What Higher Apple Dividend Means for Investors

Finance Gourmet on April 27, 2015

I’m a huge fan of higher dividends. I’m less of a fan of share buybacks, but let’s get there in a minute.

Apple Raises Dividend

apple-stock-logoTheoretically, owning a stock means owning a part, or share, of a company. However, if you really break it down, being a shareholder means virtually nothing anymore. For example, in business classes around the country they will tell you that as a shareholder, one of your rights of ownership is voting for the company’s Board of Directors. That’s technically true, but these days, that means nothing. Only a certain number of seats are up for election at one time. Only the candidates that the company’s current management wants are on the ballot. In other words, even if you owned 51% of a company’s stock, your ability to vote would take years to actually affect the company. Your actual avenue for affecting any sort of change is the courts.

If you don’t get to “own” the company, then what is your stock actually worth? Well, it is an item of limited supply that others believe have value. It’s the same way U.S. currency works, or Bitcoin.

The exception is when a company pays a dividend. Then, you actually own something. Dividends are paid to shareholders according to how many shares they own. While you have no ability to control that dividend, if the company pays it, you get it. That gives your shares actual, intrinsic value.

Apple was long a stock that did not pay any dividends. The idea was that owning something tied to something that makes lots of money was good enough. Eventually, the pressure to do something with all that money grew, and Apple started paying out a dividend and buying back it’s own stock.

Today, Apple raised it’s dividend 11 percent from 47 cents per share to 52 cents per share. That makes Apple a growth stock that you can also earn 1.5% dividend on.

Apple Share Buyback

Like many other companies, Apple continues to increase it’s share buyback program. Share buybacks are the Diet Coke of returning money to investors. There is no commitment to continuing a share repurchase, versus the repercussions of cutting your dividend. Also, share buybacks don’t actually provide any cash to investors. Instead, it indirectly boosts share price by reducing the number of shares on the market, which reduces supply, and increases things like earnings per share, all other things being equal.

What makes this announcement really interesting is the reason Apple started buying back shares and paying a dividend in the first place was that it was accumulating this big pile of cash and not doing anything with it. Ironically, sales and profits for Apple were so good that even though it has been using that money to buy it’s own stock and pay dividends, it’s cash on hand actually grew.

Today’s news shows that Apple still has some room to grow, particularly in China and other markets. For long-term investors in the stock that news, and their new, higher dividend should make them feel pretty good about this particular stock investment.

Disclosure: The FinanceGourmet owns shares of Apple stock, although that may change at any time without any notice. This article, and all articles on Finance Gourmet are for informational or news purposes only. This is not a recommendation to buy or sell stock. This is not an offer to buy or sell securities.

 

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Finance Gourmet on April 24, 2015

Can you get a real credit score for free? The answer is yes, no, maybe, and well… sort of. If you don’t like that answer, let’s jump right in with some specifics that will make it clear whether or not you can really get real credit scores for free.

Real Free FICO Credit Scores

One of the issues with free credit scores is the idea of what a real, true, or legitimate credit score is. Technically, there is no such thing as a real credit score or true credit score. This isn’t physics. All credit scores are mathematical models of the information on your credit report. This produces a number that lenders can use in a statistical model to determine the approximate default rate of borrowers. In a way, it is similar to the mortality rates life insurers use to price life insurance. It doesn’t matter if it is right or wrong for a single person, as long as the overall pool of insured (or borrowers in this case) behaves as predicted.

free fico credit scoresTheory aside, in the real world the vast majority of lenders use the FICO credit score by Fair Issac when they make lending decisions. Different lenders use different credit reports, and some pull scores based on more than one credit report, but almost all lenders use the FICO score when they decide whether or not to approve that new rewards credit card, a second mortgage, or car loan. They use the same FICO score to determine the interest rate they will offer you. So, when people talk about a real credit score, they mean a FICO credit score.

Unfortunately, it is not that easy. As you can imagine, people treat different kinds of credit differently. People tend to default on credit cards first, then car loans, and lastly mortgages, for example. For that reason, Fair Issac offers more than one credit score. Some are tailored to auto loans, some are tailored to mortgages, and so on. Then, for each type of FICO score, it can be calculated from any of your three different credit reports. So, even if you have an actual credit score from Fair Issac, that doesn’t mean you have the true credit score that your lender is using.

No matter what score your lender uses, FICO doesn’t come free. FICO charges for credit scores. They charge lenders, they charge banks, they charge you, if you use their myFICO service. This isn’t a non-profit think tank.

Fake Free Credit Scores

All of this brings us to the concept of fake credit scores, or as finance snobs like to call them FAKO credit scores.

