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Articles by Miranda Marquit

When To Take Social Security: A Question Of Cash Flow

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One of the biggest decisions you have to make as you approach retirement is when you want to begin taking your Social Security benefits. Indeed, this is an important consideration. For the most part, it depends a great deal on what you think your cash flow needs will be as you age.

Do You Need the Cash Now? Or Can You Wait?

You can start pulling on benefits at age 62. However, if you start taking benefits as soon as you can, your monthly payments will be lower than if you wait. Indeed, your payments will only be 75% of what you would get if you wait until age 66 (which is considered the “full” retirement age by the government). And, if you can wait even longer — to age 70 — you see an increase of benefits by 8% each year between 66 and 70. There is no additional benefit for waiting beyond age 70.

Timing Of Taking Social Security
Understand, though, that you aren't necessarily getting “more” in the sense that your overall total will be higher. Instead, the formula is worked out so that you should have roughly the same benefits over time if you start, no matter when you start taking Social Security, at age 66. The difference is that if you wait longer, the government will offer you a higher monthly payment amount to make up for the fact that you haven't been taking what you could for the past few years.
As you decide when to start taking social security benefits, you will need to consider your cash flow situation and any tax implications. If you are 62, and you need the money to help cover shortfalls in your tax advantaged retirement account, you might need the money now — even though you will be penalized for not waiting until the “full” retirement age. If you need the money to help you in your retirement, and you can't find other sources of income to help you, then taking Social Security earlier might be your only option.

However, if you can wait until later, it might be worth it. Later on, your expenses might increase as your health declines (and costs rise), or as your retirement fund starts to run a little lower. Being able to wait until later and receive more each month might be very helpful. If you can keep working in between, earning income and paying into the system, your benefit will increase as well. This can be a great help to you later on, when you might want a larger monthly income.

Bottom Line

Before you decide when to start taking Social Security, you need to consider your situation, and what you expect in the coming years. In some cases, you might be worried that benefits will be cut due to economic concerns and problems with the federal budget; in that case it might make sense to start receiving payments as soon as you can, in order to get what you can.

However, if you expect that you will receive your benefits as promised, you need to look at your situation. How much can you expect from various revenue streams, and your retirement accounts, and for how long can you expect to keep up the income pace? You should plan to take Social Security when it will most help your monthly cash flow.

Here Come the Holidays: Could Layaway Save Your Christmas Budget?

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The financial crisis, and the recession, prompted the return of of layaway. For years, many stores stopped offering the layaway option; it was pointless, since so many of them had co-branded credit cards and were more than willing to encourage people to use those to make purchases. (Not to mention the storage space multiple items on layaway take up.) However, the financial crisis served as a wake up call for many. Instead of just charging Christmas gifts, they began looking for another option.

Layaway For Christmas Gifts

Layaway

A layaway program allows you to reserve an item for future purchase. You make a payment up front, and then make period payments until the item is paid off, and you can take it home. With many layaway programs, you are charged no interest, so you don't have have to worry about borrowing the money. Some layaway programs are designed so that you pay each week, while others have you set up a certain number of payments within a certain timeframe, such as four payments over the course of two months.

The idea is that you can get an item at a good price (although some stores won't let you reserve certain sale items on layaway), and pay for it gradually, without the need to use credit and pay interest. You don't need to come up with all of the money up front, so it makes it easier to pay for big ticket items, since you can do it over time.

Using Layaway to Help Your Holiday Budget

If you want to reduce the strain on your Christmas budget, it is a good idea to begin planning now. You know that your holiday spending will add significantly to your budget. Indeed, many people find that their December expenses can balloon to the point where the entire budget for that month can explode.To avoid this, start now to plan. Whether you put together a Black Friday strategy now, or decide to set aside a certain amount of money each week from now until December to cover your costs, planning now can save you money in the long run.

Layaway can be part of your plan. Because it's a good way to spread out the cost of a higher-cost item, layaway can be ideal as a part of your plans. Find out which items on your list can be set aside, and focus on putting those on layaway, and then paying them off over time. Then, your available funds can toward items that can't be reserved for the future.

When using layaway, though, you need to be careful. Make sure you understand all of the terms and conditions. Know the payment process, and understand the penalties if you miss a payment or are late. You should also understand that some stores will charge a “restocking fee” if you change your mind, and decide you don't want an item after all. Additionally, while most stores don't charge fees or interest for layaway, there are some stores that might charge a fee for this service. Make sure you are clear about the procedure, and all of the charges, before you agree to a layaway.

If done right, a layaway can be a great part of your Christmas budget planning. You don't have to break your budget, or go into debt, to complete your holiday shopping.

