Archives for January 2011

How Much Of My Annual Pay Should I Be Saving For Retirement?

Over the past few weeks I've been noticing quite a few searches coming to this site with people putting together their financial strategy for the new year, and asking one important question. How much annual pay should I be saving for retirement? It seems like a lot of folks are just unsure about how much they should be saving, and they're worried that they won't have enough, especially given the current economic climate, and debts they may be trying to pay off first.

Today I thought I'd do an examination of this question, and talk about what some of the different thinking on the topic is.

How Much Should I Save For Retirement?

There are several viewpoints that people can come from when trying to figure out how much to save for retirement. Their calculations all seem to take into account different assumptions and criteria, so it's important to look at them all, and figure out which you think would work best for your situation.

Some of the criteria that may be important when calculating how much you'll need include how long you expect to live, the costs of health care in the future, how much inflation we'll see and what type of lifestyle you're living. Also important are your age, your current income, how much you've already saved, your employment prospects in the future and how much you're willing to sacrifice now for future security.

With that said, here are some differing viewpoints on how to determine what you should be saving for retirement.

Save A Set Percentage. Save 10-20% For Retirement

Most retirement calculators will use people's current pre-retirement income as a frame of reference when calculating how much the person should save for retirement. A lot of financial planners will say that most people will need anywhere from 70-100% of their income in retirement in order to be able to live a similar lifestyle when they retire. To do that most of them will suggest that people save anywhere from 10-20% of their income. While I think that it can be a decent rule of thumb to save that much, in some cases it may not be adequate – or in some it may lead to saving more than you need.

Save As Much As You Can

Another viewpoint that I've seen quite often are the folks that just say to save as much as you can. Some months that may mean saving just a little, other months it may mean up to 1/2 or 3/4 of their income. Basically they feel that there is no such thing as “too much savings”. They feel that if they can just save as much as possible every month, they'll be fine when it comes to retire. While this may serve some folks well, it may be a bit too simplistic for a lot of people. It may lead to saving more than you need, requiring more sacrifice than is necessary. It could also lead to saving too little if the “saving as much as you can” is only a little bit of money at the end of the month after all other bills and even entertainment costs are paid.

Save What You'll Need

Some people believe that saving for retirement is an extremely personal thing, and you should really put together a personalized retirement package based on your own expectations and personal situation. For example, they'll factor in things like their current income and age, amount of money the have already saved, their employment outlook, how long they expect to live when they retire, and what type of lifestyle they'd like to live in retirement. They also factor in things that may be changing when they retire like downsized housing costs, reduced auto expenses, and increased travel and entertainment expenses. In other words they take a comprehensive look at what their current situation is, what they hope to do in retirement, and then they make a plan based off of what their ideal situation would be, and how much they will need.

Retirement Planning Is Very Personal

I think that retirement planning is a very personal process, and one that all families should undertake. When looking at the viewpoints above I think I come down closest to the “save what you'll need” camp, where you figure out your personal situation, factor in your personal needs and desires, and then come up with a number based off of those. Once you come up with a number – add 10% to it, better to have too much saved than too little.

While I understand that getting into the nitty gritty details is probably the best idea, I know not everyone will take the time to do that. If you don't go through with it, at least stick to the old 10-20% rule, and start saving for your retirement as early as you can!

List Of Retirement Calculators

Here is a list of retirement calculators I found via getrichslowly.org. The ones on this list take into account more criteria than just income, and will probably give you a better picture of what you need to save.

T. Rowe Price: Retirement income calculator
The Motley Fool: Am I saving enough? What can I change? (calculator)
Bankrate: Retirement income calculator
Moneychimp: Simple retirement calculator
Scottrade: Retirement calculator

Have you figured out what your retirement savings number is, and how much are you saving towards that number today? How did you determine your goal? Do you think you'll reach it?

Breaking News: Personal Finance Blogger Makes Silly Financial Mistake

By Mr. Money 10 Comments

This past week I made a mistake, and it was a costly one.

I've been writing personal finance blogs for 3 years now, and in that time I feel like I've learned quite a bit about personal finance. I've learned about the importance of investing early and often, about the power of compound interest, and the importance of staying focused on your goals by using a budget. Just because I write about personal finance, however, doesn't mean that I'm always on top of my own finances unfortunately.