In fairness, none of these scores is fake, per se. They are calculated in a similar manner to a FICO score. The only thing that makes a FICO score more real is that a lender is more likely to actually be using it. A more nuanced terminology might call these alternative credit scores.

There are several kinds of alternative credit scores. These can come for free, depending on who is using them. For example, one alternative credit score, called the VantageScore is owned and calculated by the three major credit bureaus, so anyone affiliated with them can use those scores for free. This is where CreditKarma gets its free credit scores from, for example. In fact, virtually all of the online free credit score services out there from Credit Sesame to Credit Karma to Quizzle and beyond, use alternative credit scores when they give you a free score online.

Can You Actually Get Free Credit Score?

free credit report websiteWhich brings us to the million dollar question. Can you actually get a real free credit score anywhere?

The answer is yes, you can.

Some banks and credit unions, as well as credit card companies, offer to let you see your credit score for free. A certain Discover Card offers free FICO credit scores on your monthly statements.

If these companies aren’t getting free credit scores, then how can they offer them to you for free when places like Credit Karma don’t use real FICO scores?

The answer in all of these cases is that these companies are already getting your credit reports for their own purposes. They are just passing the information on to you.

Most financial institutions regularly pull credit reports on their customers. Your credit card company, for example, wants to know if your credit score is plunging, or rising, before deciding to send you that mailer offering a great new benefit and higher credit limit. Likewise, your bank or credit union doesn’t want to waste money advertising a new home equity line to people with a 420 credit score. So, every so often, they pull your report. Yes, it costs them money, but they are already making money providing your financial services. An extra credit score pull is just the cost of doing business.

Compare this to the online free credit score companies. They make no money off you unless you buy something through them or click on an ad. That kind of revenue isn’t enough to constantly pay for new FICO credit scores for everyone.

Remember, the point of seeing your credit score isn’t so much to know your exact number, it changes daily. The point is to ensure that it isn’t going up or down in ways that you don’t expect. By following along with your credit score, whether it is from a true FICO score or an alternative credit score, you can tell when that high balance on your Target Red Card is hurting you, or that getting a new Fidelity Card doesn’t have any effect because you chose the debit card. After all, there isn’t really anything you can do to your credit score other than improve it by paying everything on time all the time. Everything else, from how many credit cards you have, to how many people have pulled your credit report recently has a smaller affect than your payment history, and those effects get smaller with time.

Use your credit score reporting, however you get it, to keep an eye on your report, not to obsess over the current number, and you’ll be fine.

Finance Gourmet on April 21, 2015

When it comes to retirement planning, 457 plans are kind of the neglected younger sibling of the better known 401k plans. Both are employer sponsored retirement plans, meaning your employer has to set them up for you, unlike an IRA or Roth IRA which are individual retirement plans. However, a 457 plan is a special retirement savings plan in that it is only allowed for certain organizations, specifically governmental employers and non-profit employers. The non-profit 457 plans are known as non-governmental 457 plans and are less flexible.

For governmental 457 plans, the main advantage is that unlike 401k plans, there is no 10 percent penalty for withdrawing money from a 457 plan prior to age 59 1/2 like there is for a 401k savings plan. However, withdrawals from a 457 plan are taxable, just like withdrawals from a 401k plan are taxable.

Which, brings us to the Roth 457 savings plan.

Roth 457 Retirement Plan

roth 457 retirement planAs you can probably guess from the name, a Roth 457 plan has similar tax-advantages to a Roth IRA, or Roth 401k, namely that withdrawals from the account are tax-free, rather than taxable. In exchange, you do not get the up-front tax savings from your contributions like you do with a traditional IRA or traditional 401k retirement plan.

In order to use a Roth 457 retirement account, your employer must first offer that option. An employer may offer only a regular 457 plan, or may offer both a Roth 457 account and a traditional 457 account. For example, the State of Colorado offers a Roth 457 retirement account plan option via Colorado PERA.

If your employer does offer a Roth 457 plan, then you contribute via salary deferral just like with a standard 401(k) plan. Your deferral may be as a percentage of salary, a fixed amount contribution, or other option, up to the annual maximum 457 contribution allowed by law and your plan. There are no coordination rules with 457 plans versus 401k plan anymore. That means you can make the maximum 401k contribution AND another full maximum annual contribution to your 401k plan, for a total of $36,000 ($18,000 each, with a catch-up contribution allowed for those age 50or older).

Your contributions are after-tax. That means that the amount you contribute still counts as taxable income.

