The shifting retirement burden

KJ: Long gone are the days of our grandparents where they worked for a company for 30 years and received a pension for 20+ years in retirement. The chart from JP Morgan below shows the change in landscape of retirement options for employees. Basically a pension (that provides a regular income stream) is represented by the “Defined Benefit” line, and the 401(k)/403(b) plans we have all come to learn to love would represent the “Defined Contribution” line.

JP Morgan Defined Benefit Vs. Defined Contribution Historical Chart

Why the shift?
The short answer is: it’s less risky and less expensive for companies to offer defined contribution plans over defined benefit plans. More and more, companies have been shifting away from their open-ended liability of pensions to a more defined liability offered by a defined contribution plan. In layman’s terms, defined benefit plans require the company to be responsible if there is a shortfall in contributions and/or investment returns over time. With a defined contribution plan, however, what the company contributes to your account is the extent of their promise, so any future earnings, growth, and accumulation to provide for your retirement is up to you. Without getting into all of the differences between the two, the bottom line is the employee is more and more responsible for making sure their own retirement savings is sufficient to provide for their retirement income.

You’re responsible for your destiny
Now more than ever it is more important to rely on yourself and your savings to generate income for retirement. With Social Security in question too, if you don’t build it yourself, you may not have much (if anything) to fall back on. Kind of scary, right? I think it’s both scary and empowering at the same time because it allows you to focus on what you can control yourself and make adjustments as needed instead of just hoping someone else can or will take care of it. Chances are that professional advice in navigating this more complex world will be ever-more important, so don’t feel bad if you can’t handle it yourself! Seek the advice of a professional when needed.

AJ: Our generation has an incredible opportunity to shift perspective on the future by relying only on our own work ethic and ability to intelligently leverage the experience and knowledge of financial professionals to define our individual well-being. Proactively planning for your future, regardless of income or profession, ensures that the person most interested in your long-term success (you) is protected.

KJ: While it’s definitely a shift from the recent past, it’s a more empowering future to know your decisions and actions today will directly affect what you hope to accomplish in tomorrow’s world – however distant that tomorrow may be!

    How do you feel about this shift in responsibilities?
    Are you prepared to make the decisions you need to stay on track?
    Tell us how you make it work.

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How do my savings compare?

KJ: Before the Great Recession, the savings rate in the U.S. was at all-time lows. Then, just years after the recession started, savings rates had crept up to a more comfortable level. Now that things seem to be getting better in the economy, this number has started to fall back down to dangerous levels. See the JP Morgan chart below that outlines the savings rate of the average American. Pretty scary, huh?

Historical Savings Rate JPMorgan Chart

With savings rates at such low levels, we need to figure out ways to bring it back up. The U.S. has been in a multi-decade long period where our savings rates have continued to shrink – especially compared to the levels of the 60′s and 70′s. Is it higher energy costs, easier access to high interest credit cards and loans, higher education costs, food costs, housing prices, or a combination of all of those that have caused this trend? Regardless of the cause of the trend, we all need to be a little better about how to break away from the trend and get on a sustainable path. Let’s get back to the basics of separating our needs from our wants. Maybe we don’t need two cars (and can survive as a one car family), can scale back on the dining out costs, and can get rid of the expensive TV (not quite able to break the first or last tie in our household!).

AJ: There seems to be an increased level of attention being paid to the haves and the have nots based on the great political debates currently brewing. Regardless of your political affiliation, the numbers in the above chart are pretty startling. Personally I’m concerned about the decreased level of focus individuals are placing on their own well-being and future planning with regards to their independent financial stability. Take time to analyze where you and your family stand with your own savings. Identify goals and obstacles and create a realistic plan to ensure you stay focused. We’re ultimately all responsible for the role we play in the future.

    What are you doing to keep your savings up?
    Are you doing anything to beat the odds?
    Tell us how you stay on track.

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Why asset rich is not the same as cash flow rich

Net Worth and Goals MemeKJ: There is a huge difference between someone being asset rich/poor and cash flow rich/poor. “How can this be?” you might say. Shouldn’t everyone who has $5,000,000 in assets be cash flow rich and be able to do what they want? The answer may surprise you. While the figures below would put these fictitious people in the 1%, it may not be so cozy for one of these families, and an example outlining the two concepts may help put it in perspective.