Why I’m Not A Big Penny Pincher

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Anyone who really knows me, is well aware that I'm a spender. Penny pinching isn't my thing. That isn't to say that I'm flinging money about like water. What it does mean, though, is that I don't go out of my way to save a few cents — or even to save a few dollars. While I think that saving money, setting funds  aside for the future and emergencies, is important, I don't really think that I'm going to achieve financial freedom by clipping coupons and denying myself a weekly meal in a restaurant.

Sometimes It's Worth It To Pay More

One of the biggest reasons that I'm not a penny pincher is because I honestly believe that sometimes it's worth it to spend more money. Yes, I can go to the buffet chain restaurant and load up on mediocre food. I can save a lot of money doing that, too. But I don't enjoy it as much as I would a meal from the best restaurant in town. Since I enjoy food, and good food is a priority for me, I am willing to pay a little bit more for it.

This is true of some conveniences, such as flying at a time that I consider saner than taking a red-eye, and that allows me to see my son off to school before I leave. It's worth the extra $50 to me. Of course, there are things that I wouldn't spend as much money on. I'm not big into trinkets; buying a postcard or a cheap magnet to commemorate a trip is sufficient for me.

I'd Rather Make More Money

While I believe that it's important to get good value for my money, I don't like taking the time that it takes to be really successful at some of the techniques that are often used to pinch pennies. Yes, I look for bargains. But I'm not nitpicking over a couple bucks. And I don't enjoy the coupon game. While it works for some people, and I don't think there's anything wrong with being frugal and pinching pennies, it's not my preferred method of paying for what I want.

Instead, I prefer to make more money. I have to admit, though, that I am lucky and blessed in that it isn't usually very hard for me to make a little more. I can write an extra article or two, or take on an extra project. If I want a pedicure, I can write an extra article — there's no need for me to pinch pennies for three weeks with coupons, or skip my trip to the restaurant.

Bottom Line

We all have different priorities, and we all prefer to spend our money on different things. Perhaps I'm not being as disciplined as I could be, but as long as I have a general plan for the future, and I'm taking care of what needs to happen, I don't see any reason to pinch pennies if I don't have to. What do you think? Are you a penny pincher? Why or why not?

Are Your Emotions Getting In The Way Of Your Financial Success?

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It's impossible to completely keep emotions out of finances. After all, money is related to a number of emotions, especially fear and excitement. While it might not be advisable to completely eschew all emotions, you do need to acknowledge how they affect you — and watch out for indications that your emotions could be getting in the way of your financial success.

Emotions and Finances

Excitement

It is possible to let your excitement get away with you. Consider how you feel when you first get paid. Indeed, studies have shown that people are more willing to spend money on pay day — when they feel flush. So, even though you might be excited about pay day, or an unexpected windfall, it's important not to spend money when you are in that first flush of giddiness. Don't let your excitement, or your relief, overwhelm your good senses. Say no to extra spending, and take a step back. Examine your priorities and make sure that your excitement isn't leading you to make a poor decision.

Fear

My husband has a Ph.D. in experimental psychology, and one of the things that he says that studies show over and over again is that fear is a very strong motivator — especially in the short-term. Unfortunately, when it comes to money, the fear-based decision making of the short-term can have very long-term consequences. Making decisions based on fear, whether it's pulling out during a stock market drop or buying into a Ponzi scheme because you're afraid of missing out, can lose you a lot of money.

Your fear of loss can also work against you. If you have a huge fear of risk, you might miss out on opportunities to grow your wealth, or start your own business. While you want to limit your risk, and take calculated risks, you do have to be careful of avoiding risk altogether. That kind of paralyzing fear can keep you from reaching your financial goals.

Despair And Disappointment

One of the hardest things about getting out of debt is getting over the despair and disappointment. It is easy to look at the impossibility of the situation, and give up. Try not to let this despair cripple you, though. If you do, you can become trapped in a debt spiral. Instead, find a little optimism. Make a plan to help you get out of debt, and make progress toward your goals. Once you do that, you will be more likely to notice your progress, and avoid the debilitating emotions associated with giving up on your goals.

Sticking To Your Plan

Making a plan is a good idea no matter your situation. Whether you are creating an investment plan for retirement, or making a debt reduction plan, having a road map to follow can help you avoid the pitfalls of letting your emotions rule you. When you feel like spending money because of a sense of euphoria, or when you are ready to sell a stock because of a market crash, step back and refer to your plan. Having that to fall back on can help you keep your emotions in check — and your finances on the right path.

Hedging Market Risks To Your Retirement

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The current stock market volatility has many wondering how market risks could affect their retirement prospects. Many almost-retirees found, to their dismay, that the market crashed, wiping out retirement portfolio values, just before they needed that money. While the market has been recovering since 2008, the fear of what happens “next time” has many wondering what they can do to hedge some of the market risks to retirement.