Withdraw from Roth 457 Plan

The main advantage of a 457 plan over a 401k plan is that there is no 10 percent tax penalty on withdrawals made before age 59 1/2. However, in order for a withdrawal from a Roth 457 contribution to be tax-free, the plan participant must be older than 59 1/2. In addition, the first contribution to the Roth 457 plan has to have been made at least five years before the withdrawal.

It is easier to understand with a quick table:

  • All withdrawals from a regular 457 plan are taxable.
  • Early withdrawals from a regular 457 plan are taxable but NOT subject to an additional 10 percent penalty like early withdrawals from a 401k plan are.
  • Early withdrawals from a Roth 457 plan are also not subject to a ten percent penalty. However, early withdrawals ARE subject to ordinary income taxes.
  • Withdrawals from a Roth 457 plan after age 59 1/2 are both tax-free and penalty free.
  • Withdrawals from a Roth 457 plan where the first contribution was made during the last 5 years are taxable regardless of age.

Which is Better Roth 457 or Regular 457 plans?

Determining whether a traditional 457 plan is better than a Roth 457 plan or if a Roth 457 retirement plan is better than a regular 457 retirement plan is kind of a tricky question. The answer, depends upon whether or not you ever take an early withdrawal.

If you end up taking an early withdrawal, then the regular 457 plan is better than the Roth 457 plan.

Why?

The traditional 457 plan gives you a tax-savings on every contribution you make. The Roth 457 plan offers no tax-savings or deduction on contributions. However, both plans will make you pay regular income taxes if the withdrawal is early. In other words, for an early withdrawal from a Roth 457 plan, you will pay taxes both on the contributions and on the withdrawals. On an early withdrawal from the traditional plan, you will only pay on the withdrawal, not the contribution.

If you do not take an early withdrawal, then the difference is the same as the difference between a Roth IRA and traditional IRA. Assuming the money invested inside your account grows over several years, you will probably save by not paying taxes on a much larger amount than your contributions. However, you may be in a lower tax bracket during retirement, so you may have reaped a bigger reward by getting tax savings while working. This is especially true for contributions made near retirement.

If you consider your 457 plan to be part of your emergency fund, then do not use the Roth option. If you (more wisely) intend to never withdraw from your 457 plan until you retire, then the Roth options is viable.

 

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Finance Gourmet on April 12, 2015

If you have a Capital One Rewards card in 2015, that is not a cash back credit card, then chances are you are earning points with each thing you buy.  Capital One No Hassle Miles are earned on numerous Capital One rewards cards. The program follows the basics that all other miles based credit card rewards programs use. For each dollar you spend on the credit card, you earn a certain number of miles or points. Different cards have different earning rates. Some cards earn 1.25 miles per dollar, or 2 miles per dollar for purchases at certain places like gas stations or grocery stores. Miles can be redeemed for free airline tickets, free hotel rooms and other free travel services.

2015 Capital One Rewards Catalog

Capital One saves money by not mailing a printed rewards catalog to every cardholder. Some customers report that they get catalogs because they have a high point balance, while others say that they only get the miles redemption catalogs when they have high credit card usage. Either way, there is no way to order a Capital One Rewards catalog in the mail. You either got one or your didn’t.

Like all rewards programs, the merchandise you can redeem miles for is not offered at a consistent bargain price. The reward “prices” are good for months at a time, so unless the card company is willing to hold inventory of merchandise (expensive), it is necessary to charge an amount of points that results in paying full retail or more for an item. You are much better off redeeming your rewards points and miles for free travel online anyway.

Capital One Rewards Chart

Fortunately, you don’t even need a complicated Capital One rewards chart to figure out how many miles you need to redeem for a free flight, depending upon whether you have Capital One No Hassle Miles, or Capital One Venture Miles.

For the Capital One Venture Card, and its no-fee cousin, the Capital One Venture One Card, you redeem your miles at a rate of 100 miles per dollar for any travel expense. (Only certain categories of travel expenses are allowed under the Venture One rewards program, but they include airfare, hotel and car rental.)

You don’t have to order your reward or redeem miles in advance. Rather, when your travel expenses show up on your credit card statement, you can redeem your miles against the existing charges. For example, if you spent $650 on a free plan ticket as your credit card reward, you would buy the ticket using the Venture card just like you would if you were not redeeming miles for free trips. When you see the $650 show up on your monthly bill, or online, login to to redeem your miles. Use 65,000 miles to cover the $650 charge and your balance is now $650 lower. Just pay the rest of your credit card bill like normal.

If you have a Capital One No Hassle Miles card, the deal may require a free ticket rewards redemption chart.

  • A ticket that costs less than $150.00 takes 15,000 miles to redeem.
  • $150.01 to $350.00 takes 35,000 miles to redeem.
  • $350.01 to $600. 00 takes 60,000 miles to redeem.
  • Tickets over $600.01 are the price times 100 miles to redeem.

