Retirement Planning Newsletter Fall 2016

Transcription

1 Retirement Planning Newsletter Fall 2016 When should you start thinking about retirement? Now is a good time. With Winter approaching, you may be thinking about the financial goals you set earlier in the year. If so, we d like to help. In this issue of Financial Footnotes, you ll find articles about saving, spending, investing, and protecting your money. And, in a new section called Tactical Tip, you ll find practical ideas you can use right now because no matter the season, now is a good time. SAVING Three elements of a personal savings program Over the decades, responsibility for retirement has undergone a big shift. Many people will rely on Social Security and personal savings to see them through 20 or more years of retirement. But saving for two or more decades of retirement can feel daunting. Your company, however, offers a retirement plan that allows you to save automatically through payroll deductions. Some plans even allow access to professional investing advice through the retirement plan a great advantage for your future. Ask about it in your Human Resources office. Keep in mind these three elements for your savings program: time, discipline and planning. Let s take a closer look at each. Time To illustrate how time can impact your long-term savings, let s look at Juan and Jacqueline. Both have saved $100 each month since they joined the plan, and their accounts have each earned an average of 8% per year. Juan started saving at age 25, and Jacqueline started saving ten years later, at age 35. By age 65, Juan s account has grown to $310,867. Jacqueline s account amounts to $135,939, or $174,928 less than Juan s only because Juan saved for 10 more years. It may be a good idea to follow Juan s lead and save as early and as often as possible. 1 Continued on Page 2 1 This example assumes the employee contributes $100 per month to the plan on a pretax basis. The investments earn an average of 8% per year. The calculation does not factor in salary increases or inflation and is for illustration purposes only. 1 Financial Footnotes Fall 2016

2 Three elements of a personal savings program (continued from Page 1) Discipline Saving takes discipline, one of the main reasons to save through your retirement plan at work. If you contribute to the plan using payroll contributions, you may be less likely to miss the money from your paycheck. And the impact on your paycheck may be surprisingly small. Take a look at this calculator to play with some contribution amounts, and see for yourself. Consistency plays an important role in saving. Let s look at another illustration. Both Shelley and Joe started saving in 1970, with each contributing the same amount and investing it in the stock market. The difference is that Shelley gets nervous when the stock market moves too much (something known as volatility) and takes her money out of the market. Joe leaves his money invested, even during the volatile periods. Planning Planning ahead may help protect you against what Shelley experienced. When you have a strategy that you feel comfortable with, it may be easier to focus on the big picture, rather than reacting to every piece of troubling financial news. What does that mean for Joe and Shelley? Joe s $100 investment would top $2,100 by the end of By missing only the 25 best days in the market, Shelley s $100 would have reached only about $475. 2,3 2 If you re an inexperienced investor or even an experienced one, how do you develop this kind of strategy? You can learn about the markets and figure out your strategy on your own. Or, if you re like a lot of people who don t have the time or the interest to create an investment strategy on your own, it may be a good idea to work with a professional. If you have access to a financial advisor, why not spend some time discussing your personal situation and financial goals? Once you ve set your direction, an occasional review may be all that s needed to keep you on track Fall 2016

3 SPENDING Why do people overspend? New research on why we break the budget and how to fix it Our tendency to break the bank is as much hardwired as it s learned. Why? We fail to consider future expenses that come with future income It s a lot easier to imagine future income, but projecting future expenses 4? Not so much. Buying more car than you can afford is a good example, because we tend to de-emphasize the expected future costs of maintaining it. It s a good idea to set a realistic budget that forces you to spend no more than what you earn and save regularly. Saving while borrowing creates a false sense of security Sometimes the sole objective of a financial plan is to save money. But to achieve this laserfocused objective, some actually borrow to save. For example, contributing 10% to the company retirement plan is great. But doing so while making minimum monthly payments on credit card debt or worse yet, taking cash advances from your credit card to fund an elaborate lifestyle may do more harm than good. A solid savings plan usually starts with paying off existing debt. Then, it should allow for a certain amount of discretionary spending that won t mean borrowing more. Collapse of willpower Some people think willpower is a limited resource that s quickly depleted. Others see it as not easily used up. Which are you? People who believe willpower is finite can make impulsive decisions such as overspending, eating junk food or procrastinating. 5 If you find yourself in this category, why not reward yourself after your hard work by doing something that doesn t involve much spending, such as engaging in sports, taking nature walks or meditating? We think rising home equity equals wealth Sometimes the more a house is worth, the more money people feel they have to spend. 6 In reality, there are only two ways to access wealth from a house that s increased in value: sell it, or borrow against the equity. In all likelihood, selling to buy a comparable house won t improve your situation, if property in general has increased in value. Borrowing against the equity may lower your interest rate, but if you take out cash you may face expenses like closing costs and mortgage insurance that you didn t have before. 4 Charles Wells, The Hidden Reasons People Spend Too Much, The Wall Street Journal, November 2, Veronika Job, Gregory Walton, Katharina Bernecker, Implicit Theories About Willpower Predict Self-Regulation and Grades in Everyday Life, Journal of Personality and Social Psychology, April John V. Duca, John Muellbauer and Anthony Murphy, How Financial Innovations and Accelerators Drive US Consumption Booms and Busts, Dallas Federal Reserve Bank Economic Letter (Vol. 11, No. 3), April org/assets/documents/research/eclett/2016/el1603.pdf 3 Fall 2016