This year has been a stressful one. We had a new baby at our house, and getting enough sleep has been tough. We also have been dealing with various health issues for my wife. In addition it's been busy at my day job – and the blogs I run are all doing well. But again – it's busy.

I Made A Money Mistake

I'm not trying to excuse what happened by explaining it away – and claiming life has just been too stressful and busy to stay on top of things – it's just one of the reasons why I allowed things to get away from me. In reality, it should never have happened.

So what happened to this personal finance blogger? What horrible awful mistake did I make?

I overdrew my checking account. (Gasp! )

I know it's pretty horrifying. I talk about budgeting all day long every day, yet I can't even keep my own checkbook balanced. So what happened?

My wife and I currently use Microsoft Money as our budgeting and all around money tool. Sometime last year Microsoft announced that they would be discontinuing the product, and at the end of 2010 the product would no longer allow for online account updates. In other words, the software would stop downloading bank statements and transactions directly into the software.

While that in itself shouldn't have caused me to overdraw my account, what it did was remove one of the checks and balances I had in place. If I forgot about a transaction or didn't get a receipt, it would still show up in my account because all transactions were downloaded from my bank. When the online updates stopped working, my carefully laid plans disintegrated.

Several auto-transfer transactions that previously were automatically entered were now not entered for two months. Also, my wife forgot to enter a pretty large purchase she made online. Because of those oversights the balance we showed in our account was actually about $300 more than we actually had.

At the beginning of this month I paid for several large bills all at once. I paid for our mortgage, my estimated tax bill, as well as a couple of checks to our church. All in all I paid about $2500-3000 in payments all at once. I thought I had more than enough to cover it, but due to the oversights we made, we overdrew our account by $107. The result? $140 in overdraft charges. The worst part was, the day after a payment showed up in my account for $1900. If only I had waited a few days to pay those bills!

Time To Fix Our Problem

When I realized what had happened, I talked to my wife about it, trying to figure out what had gone wrong (already stated above). I hadn't caught the issues because I had been lax in balancing our accounts for the last couple of months. If I had been balancing the checkbook as I normally did, I would have caught these problems a couple of months earlier and avoided this mess. Once we discovered the overdraft I went back and balanced our checkbook based off of my bank statements for the past 3 months. I quickly found the sources of our error.

Ask For The Bank Charges To Be Reversed

So now that I knew what happened, what was I going to do about this big $140 overdraft charge? There's no way I want to pay that – even if I did overdraft. So I decided to ask the bank to remove the charge as this was a one time issue, and it wouldn't be happening again. What's the worse they can do, tell me I have to pay it anyway?

The first customer service rep I talked to told me she could take off one of the charges, so I would still owe $105 in charges. That's better, but still not that great. I asked if I could talk to her manager because I'd like to have all of the charges removed.

She transferred me over, and I told the manager that I'd like the charges removed. The manager told me that she couldn't take them all off, it was “bank policy”. I persisted and said that I would at least like all but one of the charges removed, or I would consider closing my account. At that point she agreed to remove all of them except for one – leaving me a total fee of $35. I may have been able to get that one removed as well, but I can't say I feel as bad about that one fee, because I did make an error. Sometimes you need the pain to remind you not to make the same mistake again.

What I learned from this is that the bank – and the bank manager do have some flexibility to fix a situation for you. You just have to ask.

What I Learned From My Money Mistake

Now that this mistake is behind us, what are some things I've learned from it?

Everyone makes mistakes: I'm supposed to have it all together – being a personal finance blogger and all. But I'm human, and I make mistakes too. How you learn from your mistakes is the important thing.
It's important to stay focused on your financial situation, or it can get away from you: If you aren't doing a budget, balancing your checkbooks and keeping spending in check, you will have issues like this too.
Make sure you have a backup plan: Having this problem also made me realize how important it is to have a backup plan and checks and balances set up. It can help avoid these types of situations.
Don't let it get you down: When you make a mistake, just brush yourself off, fix the mistake and move on from there. Learn from it, but don't let it haunt you!

Have you made any money mistakes recently? What was it – and what did you learn from it? What do you do to keep things like this from happening?