Capital One Purchase Eraser

However, most Capital One rewards cards now offer the company’s Purchase Eraser. For cards that earn miles, travel purchases, such as airline tickets can be erased for 100 miles per dollar. A $200 airplane ticket would require 20,000 miles to erase, giving the equivalent of a free airline ticket on any airline. The Purchase Eraser also works on non-travel charges, but it costs more miles, or points, to erase non-travel expenses.

A relatively wide range of charges are considered travel expenses by Capital One and thus subject to the best redemption rate. For example, I’ve noticed Car2Go rental expenses show up as travel, as well as hotel stays, many hotel charges, restaurants that are in hotels (even if you didn’t stay at the hotel) and so on. Just log into your Capital One Rewards redeem website to see which items show up under “travel”.

Redeem Miles for Cash or Gift Cards

You can also redeem No Hassle Miles for cash or gift cards.

Cash rewards are the same cost as statement credits. The only difference is that you don’t get a check in the mail. Each reward is redeemed at a rate of half the redemption points for travel. In other words, while 10,000 miles should get you $100 worth of travel, it only gets you $50 worth of cash, or $50 as a statement credit.

Gift card rewards are dependent upon both the retailer and amount. Some retailer’s gift cards cost the same amount as cash. In that case, you are better off buying the cards, collecting the points for spending the money and then redeeming for a statement credit. Other retailers redeem at the same rate as travel. There are also special deals that come and go for certain cards that come out as a better deal compared to cards. At the time of this writing, a $100 Bed Bath and Beyond Gift Card was 8,000 miles, while a $100 Bass Pro Shops Gift Card was 9,000 miles, and a $100 Lowes Gift Card was a full 10,000 miles.

Watch out for changing redemption rates based upon the size of the card. Some retailers will charge a higher rate on cards with smaller values. Often, the better rate begins at $100 gift cards, so check this price point first, and compare to the lower price amounts.

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Finance Gourmet on April 9, 2015

Do Millenials Have Money To Invest?

A recent Bankrate survey shows that just 26 percent of Millenials say they own any stock. That sounds about right to me. As a former financial advisor, I never conducted any official, statistically valid surveys, of course, but I did talk to a lot of people, many of them younger. Younger people, like Millenials, almost never became my clients. The feeling was mutual.

people-clipart

You see, most younger people don’t HAVE any money, even if they are currently making it. If you graduate from college at say 22, and you get a job paying $75,000 per year, then you are doing pretty well. But, you may have student loans; you probably would like to buy a house; you might be getting married and saving for a wedding. Of course, you might also be enjoying your freedom and taking trips, buying cars, and so on.

The thing is, even if you were saving 10 percent of your income that still means you only have $7,500 of investable assets after a year. $15,000 the next, and so on and so on. By the time you had even the minimum of $100,000 that makes it worth even a junior-level financial advisor to take you on as a client, you are in your 30s, at best. In other words, there is a very big difference between cash flow, and actual assets.

Of course, investment returns and compound interest help, but they take a long time to kick in. The result is that unless you inherited money, or got a big gift or bonus somewhere along the line, the only reason you would own any stocks at all is if you signed up for your 401k (which you should do, right away as part of any retirement plan), you don’t really have any money to put in stocks.

Many Millenials cited in the survey, however, stated the reason they don’t own any stocks is lack of information and understanding. That’s not surprising. They don’t really teach that stuff in schools, and the current narrative in our country supports the theory that the financial professionals out there aren’t always looking out for your best interests, rather than their own bonuses. That means there really isn’t any place to turn to learn what you need to know to have a solid financial plan and good finances. (I try, but there is a lot of knowledge to cover out there :)

For those under-30 today, the other issue is student debt. The reports about the levels of student debt are exaggerated for news headline purposes, but the fact remains that many younger adults do have $20,000 to $40,000 in debt. While that isn’t crippling (student loan repayment options offer very low monthly payments) many younger adults watched their parents get in trouble with debt. That means their focus is paying off those loans, not investing. And, with the exception of dropping some money in a 401k plan, that is a smart move.

Of course, this will all turn around eventually. Someday soon, more people will remember rising stock markets and friends who ended up with big nest eggs than people remember plunging markets and a financial crisis that we were lucky to pull through thanks to strong Federal Reserve leadership. In the meantime, experts in the press will wring their hands about low investment rates, and everyone will do what they always do, figure it out, pay their bills, send their kids to college, and then find a way to make it in retirement.