Two of the risks that you are likely to run into include the following:

  1. Market crash just prior to your retirement. This could also include a period of a down market. This means that when you withdraw from your retirement account, you are selling investments at a time when you are locking in losses — and you have to sell a higher volume to meet your needs, reducing the amount of investments in your portfolio.
  2. Maturity on some products at an inconvenient time. Your CD might mature just after interest rates plummet, leaving you no option to roll over at the same yield, or a bond might be called early (or mature), while rates are low.

While you can't completely eliminate these risks (all investment comes with risk), you can hedge against them in a way that can help you limit your losses.

Hedging Market Risks

Diversity

The first line of defense against huge market losses is diversity. When some markets are down, others are up. Consider adding a little more diversity to your portfolio in terms of real estate and commodities, in addition to stocks and bonds. You can also look at diversity in terms of foreign vs. domestic investments, and diversity across sectors, as well as adding some dividend aristocrat stocks to help with your income during retirement — even during a down market.

Stagger Your Maturities

Don't invest in a bunch of CDs that mature at the same time, or invest in Treasury securities that all mature in five or 10 years. Choose different maturity dates, and acknowledge that you might need to have a plan for short-, middle- and long-term investing. A CD ladder can help you create a system that allows you to earn the highest possible yields on long term CDs, while still having the opportunity to take advantage of higher rates when they arrive. Choose bonds of different maturities so that they aren't all coming due at the same inconvenient time. A little staggering can help you avoid having to reinvest everything at the same time — and possibly lose out because of it. Also, make sure you have some investments meant for different time frames so that you have a little more flexibility when deciding what to sell, and when.

Extra Income and Emergency Fund Padding

You can also hedge against market risk by planning your retirement income. Look for ways to build up additional income streams, especially passive income streams. That way, you won't have to rely heavily on withdrawing from your retirement investment account during a down market, and you can leave your portfolio alone to try to recover. (Some even recommend certain, carefully chosen annuities to provide income so that you don't have to deplete your investment portfolio in tough market times.) The same is true of having extra emergency fund padding. Look for ways to build up a supply of money that you can draw on without having to sell investments in a down market.

Roth IRA: Emergency Fund?

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I recently found out that one of my associates uses her Roth IRA as an emergency fund. Rather than put money into a low yield savings account, or some other cash account, she uses her retirement account as an emergency fund. Technically, the basics of a Roth IRA are conducive to this arrangement. However, you do want to be careful. Think things through before you use your Roth IRA as an emergency fund.

Why Your Roth IRA Could, In Theory, Be An Emergency Fund

In theory, your Roth IRA works as an emergency fund because of the withdrawal rules. You are actually allowed to withdraw your contributions to a Roth IRA at any time, and for any purpose – no matter your age. This means that you can take money out of your Roth IRA with no penalty or tax, as long as you are only withdrawing money that you have sent to the account through regular annual contributions. As long as your withdrawal amount doesn't exceed your overall contribution amount, you don't have to pay a penalty or taxes. Keep in mind that previous withdrawals count against your overall contribution amount.

Roth IRA Emergency Fund

You do have to be careful, though. Withdrawing from your Roth IRA can cost you if you don't do it right. If you are under 59 1/2, and you exceed your contribution amounts (except in certain cases), you might be subject to a 10% penalty and to paying income taxes on the amount. Make sure you know what you are doing before you withdraw money from your Roth IRA to shore up your finances in the case of emergency.

Opportunity Cost

While you might not have the expenses associated with penalties and taxes when you withdraw your contributions to your Roth IRA, you are still subject to opportunity cost. Remember: The money in your Roth IRA is working for you. You are earning interest at a pretty good rate (depending on your asset allocation and market conditions), and if you withdraw principal, you miss out. You can't replace the time that your money might have spent in your Roth IRA, growing with the power of compound interest.

On the other hand, though, some insist that the opportunity cost comes when you put that money in a low yielding cash account as an emergency fund. Because your money (theoretically) grows faster in the Roth IRA, the power of compounding interest at a higher rate makes up for the fact that you withdraw some of your contributions for emergencies.

Bottom Line

What you decide to do depends on what you think is likely to work best for you, and provide for your needs. If you plan ahead sufficiently, it should be possible to get quite a bit built up in your Roth IRA. Of course, for it to work, you need to make sure you only withdraw contributions in cases of true emergencies. If you use your Roth IRA as an ATM, you could easily remove all of your contributions quickly — and then move into penalty areas where it starts costing you more. Make sure you carefully evaluate your situation before adopting this emergency fund strategy.