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Money Makeover – Saving for college and retirement at the same time
October 21, 2007
I had the pleasure to work on a Money Makeover for the Kansas City Star recently. Here’s the article that appeared in the KC Star this morning…
Money Makeover: Couple frets over saving at the same time for their retirement, kids’ college expenses
by Gene Meyer
The Kansas City Star
Steven and Angie Cortez look into the future and see a financial dilemma they want to resolve now.
The couple, who both are educators and not yet 40, theoretically will be eligible to retire when Steven turns 53 and achieves the combination of age and years in service to qualify for Kansas Public Employees Retirement System teachers’ benefits.
That doesn’t seem realistic, the Olathe residents say, because their children, twins Kennedy and Carson, who turn 6 Monday, will still be in college when the milestone arrives.
They don’t mind postponing retirement for a few years. But they are concerned about how best to prepare now to hit two humungous savings targets — college and retirement — so potentially close together.
“We’ve been told that we should max out our Roth IRA savings before we contribute anything to college funds, but I’m not sure that’s the best way to go,” Steven Cortez said.
Neither target is an easy one.
Some rough, back-of-the-envelope calculations based on College Board projections show that the $50,000 it costs to send a student to a public college for four years now may more than double by the time Kennedy and Carson are freshmen. For a private school, the already higher costs will almost double too.
But a financial planner who analyzed the Cortezes’ situation more thoroughly calculates Steven and Angie also need to accumulate $1.97 million in the next two decades to supplement his KPERS and their other projected retirement benefits so he can retire at 60 and live as comfortably as they do now.
“Retirement savings should be your higher priority,” said Kristine McKinley, the certified financial planner from Lee’s Summit who examined the Cortez’s circumstances.
Saving for retirement often is more urgent than saving for college, McKinley said. First, as is the case with the Cortezes, retirement requires more money than college. Second, families have resources such as loans, grants or scholarships to turn to if savings come up short. Retirees have far fewer alternate choices.
But there’s good news too, McKinley told the couple.
Saving more aggressively and more efficiently now for retirement should also provide a potential cushion to help with the college funding if that’s needed.
The keys are Roth IRAs that the Cortezes opened to provide tax-free income when they retire. In a jam, Roth savers also can withdraw money they’ve contributed — but not the investment profits earned — before retirement without incurring penalties, she said. Pulling money out also will trim the account’s potential growth, however, so it shouldn’t be done lightly.
Click here to continue reading…
More Financial Aid for College Students on the Way?
September 6, 2007
According to MarketWatch.com, President Bush plans on signing legislation that would increase college financial aid by about $20 billion over the next five years.
The new bill would reduce the interest rate on need-based student loans to 3.4% (currently 6.8%) over the next four years.
It would also increase the Pell grant maximum to $5,400 over the next five years.
Other provisions in the bill will help borrowers who are having trouble meeting payments due to economic hardships.
For more details, click here.
Why You Need Bond Funds in Your Portfolio
July 22, 2007
With the stock market doing so well, you might be wondering…
1. Why aren’t my bond funds performing well? or
2. Why do I need bond funds in my portfolio?
The main purpose of bond funds (or bonds) is to provide diversification for your portfolio. Diversification reduces the risk that your portfolio will lose money in a market downturn.
Bond funds typically go down when the stock market is performing well, and up when the stock market takes a turn down. So when your stocks and stock funds are performing well, it’s normal for your bond funds to have a small or even a negative return.
A balance of stocks and bonds in your portfolio reduces the volatility of your overall portfolio, and reduces your potential losses during market downturns.
Still not sure if you need bond funds in your portfolio? Check out these returns of stocks and bonds during market downturns:
| Total Returns of Stocks and Bonds During Market Downturns | ||||
| From December 31, 2000 to October 31, 2002 | From June 30, 1990 to October 31, 1990 | From July 31, 1987 to December 31, 1987 | From December 31, 1972 to October 31, 1974 | |
| Bonds | 29.07% | 2.93% | 2.97% | 6.17% |
| Stocks | -37.39% | -14.09% | -21.39% | -32.99% |
| Source: Calculated by American Century Services, LLC, using information and data presented in Ibbotson Investment Analysis Software ©2007 Ibbotson Associates, Inc. All rights reserved. Used with permission. Stock returns are represented by the S&P 500 Stock Index, an unmanaged group of stocks considered to represent the stock market in general. Bond returns are represented by the Lehman Brothers Intermediate Government/Corporate Bond Index, an unmanaged market value weighted index of government and investment grade corporate fixed rate debt issues with maturities between one and 10 years. Stocks may be volatile. Past performance is no guarantee of future results. |
Family Records Organizer CD
July 1, 2007
If you’re like most people, you probably have dozens of financial accounts and records to keep track of, such as retirement accounts, bank accounts, credit cards, investments, debts, loans, and mortgages, as well as trusts, wills and medical information.