 

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Finance Gourmet on March 27, 2015

There has been a lot of talk recently about the Federal Reserve raising interest rates. First, remember that the Federal Reserve only actually sets interest rates for banks. Specifically, the Fed sets two interest rates. The first interest rate, called the Discount Rate, is the interest rate the Fed charges banks for an overnight loan. The second rate is called the target rate, and this is the interest rate the Fed tries to achieve via the open market operations.

Since the monetary crisis that started off the Great Recession, the Federal Reserve’s target interest rate has essentially been zero. The purpose of such a rate is to make it more worthwhile for banks to lend money. The idea is that more money in the economy stimulates additional growth. The economy is still growing very slowly, but it is still growing, which brings us to raising interest rates.

Interest Rates Growth and Inflation

fed raising interest ratesIn physics, basic equations come with the caveat that they are true, on a friction-less plane, in a vacuum. In other words, if there is no gravity or wind resistance. Such calculations are useful for understanding concepts, but would be devastatingly inaccurate for use in the real world. Likewise, many economic concepts can be reduced to simplicity by ignoring a host of real world factors.

Once we ignore all of the other influences on the economy, we get the concept that if money is cheap (interest rates are low), then consumers and businesses will spend it on new equipment, new goods, new services, etc. This spending allows other consumers and businesses to have money to spend, and so on and so forth. This is considered “stimulative”, which means that it helps the economy grow.

If the economy grows too fast, then inflation occurs (again, this is only in the simplest of models, there are a lot of real world factors that matter here as well). Inflation occurs because money is “cheap.” That is, too many people have too much money. If we use the equally simple model of supply and demand, it looks something like this:

Widgets cost $100. With low interest rates and lots of spending, then a lot of people have extra money to spend on widgets. Since more people are buying widgets, there is more demand, and the company will raise the price of widgets accordingly. When this happens across the economy prices rise, and inflation occurs.

To prevent this, the Federal Reserve can do the opposite of lower interest rates. When the Fed raises interest rates, then it becomes more advantageous to save some of that money rather than spend it. Also, it becomes more expensive to borrow money, so consumers and businesses are likely to cut back spending rather than expanding their credit.

Back to our widgets, if the demand falls (or better yet, never increases enough to generate higher prices in the first place) then prices stop rising and inflation is “tamed.”

Target Inflation

In reality, inflation cannot be stopped. More people means more goods and services and more labor. There simply has to be more money to accommodate this. Thus, the Fed’s goal is not necessarily to eliminate inflation, but rather to keep it small. A growing economy is an inflationary economy, all other things being equal.

The trick for the Fed is to allow growth and a little inflation without allowing too much.

For some, the time to start raising interest rates is now.

What Happens When The Fed Raises Interest Rates?

When the Fed raises interest rates, the effects can take some time to come online. This is the difficulty of the Federal Reserve’s job. They must predict both what their actions will cause, and how long those effects will take to impact the economy, while also predicting what the economy itself will do in the mean time.

For consumers, the results tend to show up first in their credit card interest rates. Most credit cards have a variable interest rate equal to some benchmark interest rate plus some amount. So, when the Fed raises rates, the interest rate charged by your credit card goes up.

Likewise, banks will raise interest rates for new loans. That means instead of being able to afford a $35,000 car, maybe you can only afford a $32,000 car loan. Home loans are eventually effected to, indirectly.

Overall, the economy should slow its growth and prevent inflation.

The million dollar question is when it the right time. Too soon, and the economy stagnates or falls back into recession. Too late, and inflation takes hold before rates can rise.

 

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Finance Gourmet on March 23, 2015

Retirement planning is actually incredibly simple and straightforward for most people. However, it can quickly sound complex because of all the edge cases, exceptions, and possibilities that really only affect a small number of people. If you eliminate all of that noise, however, there really isn’t much to the average American’s financial plan. Follow the following information and there really is no reason you can’t make your own simple retirement plan.

Obviously, every situation is different. If you have unusual circumstances such as a coming inheritance, money in trusts, or other legal situations, this plan won’t work for you. If you have regular income, a family, and just need a plan, this is perfect for you.

Do It Yourself Financial Plan

simplify retirement planningOne of the things that quickly complicates financial planning is the idea that you have to predict how much income you will need in retirement. This step is a waste of time for 90 percent of people.

Why?

Because, for most people retirement saving and investing is about how much they can save, not how much they will need. To put it another way, consider this. If I tell you that if you can save $10,000 per month, you will have an amazing retirement, does that help you?

It only helps if you actually CAN save $10,000 per month. It’s completely irrelevant if you can only save $2,000 per month, or even $7,000 per month. Projecting your retirement needs is a fools errand. Not only is that number a complete guess, but it will change greatly over the course of your life.