Prepaid Debit Cards Often Cost More Than Checking accounts

By Contributor 5 Comments

Checking accounts and debit cards have something in common: hidden fees that are meant to catch you off guard. If you are trying to figure out the option that has fewer fees, you will probably find that a checking account is cheaper. There are several reasons why.

The Overdraft Factor

Generally speaking, a normal user will find that prepaid debit cards are more costly than checking accounts. At Nerdwallet.com we’ve conducted a small experiment: comparing the fees for a checking account at the ten largest checking account providers against the fees associated with ten prepaid debit cards, including America’s most popular, the WalMart MoneyCard.

On average, a prepaid debit card will cost you more than $19 per month, while the average checking account will only cost $6. In the appendix, you can find more details on how we got these numbers.

The major variable, though, is if or when a checking account holder decides to use overdraft protection, the mechanism banks use to make money on checking accounts. Usually, the overdraft charges assessed on a checking account-connected debit card are incurred by mistake. These mistakes are expensive though, as overdraft charges can be up to $35 per transaction. This can be especially damaging if you get hit with the fee without realizing your account is empty.

How much can overdraft fees end up costing you? A study conducted by the FDIC reports that Americans who overdraw their accounts more than twenty times a year stood to lose more than $1,600 for doing so.

Ultimately, you would have to overdraft your checking account five times a year in order to spend more on a checking account than with a prepaid debit card.

On average, the overdraft fee assessed by America’s 10 largest checking account providers is $33.75, which can certainly push users past the $229.67 in yearly fees that accrue to a prepaid debit card, when added the $81.80 in fees that are paid on the average checking account without overdrafts. But those with the discipline to avoid overdrafts will be best served by getting a checking account at a bank.

In addition, as of August 2010 the FDIC has prevented banks from opting customers in to overdraft programs without consent. So now you don’t even need to be disciplined to avoid overdrafts – just don’t opt in to them.

Rather than a prepaid card, get a secured credit card and a checking account

The state of your wallet will probably benefit from avoiding prepaid debit cards. Getting a secured credit card in combination with a checking account is the best option, for the following reasons:

A secured card can build your credit, something a prepaid debit card can’t do.
Since you need to pay upfront either way, why not pay for the service that improves your credit as well?
The woes of consumers expressed through internet forums also provide a grave warning about the potential of getting scammed by a prepaid debit card. Prepaid debit cards do not have the same level of protection for fraud, disputes, or travel-related incidents that most credit cards do.
Many secured cards also allow you to move up to a standard card after a period of proven trustworthiness. So, going with a secured credit card now could end up getting you access to more premium rewards credit cards in the future.

All this goes to show that you are probably better off with a checking account connected to a secured credit card than with a prepaid debit card. According to the FDIC, the number one reason why people opt not to open a checking account is that there is “not enough money” to make use of one. Since having a checking account is so much cheaper than a prepaid debit card, perhaps you should consider whether you can afford not to use one.

Appendix

In order to calculate the numbers above, we assumed that prepaid debit card holders would have 1.5 withdrawals from ATMs, eight purchases, two card reloads, and only one balance inquiry each month. Using these values, we evaluated cards from ACE Cash Express (NetSpend), Green Dot, RushCard, Emerald Card, Net Spend Visa, Vision Premier, Western Union MoneyWise, Walmart MoneyCard, AccountNow, and Pay Power.

For the banks in the comparison, we made the assumption that a checking account will start with a $100 balance, and that account holders would use an ATM that is out-of-network once per month. With these values, we looked at checking accounts from Citi, HSBC, PNC, Capital One, Sun Trust, US Bank, Wells Fargo, Chase, Bank of America, and TD Bank.

This post comes from the NerdWallet.com team, personal finance bloggers and experts in helping consumers find the best low APR credit cards.

Social Security Changes For 2011

By Mr. Money 3 Comments

We had a tax package passed in December that extended the current tax rates, in addition to making other changes to the estate tax, extending certain tax credits, and other changes. One area that saw several changes was the Social Security program.