T. Rowe Price offers a complimentary Family Records Organizer CD to help you with these organizational challenges. This CD provides you with an easy way to gather in one safe place all your family’s records, including primary contacts. It can also help your loved ones know where to find this information in case of emergency.
You can order your complimentary Family Records Organizer CD at www.troweprice.com/getorganized
Health Insurance for Early Retirees
June 14, 2007
by Kimberly Lankford of Kiplinger.com
Despite a limited income, I’ve invested wisely in my IRA over the years and could retire next year at age 62. However, I don’t know if I will be able to get medical insurance or how much it will cost after the COBRA provisions expire in 18 months. Given that I take medication for depression, it is likely that any future coverage would have major restrictions — that is, if I were able to get coverage at all. Are there any alternatives for health insurance for people like me?
You ask such a great question. So many of our readers have saved carefully through the years and could retire early, except for one unknown: How much they’ll have to pay for health insurance until they’re eligible for Medicare at age 65. You’re very wise to start thinking about that now and get an idea of how much those extra costs will be.
The good news is that several consumer-protection laws can help you qualify for health insurance on your own, even if you have medical conditions.
Your first step should be to continue coverage through your employer’s plan through COBRA, a federal law that requires employers with 20 or more employees to let them keep their coverage for up to 18 months after they leave their jobs. Your premiums will be a lot higher than they had been as an employee — after you leave the job you have to pay both the employer’s and employee’s share of the cost, and most employers subsidize about 75% of the premiums for employees. But at least you can’t be rejected or charged a higher rate because of your health.
If you’re healthy or have moderate medical conditions, check out your other options right away because you may find a better deal on your own. The prices and rules about covering medical conditions can vary enormously from insurer to insurer, so it’s a good idea to contact an insurance broker who knows which insurers in the area are likely to offer the best deal for someone with your condition (you can find a health insurance broker in your area through the National Association of Health Underwriters). You can also visit eHealthInsurance.com to get price quotes for several companies’ policies (or call 800-977-8860 if you have medical conditions to explain them up front).
If you have a medical condition, some insurers may reject you while others may offer you a decent rate. Or some may offer you a policy but exclude the condition, while others could boost your premiums by 25% to 150%. It’s generally better to pay extra than to accept an exclusion for a potentially expensive condition.
And if insurers do reject you, you generally have other options. Thirty-three states have high-risk pools, which must accept people with medical conditions who have been rejected elsewhere (for more information, go to the National Association of State Comprehensive Health Insurance Plans Web site. And a few states, such as New York, New Jersey and Massachusetts, must cover everyone regardless of their medical condition — this is called “guaranteed issue.” This leads to very expensive insurance for younger, healthier people, but does provide an option for people who have health problems.
A few states don’t offer high-risk pools or guaranteed issue policies, but you should still have some options if you’re coming off an eligible group policy. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) requires that states provide some kind of coverage after you exhaust COBRA as long as you haven’t been without coverage for more than 63 days in the preceding 18 months. For more information, see Health Coverage for All.
The rules and strategies vary a lot from state to state, but you should be able to get a lot of information at your state insurance department Web site (go to our insurance page for links). The Georgetown University Health Policy Institute also publishes excellent consumer guides for getting and keeping coverage in each state.
Tags: health insurance, insurance for early retirees
New financial aid tool helps families determine whether they will qualify for federal financial aid
May 31, 2007
Last month, the federal government launched a new online tool to help families predict whether they’ll qualify for federal financial aid. Called the FAFSA4caster, it’s modeled on the government’s official aid application, the FAFSA (which stands for Free Application for Federal Student Aid).
The FAFSA4caster estimates a family’s expected family contribution to college costs and notes whether a family will qualify for the federal Pell grant program, allowing families to plan ahead for the cost of college. To use the tool, parents will need to enter their child’s Social Security number, as well as their own tax and financial information.
When you’re ready to apply for aid, you can easily transition from FAFSA4caster to FAFSA on the Web. Much of the information that you enter in the FAFSA4caster will populate your FAFSA on the Web application, making the experience of applying for federal student aid a lot easier.