Instead, for a simplified retirement plan, focus on how much you can save. Chances are you need to save more than what is comfortable for you, but you can’t do it today. So, what should you do?

Enroll in your 401k plan. No matter what you think you see or hear about better options, for 90 percent of working Americans, nothing is better than your 401k plan. What’s more, for most Americans, the maximum amount that you can put in a 401k plan is more than you have the ability to actually save anyway. So, just ignore all of that other stuff and start socking away as much money as you can in your 401k savings plan.

If you are contributing the maximum percentage, or if you are maxing out the highest possible 401k contribution for the year, skip to advanced retirement planning.

How Much Should You Save For Retirement Calculator

The next thing that overly complicates retirement planning is calculating how much you need to save. That number is based upon the previous calculation about how much you will need. Don’t bother. Trust me when I tell you that unless your expenses are a very low percentage of your income, then it is virtually impossible to over-save for retirement. In other words, just save as much as you can. If you’d rather see numbers than trust me, read on.

The maximum 401k contribution for 2015 is $18,000, or $1,500 per month. Put another way, that’s 10% for a person making $180,000.

Do you make $180,000 or more for the year?

If not, stop worrying about other kinds of retirement plans and load up your company 401k plan with as much money as you can afford to save for retirement.

For the best retirement, you’ll want to be saving 10 percent of your income at minimum. Can’t afford 10%? Most people can’t, at least not right away.

Here is how to build your retirement savings.

First, start by setting your 401k contribution as a percentage instead of a flat amount each paycheck. The result is that every time you get a raise, your contribution amount automatically increases thanks to the way percentages work. But, that’s not good enough if you aren’t already contributing 10%.

So, second, every time you get a raise, increase your contribution percentage by 1% until you reach 10 percent.

That’s it.

Do that, and you will have the best retirement you can afford.

Do I Need Advanced Retirement Planning?

That wasn’t so bad, was it? But, now you are thinking, about that one thing you read about. And, what about a Roth IRA, or shouldn’t I worry about…

Stop right there.

Let me break it down for you, in numbers, realistic financial advice style.

First, unless you are maxing out the full annual 401k contribution every year, chances are very unlikely that you are going to need to worry about your taxes in retirement. That means you don’t need to worry about getting any tax-free retirement income from things like a Roth IRA, or other tax-deferred retirement plan.

Unless you are maxing out your full 401k contribution, you most certainly do not need anything like an annuity, whole life insurance, or anything else to manage your taxes in retirement.

Fact: Unless you are in your 20’s and already pumping money into your 401k, chances are you will retire with around $1 million.

Fact: In order to never outlive your money, you’ll want to keep your withdrawal rate in retirement around 5 percent.

Fact: 5 percent of $1 million is $50,000 per year.

Fact: You do not need a way to “manage your taxes in retirement” if you are only have $50,000 per year in income.

Proof:

  • $1,000,000 in retirement nest egg.
  • Withdraw 5% per year = $50,000 as taxable income (all gains inside account still tax-deferred).
  • Standard deduction for a couple (assuming you are married) = $12,600.
  • Taxable income = $37,400
  • Income tax on $37,400 for married filing jointly = $4,687 (2015 tax tables)

That’s an effective tax rate of a little less than 10%.

Do you pay less than 10% in taxes today?

Then, you are coming out ahead by getting the tax savings now versus a Roth IRA, or any other tax-free later retirement program.

If you retire with less than $1 million, then you have even less of an issue.

What about inflation? All of the numbers above will adjust with inflation, but there is a catch. Your salary, your taxes, and your final retirement number in the future will all be hire, but the end result is the same because those numbers tend to move up together over time. So, if you are 25 now, yes, you’ll retire with more than $1 million thanks to inflation. Of course, you’ll need 5% of whatever that amount is in order to live like the same as $50,000 gives you today.

If you have more than $500,000 in your 401k retirement plan today, or if you are maxing out your 401k contributions, you may need more advanced financial planning. Otherwise, stick with loading up your 401k until you either:

  • maxing out your 401k contributions and still want to save more for retirement

or

  • your retirement account balance is $500,000 or higher and you are more than 10 years from retirement

Coming soon:

I’ll be putting together an advance personal retirement planning guide soon, or make an appointment with a professional financial advisor. With that much money, you’ll be sure to get the attention you need.

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Finance Gourmet on March 19, 2015

According to a recent CNN article, the Social Security Office still has active (that is, not official deceased) numbers and records for 6.5 million Americans age 112 or older. There are only 35 total people living worldwide who are that age.