Social Security benefits are received by nine out of ten individuals age 65 and older, so it's an important piece of the puzzle for many people. (Whether it should be is up for debate)

The Social Security changes for 2011 will give workers a temporary 1 year tax break on the amount they pay into the entitlement program, in addition to several options for retirees being eliminated. Here's a look at how the Social Security program will change this year.

Lower Social Security Taxes: 2% Payroll Tax Holiday

As was mentioned a while back, the Making Work Pay tax credit expired at the end of 2010. The expiring credit, which you can claim on your 2010 taxes, amounted to about $400 for singles and $800 for married couples. Since that credit was expiring, the Obama administration wanted to pass something to replace it to a degree. Because of that they passed the 2% payroll tax holiday.

So how does the 2% cut work? The amount we pay into Social Security will drop this year from 6.2% of your income (up to $106,800 annually) to 4.2 % in 2011 only. The employer portion of that will remain at at 6.2%.

For those who are self-employed, the Social Security tax rate will drop from 12.4 percent to 10.4 percent next year, due to provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed by President Obama on December 17th of 2010.

While this move has been criticized by many because the Social Security pr0gram already is having predictions of running out of money in the near future, others say the program's finances won't be harmed because the trust fund will be reimbursed for the tax cut funds from the general fund of the Treasury. In any event, the program's much publicized problems will still be an issue – even if this tax cut doesn't directly affect the program.

Interest Free Loan Option Removed

In the past retirees were able to start claiming social security payments at the age of 62, and then pay back all the benefits received at age 70, so that they could reclaim social security at the higher delayed claiming rate. In effect this gives those retirees an interest free loan.

New rules only allow beneficiaries to withdraw their application for retirement benefits within the first 12 months of receiving their first payment. They may only withdraw once per lifetime.

According to The Center for Retirement Research at Boston College if enough people were to use this claiming strategy it could cost the system between $5.5 billion and $11 billion. The benefit would go primarily to high-income households who had enough money to take the interest free loan without worries of having to pay it back later.

No Retroactive Benefit Suspensions

In the past retirees were able to temporarily suspend their benefits, and then restart them later – resulting in a bigger social security check based off of the time in which the payment wasn't received. This is still allowed under the new rules, however, social security recipients won't be able to retroactively suspend their benefits, and pay back money already received in exchange for higher payments going forward.

Much like the “no interest free loan” rule, beneficiaries can't pay back money already received. They can only suspend benefits for months when they didn't receive payments or for future payments, the month after the request is made.

No More Paper Checks For Retirees

Social Security recipients will no longer have the option of receiving a paper check if they apply for benefits after May 1st, 2011. Going forward new retirees will only have their choice of having a direct deposit or having their funds loaded onto a debit Mastercard.

Sending out paper checks to retirees every year has quite a large cost associated with it. It costs the federal government over $120 million dollars to send out checks. Making this change going forward will save Social Security $1 billion over the next 10 years, according to the Treasury.

Retirees who are already receiving paper checks can continue receiving them for now. In the end though they will need to switch to direct deposit or the prepaid debit card by March 1, 2013.

How You Can Pay Less For Insurance

By Contributor 3 Comments

When people are trying to save money the first step they usually take is to eliminate anything they feel is an unnecessary expense. Unfortunately insurance policies, like renter’s insurance and life insurance, are the first to go when push comes to shove. Even if you understand the importance of your insurance policy and the premium is 50 dollars a month, if you don’t have that extra 50 dollars you have to make a cut.

However, most people simply let policies lapse out of financial frustration instead of looking at ways that they can save on their monthly premiums and keep the piece of mind that their policy provides.

But don’t think this is only for people who are facing dire straits. Anyone who is looking to save a bit of money each month should consider the following tips to see which ones can help them keep more money in their pocket.

How To Save On Insurance

Shop around: It sounds simple but how many times do we buy something without comparison shopping first? Not to mention the fact that things may have changed since you last looked at the different policies competing agencies may have to offer.
Pay your premiums all at once: It may be tough to do on a strict budget but if you can pay a year’s worth of premiums at once, or even at six month intervals, your insurance company will most likely give you a nice discount. Plus, that’s one less thing to include in your monthly budget.
Be low risk: Insurance is all about risk. Ask your insurance company what you can do to put yourself in the lowest risk category available. Simply adding a deadbolt lock or keeping up to date fire extinguishers in your home may help you save some extra cash.
Higher deductibles = lower premiums: By increasing the amount you are responsible for in the event of a claim will lower your monthly premiums but be careful. Don’t increase the deductible to a point that you will never be able to meet it on your budget.
Reduce your insurance: Sometimes, less is better. Assess what you really need and make sure those items are covered leaving out the stuff that you can really get by without.