Family scenario one details:

    Two people, age 65, recently retired
    Net worth of $5,000,000
    Home value of $2,000,000 with a loan of $500,000
    Second home value of $750,000 with a loan of $250,000
    Retirement accounts of $2,000,000
    Regular investment savings of $1,000,000 (with 50% in private equity)
    No other loans
    $50,000 per year in total household inflows
    Living expenses of $175,000 per year

Family scenario two details:

    Two people, age 65, recently retired
    Net worth of $5,000,000
    Home value of $500,000 with no loan
    Second home value of $500,000 with no loan
    Retirement accounts of $2,000,000
    Regular investment savings of $2,000,000
    $50,000 per year in total household inflows
    Living expenses of $175,000 per year

Some notable differences
Can you see how different these two scenarios may be? Their net worth is the same, their cash inflows are the same, and their living expenses are the same. However, the first couple has a significant amount of their net worth tied up in their multiple houses (not to mention, that’s probably a significant contributing factor to their living expenses with the additional cost for upkeep, taxes, insurance, etc.). In fact, the first couple may feel quite constrained with their living expenses, but the second family may have much more flexibility for dining out at fancy restaurants, traveling to exotic locations, donating more to charity, gifting to family members, etc. If something happens in the market and their investments decline in value, they can more easily cut back on those discretionary expenses, whereas the first couple’s expenses are likely to be much less flexible at precisely the time where they may need it to be so.

Learn the roles of each component of your net worth
Part of building your savings and net worth over time is to understand the different components of your net worth. Some investments (often dubbed alternative strategies, hedge funds, private equity) may not be readily accessible if/when you need the cash, but additionally, your home may not be able to be sold quickly if you need the cash equity (if it even exists like millions of homeowners saw coming out of 2008). If you don’t have the wherewithal to know where to start, find someone who does!

All net worths are not created equal
It’s not all about the number next to your net worth that’s imortant, but it’s equally important to understand the composition of your net worth. Can you readily access the money if you need it or would it be cost prohibitive? If the economy is going through a slump, would that cause additional pressure on your net worth at the worst of times?

What should I do?
Much like it’s important to not put all of your eggs in one basket for investing, it’s equally important to do that for your overall financial well-being across different account types. Look to figure out what you and your family need to build each “bucket” of (1) readily accessible savings/CDs/money market accounts, (2) regular investment accounts, (3) retirement accounts, (4) use assets – home, cars, etc., and (5) HSAs, FSAs or other medical-related accounts. Research how you can access the funds and what flexibility (or lack-thereof) you have with the groups of assets, and play each one to its strengths and purposes in life. Build your personal balance sheet statement regularly and your long-term goals will much appreciate it!

    Are you “asset rich” or “asset poor”?
    Are you “cash flow rich” or “cash flow poor”?
    Tell us about what you can do to improve your situation.

Why "asset rich" is not the same as "cash flow" rich is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

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Same sex marriage and new planning considerations

Same Sex Marriage Equality Sign.jpgKJ: With the repeal of the Defense of Marriage Act (DOMA) and the recent rulings from the IRS, the rights of same-sex couples have changed dramatically, and there are many financial planning implications for the sweeping changes for taxes, long-term planning, gifting, and retirement. Here’s what you need to know about the recent changes and how it may impact your life or the lives of loved ones:

Income tax implications
Married, same-sex couples are now treated as married for federal income tax purposes. Also, looking forward, you are required to either file as married filing jointly (MFJ) or married filing separately (MFS). Typically, it’s better for a married couple to file as MFJ, but please seek professional tax advice to explore the options further. One thing many same-sex married couples may see is that their income taxes could actually increase given that a number of deductions, phase-outs, etc. for married individuals are not simply double the rates of single filers. An additional part of the ruling from the IRS stipulates that married same-sex couples are actually allowed to refile their tax returns going back three years from the date of their tax return filing. This additional feature isn’t a requirement, but if the calculations turn out to be income tax beneficial, then you can file and claim the tax refunds.