To see the tool, visit the Department of Education’s website at www.fafsa4caster.ed.gov.
Tags: financial aid, federal financial aid, pell grant, fafsa
10+ Ways to Save on Fuel
May 29, 2007
by Jenny McKinney and Patrick McKinney, Retirement Planning Guides at About.com
With the price of gasoline constantly increasing, we are all looking for ways to save on this necessary liquid. If you own a gas guzzler, you might need to look for all the help you can get just to be able to afford the fuel for necessary trips.
Here are 10+ ways to help save on fuel. If you have some tips you’d like to add, email them to Jenny and Patrick at retireplan.guide@about.com.
1. Be sure your tires are inflated to the correct pressure. Your owner’s manual will tell you how much air you should have in each tire.
2. If you get a discount for using a store card, use it. If you get a discount for a credit card, use it only if you plan to pay off the balance when it’s due. Your savings on gasoline might be lost if you have to pay interest.
3. Keep your highway speed to around 55mph. Faster speeds can consume more gasoline.
4. Don’t accelerate up and down while driving. Try to keep a constant pressure on the gas pedal.
5. Plan your trips. If you have to drive very far to the market, make sure you purchase everything you might need for several days.
6. Have your automobile checked by a reputable mechanic to be sure it is tuned up and running it’s best.
7. When possible, walk instead of driving. It’s healthier and will save gasoline.
8. Carpool whenever possible.
9. Keep your car clean and waxed. Dirt and grime can cause a small decrease in gas mileage.
10. Watch for things that can obstruct the air flow on your automobile. Things such as the car top carriers can reduce gas mileage.
11. Use cruise control if you car is equipped with it.
12. Let the kids ride the school bus insead of driving them to and from school.
13. Never let you car run while you dash into the store, post office, etc.
14. Use your air conditioner instead of opening the windows while driving at high speeds.
It’s hard enough to save money for retirement without having to spend unnecessarily on the necessities of life. Almost everyone has a car and relies on gasoline or some type of fuel so it makes sense to try to economize whenever possible. We should really try to save on fuel even if it weren’t so expensive.
Wondering what prices are at some of the stations across the country? fueleconomy.gov is a handy web site that will answer your questions.
Vanguard changes their fee schedule
April 27, 2007
Vanguard has eliminated several account related fees and replaced them with a single account service fee, effective April 26, 2007.
Here’s a summary of the changes:
The following annual $10 account-related fees have been eliminated:
- The custodial fee on traditional IRAs, Roth IRAs, and SEP–IRAs with a balance of less than $5,000.
- The maintenance fee on index fund accounts with a balance of less than $10,000.
- The custodial fee on education savings accounts (ESAs) with a balance of less than $5,000.
- The low-balance fee on all nonretirement accounts with a balance of less than $2,500.
These fees have been replaced with a single account service fee. This $20 fee will be charged annually for each Vanguard® fund in which you have a balance under $10,000 in an account.
The annual account service fee can be avoided by:
- Signing up for account access on Vanguard.com® and choosing electronic delivery of shareholder materials, including statements, confirmations, fund reports, and prospectuses.
- Consolidating your accounts or investing additional assets to bring all account balances in all funds to $10,000 or more.
- Maintaining total Vanguard mutual fund assets of $100,000 or more.
To learn more about Vanguard’s new fee policy, please click here.
Tags: investment fees
Best Deals on Student Loans
April 27, 2007
I’ve gotten a lot of questions about the FAFSA form lately, as well as the best student loans to get.
Kiplinger.com has a great article on student loans right now. Some tips shared include:
- Determine which type of school your family can afford
- Set a realistic limit on how much debt you can afford
- Stick with the Federal loan programs – Perkins, Stafford and PLUS loans
- After you’ve exhausted your options in Federal loans, get a list of lenders from the school, or from FinAid (www.finaid.com)
This is part of a series of articles on paying for college. Click here to see the full text of this article, Best Deals on College Student Loans. Click here for last weeks article, Smart Ways to Pay for College. Next weeks article will focus on the best loans for parents.
Tags: saving for college, student loans, college loans
Small Ways to Save Big
April 2, 2007
Kiplinger.com has a great article on 20 Small Ways to Save Big by Jessica Anderson.
You’ve heard of the savings crisis in America. You’ve probably even thought, ‘yeah, I should probably save more.’ But eking out an existence is tough on a starting salary and sometimes comfort takes precedence over cutting corners. Besides, if you can only save $50 or $100 a month, is it really worth it? The answer: absolutely.
Tags: saving money, saving crisis