Health Psychology found that those who worked in retirement experienced better health.   Additionally, a study reported by the American Psychological Association in 2014 found that working in retirement can delay cognitive deterioration.

If you are considering part time work during retirement, start developing a plan before leaving your current position.  Leverage and expand your existing network while you are still working.   Your current employer may be interested in retaining you on a part time basis or may be aware of other opportunities for you.

Think of creative ways to utilize your skills, experience and passion to find or create a job that you will enjoy.  You may want to start your own business doing free-lance work or consulting.  Consider turning your hobbies or interests into a business such as tutoring, handyman services, party planning, programming or working for a golf course.  If you have management experience you may be able to fill a gap as a temporary executive while an organization is going through a transition.

Keep an open mind, be flexible and stay connected with your network.  Here are a few sites that can be helpful in finding part time work; Retirementjobs.com, Flexjobs.com and Coolworks.com.  Please use extreme caution when using internet job sites; many are scams that look legitimate.

Managing a Sudden Windfall

Jane Young, CFP, EA

Jane Young, CFP, EA

If you are fortunate enough to receive a significant windfall give yourself some time before making any major decisions.   A sudden influx of cash from an inheritance, winning the lottery, life insurance or the sale of a business can cause a major disruption in your life.    Over 50% of all windfalls are lost in a short period of time.  NBC news reported that more than 70% of all lottery winners exhausted their fortunes within 3 years.   You need some time to emotionally adjust to your situation and to create a plan.

You may experience a variety of new emotions and it’s important to avoid making decisions for the wrong reasons.  Some common emotions include guilt, loss of identity, isolation, anxiety, unworthiness, fear, intimidation and a lack of confidence.  It’s crucial to recognize and deal with these emotions before making big spending decisions that may hamper your long term financial security.  You also may feel pressure from friends and family.  Stand your ground and take the time needed to develop a well thought out plan.

You also want to carefully select a team of trusted advisors to help manage your windfall.  Most people will need a Certified Financial Planner, a Certified Public Accountant and an Estate Planning Attorney.  It’s essential to develop a financial plan, fully understand the tax implications of your windfall and put a new estate plan in place.

Initially your financial plan should include establishing an emergency fund equal to about one year of expenses, paying off your high interest debt, and making sure your new found wealth is adequately protected.  A significant windfall will probably necessitate the purchase of more liability insurance.  Additionally, you should address any health concerns that you or your immediate family may have been neglecting.  Also consider reducing your overhead by purchasing a home or paying off your mortgage.  This is also a good time to take care of any maintenance and repairs that you have been putting off.

Once your immediate concerns are addressed, think about the future.  If you were unable to cover your living expenses prior to the windfall, make a plan to cover your monthly cash flow needs.  Next develop a retirement plan to make sure your expenses in retirement are covered.  Consider saving for your children’s college and setting aside money for major necessary expenditures such as vehicles and appliances.   If you are in an unrewarding career, consider going back to school to transition into something more fulfilling.

Once you have addressed all of your current and future financial needs feel free to spend on some discretionary items.  You may want to help a friend or family member who is in need, make a charitable contribution, start a business, or plan some vacations.   At this point you can spend some money on having fun.  Unfortunately too many people start with fun and quickly spend through their entire fortune.