Gift and estate tax implications
When two U.S. individuals are married, they can gift an unlimited amount of funds to the other spouse without incurring gift tax consequences. This did not used to be true for same-sex couples, so they had to use their annual gift exclusion (the amount each person can give each other person per year without gift tax consequences – $14,000 for 2013) and their lifetime exemption. Now, with the IRS changes, same-sex couples can enjoy the same treatment from both gift and estate tax systems as other married couples.

Your state of residency doesn’t matter
The IRS recently announced that in order to be considered married for income tax purposes, then you simply have to have been married in a state that recognizes the marriage – regardless if you reside in a state that does not recognize the marriage.

Other considerations
More and more companies are allowing for medical benefits to cover domestic partnerships, and previously, the premiums paid on behalf of a partner were taxed as income to that individual. With the IRS’s ruling, this is no longer the case, and it may help reduce the income tax burden of covering a same-sex partner through employer benefit programs. Additionally, same-sex couples can now qualify as married with respect to benefits at an employer.

What hasn’t been addressed
The IRS didn’t address anything about cohabitation arrangements or civil unions, so those arrangements remain unchanged. The recent IRS ruling only applies to married couples.

There is still a lot to be addressed with other Federal programs like Social Security, but significant changes have been made, and the IRS rulings have paved the way for other benefits and rights to be extended to same-sex married couples. With spousal benefits for Social Security, Medicare, etc. potentially opening up to same-sex married couples in the future, the implications for your benefit amounts could be dramatically different. Consider consulting a tax advisor and financial advisor to explore how the recent sweeping changes may impact you.

    Do the recent rulings impact your life?
    Does this impact the lives of any of your loved ones?
    Tell us about what this means for you.

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Why grocery ads are a budget’s best friend

AJ & KJ: Congratulations to our winner of the Cardpool gift card giveaway! It’s great to give back to those who have given so much of themselves. We hope you enjoy the gift card and get some great use out of it. Enjoy the site…we certainly have!

Pick the grocery shopper
Tom Thumb Grocery Ad.jpgAJ: we’ve mentioned previously that groceries and meals are squarely within my wheel house. As responsible and reasonable as Kirby is, the grocery store is no place for him. He’s swayed by large quantities of items we rarely eat that live in our pantry for months on end even though he means well and truly does intend to eat all 96 pop tarts! Personally I’m an efficiency grocery shopper. My lists are organized by rows in my store and are outlined for specific dates to coincide with sales ads.

Create a grocery list
My grocery lists start months prior to my actual grocery shopping. They’re drafted based on the meal plans I create along with basics we regularly purchase (onions, milk, eggs, toilet paper) and I reference them alongside sales ads for up to a month prior to the week that I will need the items. Many times canned goods, frozen items and meats go on sale at some point within the month I will need them, but were I to wait until the week I needed them, they might be as much as 4 times higher priced.

Utilize store clubs & learn their sale schedules
I belong to two store clubs in addition to Costco and use those discount and coupon opportunities weekly. Most stores issue ads on Wednesdays along with weekend or one day specials. Some weeks this is tedious and somewhat irritating, as you would have to make three trips some weeks in order to get everything you need on the days in which they are actually on sale which is why pre-planning is crucial. One program we utilize frequently is the Tom Thumb “Just 4 U” system. You can find coupons online or via their iPad/iPhone/Droid apps and load them directly to your account. Just be sure to check the receipt when checking out to make sure the coupons were loading properly!

Planning weeks (or months) in advance creates financial flexibility
Beginning to pay attention to your grocery list four weeks in advance might seem absurd, but it actually simplifies our lives especially with regards to unnecessary financial strain. Planning is far less stressful than overspending in my world. Research has allowed Kirby and I to get ahead on our savings month over month which ultimately means we’re contributing to our savings at an increased pace. Plus, time is on our side, so we are saving early to see if we can get on track.

Practice makes perfect
KJ: The more you plan, the better at it you get, and the less time involved in each step. Much like building a budget for the first time, you don’t really know how to plan for what to normally expect let alone how to plan for anything unexpected that comes up. So start planning and create a system. If you find your system is causing you too many headaches than what it fixes, then tweak it a bit until you find your stride.

    What grocery ads do you use regularly?
    Do you plan ahead?
    Tell us how you plan your meals for your family.

Why grocery ads are a budget's best friend is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.