4 INVESTING What kind of investor are you? If you re new to a retirement plan, you may feel a little overwhelmed by all the choices. Once you decide to join, you ll have to figure out how to invest your money. Should you go with fixed income, equity, or cash equivalent funds? And what is a cash equivalent fund, anyway? These are valid and important questions. But many people may feel overwhelmed when faced with all of the new concepts and terminology especially when they know it s important to get it right. You ll be glad to know there are options available to you in the plan. Known as default investments, these are investment selections you can make yourself or your plan can make for you if you don t choose a strategy. One common default option is a Target Date Fund. In a Target Date Fund, money is invested based on your expected retirement date. Someone who expects to reach 65 in 2035, then, would choose the 2035 Fund. These funds invest more aggressively in the early years, and invest more conservatively in later years when there is less time to recover from losses. Other plans may use Managed Accounts as their default investments. A Managed Account is overseen by a professional money manager, who chooses and monitors the investments within the account. Managed Accounts allow plan participants access to professional investment management for a fee. Default investments can be good options for people who don t have the time, the experience, or the interest to develop their own investment strategies. In fact, the plan s default investment option was chosen specifically to help simplify investment decisions. You may find that it meets your needs now, and into the future. 7 7 Some options may not be available for all plans. TACTICAL TIP Keep your financial life moving ahead with this quick tip Make a file that contains contact and other information for all of your financial providers. Credit cards, insurance companies, retirement plans, banking institutions, etc. should all be included. Jot down the type of account, account numbers, and any other pertinent details. When you add a new credit account or change insurers, update your file. Then, when you move or have another change like a birth, divorce or death, you can quickly access the information you need to notify your providers of your new circumstances. Be cautious about how you store this information; you don t want to make identity theft easy for someone with ill intentions. 4 Fall 2016

5 PROTECTING Is your company life insurance right for you? When you think about protecting your financial assets, you may think about life insurance. You probably have some through your job. But the reality of company-paid life insurance could be different than your expectations. Now is a good time to make sure you have the right insurance, for the right amount. Lots of companies today give you the opportunity to purchase voluntary life insurance. Voluntary means you decide whether or not to buy it. Although you pay for it yourself, there are advantages to buying voluntary life insurance at work that you may not have considered. y Favorable rates. Life insurance you purchase in the workplace may be less expensive than what you could find on your own. y Automatic payroll deduction. This makes it easy to pay the premiums. y Underwriting. Insurance at work may not require underwriting, the process insurance companies use to decide if or how much insurance they will offer you. When you buy life insurance on your own, a medical representative may come to your home, take your vital signs, check your height and weight, and ask a range of health questions. When you buy at work, it may be easier to qualify. y You own it. Voluntary insurance is yours, not your company s, so as long as you pay the premiums, it comes with you when you change jobs. Take a few minutes to assess your own insurance needs here. Do you have enough? Ask your HR office if voluntary insurance is available. It may help you be more confident that your family has enough when they need it most. Please note: This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice. Representatives of GWFS Equities, Inc. cannot offer investment, fiduciary, financial, legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor as needed. Core securities, when offered, are offered through GWFS Equities. Inc. and/or other broker dealers. GWFS Equities, Inc., Member FINRA/SIPC, is a wholly owned subsidiary of Great-West Life & Annuity Insurance Company. Empower Retirement refers to the products and services offered in the retirement markets by Great-West Life & Annuity Insurance Company (GWL&A), Corporate Headquarters: Greenwood Village, CO; Great-West Life & Annuity Insurance Company of New York, Home Office: NY, NY; and their subsidiaries and affiliates. The trademarks, logos, service marks and design elements used are owned by their respective owners and are used by permission Great-West Life & Annuity Insurance Company. All rights reserved. G3784FF_Fall2016 (10/01/2016) PT Want to receive your account statements electronically? Log in to your account and click on Go Paperless under the My Profile icon. 5 Fall 2016