By doing a little extra homework when it comes to your insurance policies you can save a little extra money each month and avoid putting your back up against the wall and having to make tough decisions.

This is a guest post by Jeff Orloff. Jeff writes for the Renter’s Insurance Blog

15 Simple Tips For Cheaper Car Insurance Rates

By Contributor 6 Comments

Saving money on car insurance is easier than you think… with a little bit of self education. Here are 15 simple things you can do that will save you money, while better protecting your car and its occupants.

So have at it – become a confident, educated consumer and make sure you pay the lowest possible price for your car insurance!

15 Tips To Get Better Insurance Rates

Understand insurance companies – The auto insurance industry is divided into three types of businesses: Direct Agents, Independent Agents who sell the insurance of various companies, and Exclusive Agents who work on commission and can only sell one brand of insurance. If you have a good driving record, it’s likely you’ll get the best deal from a direct agent because they remove the middle man.
Shop around – This is easily one of the most important factors to consider. Don’t take quotes from just a couple auto insurance companies. Instead, really look into what each has to offer and which discounts they can give you.
Ask for insurance advice at your body shop – Your local body shop works with insurance companies and their adjustors nearly every day. Ask them which companies they prefer and which have the smoothest claims process.
Check with your state’s insurance department – Depending on which state you’re in, many publish consumer complaint data and complaint ratios that show how many consumer complaints have been made against each company. Make sure you choose a company that you’re comfortable with and has gotten good reviews.
Slow down – If you’ve had several speeding tickets, you’re much less likely to get discounts for safe driving.
Etch your VIN – Studies have shown that cars with an etched-in VIN are much less likely to get stolen. By avoiding a stolen car, you’ll avoid a claim.
Verify the accuracy of your policy – If you haven’t done so, take a minute to browse through your policy to make sure everything is correct. You’d be surprised at how quickly small charges can add up.
Avoid lapses in coverage – Even a few weeks’ lapse in coverage can make you ineligible for discounts. If you’re in the process of switching carriers, make sure you don’t quit your previous carrier until the new coverage takes effect.
Don’t claim small amounts – If you often make small claims (less than $500), you may have to pay a higher premium when it comes time for renewal. If you make a significant amount of claims in one year, your insurer may not want to cover you at all. Next time you have a claim, make sure it’s worth it in the long run.
Limit the number of people who drive your car – The more people you have listed as drivers, the higher your premium will be. Teenagers and young adults under 25 are among the most expensive drivers to add to the policy.
Verify the accuracy of your VIN – Most drivers are unaware of this, but an inaccurate VIN (even if it’s off by just one digit) can affect your auto insurance quote. Double check your VIN to ensure you’re not being overcharged.
Mind your credit score – More and more auto insurance carriers are considering credit scores when giving you a quote. Sometimes, having bad credit can end in you paying up to 50 percent more. So, make sure to pay your bills on time and check that there are no items on your credit score that aren’t yours.
Evaluate insurance costs when purchasing a new vehicle – When considering a new car, get a quote on your insurance rate, as the year, make, and model can make quite a big difference. Newer, sporty cars will be significantly more expensive to insure than used, family-style cars.
Purchase a low profile car – Similar to the above, know that cars that are expensive to repair or have a high theft rate will end up costing you quite a bit more to insure.
Don’t “pimp your ride” – Research has shown that adding modifications to your car, like a rear spoiler or lowering the suspension, can nearly double the cost of coverage.

And there you have it! Next time you’re shopping for new auto insurance, keep in mind the above tips – you may be surprised just how much money they can save you in the long run.

This is a guest post from Pam King. Pam writes on frugality, safety and insurance literacy for Direct General, a provider of cheap car insurance . When not saving money on her insurance, Pam enjoys knitting, NASCAR, family and watching rollerderby! :)

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