The problem?

social security numbersThese, so called, zombie social security numbers could be used, along with a fake birth certificate (or a lot of makeup) to create fraudulent IDs, credit cards, bank accounts, you name it. And, since the numbers are active, but not being used, no one will even be around to complain that accounts are being opened in their name.

The truly funny part about this is that the fix is so difficult, brought to you by the people who do bureaucracy best. If you aren’t a government employee, the (partial) fix is as easy as writing a small computer program. There are apparently 12 people that age still actively drawing Social Security benefits. If the total number of 112-year olds is even remotely accurate, than less than 20 people world-wide could still be alive, and counting on having that valid Social Security number. In other words, expiring every one of the 6.5 million numbers (except the 12 still collecting benefits, of course) would solve the problem in one fail swoop. If mistakes were made, it’s highly unlikely that those remaining 112-year olds that slipped through the crack (all 20 or so of them) would overwhelm the system to such a degree that any actual problems would occur.

Of course, that’s not the way the government works. There is no such thing as an “expired” number. It would take an act of Congress (and or a new promulgated rule, I don’t know for sure) to create such a designation. So, the only way to end a number is for it to marked as deceased. But, the SSA can’t just arbitrarily mark people as deceased, there are rules and procedures after all. Which means the only way for a death to be counted is for a hard copy death certificate to be sent, and verified, to the SSA. The vast majority of these people died long ago and no one is out there collecting death certificates for all of these 6.5 million folks, which means their numbers will never be expired.

In true Washington fashion, this is a punch-line news story for now. It will be again in a few years. Eventually, it will either be so ridiculous, or the use of those numbers will become so widespread that someone will actually HAVE to do something. Then, and only then, will anything come of the hand wringing about all those dead people out there with active, valid Social Security Numbers.

 

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Finance Gourmet on March 16, 2015

Once upon a time, businesses sold you goods and services. You paid once and then used them until they wore out, broke, or no longer served your needs. Then, you went and bought something new. This works pretty good for customers, but can be hard on businesses who have to constantly come up with new ways to sell you something. These days, business has found a better way to consistently fund it’s profit and loss statement, but it may have ruined its customer’s budgets along the way.

Little Subscriptions

When you make your budget for the month, chances are you properly account for those standard monthly bills like electricity, phone, cable, HOA dues, car payments, rent / mortgage, water, heat, and so on. Chances are also good that these payments eat up a fair amount of your budget.

But, are you accounting for all of those little subscriptions out there?

If you try replacing any of those above services, chances they come with different monthly subscriptions. Cutting the cord on your cable company? Netflix, or Hulu Plus are monthly subscriptions. You can also subscribe to Amazon Prime on a monthly basis. If you want to replace your DVR, Tivo wants a subscription fee equal to what Comcast charges to rent it’s DVR.

Lately, it seems like everyone wants to charge you monthly. At first blush, this can seem like a good deal, but these expenses come quick and easy, and can add up to a lot of money along the way. Like music? There are some free services, but if you like your music ad-free and with the ability to skip (or never hear) all the lame songs you want, you’ll need the premium version. Cost $9 per month.

It’s only $9, right?

True, but these days, there are A LOT of things out there wanting to use the subscription model.

I’ve had the Adobe Creative Suite for a long time now. I have version 4. That is no where near the current version, but it still does everything I need it to do, and best of all, it doesn’t cost me any money. If I want to upgrade though, Adobe wants me to SUBSCRIBE to the Adobe Creative Suite. I can get all the Adobe stuff for a whopping $30 per month, or just the photography stuff for $10 per month.

Again, it’s only $10, right?

Of course, I can do the same thing with Microsoft Office. Personal version is $7 per month, or I can install it on up to 5 PCs for $9 per month.

It’s still only $9, right?

The funny thing about the software, is that everyone has added it up and decided it’s a good deal. After all, it works out to the same cost, or even less, if you buy a full install version every time a new upgrade comes out. But, the catch is that most people don’t buy software every time a new upgrade comes out. They wait until they need new features, or their old version breaks down. It’s been years since I’ve paid a penny to Microsoft or Adobe, which is exactly why they want subscriptions.

More Monthly Charges

Software and music aren’t the only places you’ll find this new drive for subscriptions.

There are monthly subscriptions available for legal services, video games (World of Warcraft), online services for calling, sharing, or storing.

I used a Groupon for a massage last month. It was a good enough massage, but the business model of the place is for me to sign up for a monthly massage, even though I don’t usually get a massage every month.

In a lot of ways, these new subscriptions are like those coupons that offer you $1 off when you buy 4. Normally, you’d only buy one box of cereal, but you can save by buying more. I’ve noticed this seldom works out better for me. But, if I would like to increase the rate at which I get massages, I can get one a month for cheaper… I think… maybe…

Budget Those Little Monthly Charges

The most important thing is to make sure that you track and budget all of these monthly charges and make sure you are covering the cost. Seeing what they all add up to each month might also make you reassess the value of that “only $9 per month” charge you signed up for.

Sample Budget of Little Monthly Charges

  • Microsoft Office $9 / mo.
  • Adobe Photography Suite $9 / mo.
  • Spotify $9 / mo.
  • World of Warcraft $15 / mo.
  • Hulu $9 /mo
  • Tivo $15 /mo
  • Massage Place $49 / mo
  • Legal Services Plan $15 / mo
  • Investing Plan $15 / mo. (or percentage of your 401k?)
  • Carwash Subscription $11 / mo

And so on…

The list above runs $156 every month. That’s on top of your regular bills.

The key to getting these subscriptions right is to understand how you use these items and services, not how THEY show you they can be used. If you get your car washed once every 6 weeks, does a cheaper wash every 4 weeks save you money, or just make you wash your car more often?

In my case, buying Adobe on a Black Friday special deal every five or six years is clearly a better deal for ME and paying $10 every month, is clearly a better deal for THEM.

I guess maybe I’ll figure out how to use a different program… and I’ll definitely get my massages somewhere else, without a subscription.

 

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Finance Gourmet on March 12, 2015

For years, everyone involved in the TV or phone business has boosted their profits using increasingly dishonest tactics, all made legitimate by a few paragraphs of fine print on ever advertisement. For example, the advertised rate doesn’t actually include all of the costs necessary to use the package you are buying. There are plenty of add-on fees, plus modem rental, DVR rental, and so on, which I noticed not long ago when comparing Comcast to CenturyLink here in Denver, one of many articles about cable bill scams I’ve written over the years.

And, then of course, there is the gold standard of trickery, the limited-time offer, where your cable or satellite provider starts by offering you a reasonable competitive rate for a limited time. Then, your rate goes up, automatically, and all those great offers are for “new customers only.”

FTC Claims DirecTV False Advertising

Since all the TV and phone companies use this low-priced trial offer, it was somewhat surprising today to see that the FTC is charging DirectTV with false advertising regarding it’s introductory trial offer of service. Or, as the FTC blog says, “there’s DIRECTV — and then there’s Deceptively Advertised DIRECTV.” – Ouch.

The key to this particular allegation seems to be that the FTC doesn’t believe that DirecTV made it clear enough that even though the trial offer was for one year, that the contract was for TWO YEARS. In other words, you were signing a contract to pay the low price for one year, and the high price for the second year. Cancellation fees were over $400 according to the FTC complaint. Contrast this to Comcast which offers a low one-year rate and a matching one-year contract.

The interesting part here, is that in my experience this IS disclosed somewhere. In fact, when we finally cut the cord from cable earlier this year, one of the issues was the option to bundle DirecTV (or get Dish Network separately) with our CenturyLink internet. I refused to get DirecTV because I saw that I would have to sign a two-year contract and that my rates would be ridiculous during that second year.

In fact, the even more deceptive practice is that CenturyLink’s website explicitly states that you are signing up for a one-year contract. What is not made clear is that this contract duration is only for the CenturyLink part. If you bundle DirecTV, then that part has a two-year contract, even though you are only signing up for one-year with CenturyLink. The only reason I caught that was that I had already investigated DirecTV and wanted to make 100% sure I wasn’t accidentally signing up for a two-year deal with them. Click enough of those little informational buttons, and you eventually get the actual terms of service, and sure enough, there in the contract language it says that you are indeed signing up for two years.

Curiously, I think this is the same practice at Dish Network, the question is, will the FTC be suing Dish Network (a.k.a. Echostar) next, or is there something about the way that Dish displays its fine print that makes it acceptable in the eyes of the FTC? This screenshot is from the Dish website today (3/12/15) and has the same bold print for 12 mo. with the same tiny but you are signing up for 24-months below.

Dish DirecTV Intro Offer Fine Print

DirecTV’s argument will be, as always in these kinds of cases, that it did disclose (and had the customers sign that they got said disclosure) the necessary information and that customers were required to find it, understand it, and live by it, no matter how many didn’t realize they what they were getting into. To win its case, the FTC will have to prove that whatever disclosures the company made were not sufficient.

Of course, none of that will happen. Instead, the company and the FTC will pick an amount of money that is insignificant to the company (other than as a write off on its financial statements) but that sounds impressive to the public to be the fine without the company admitting any wrongdoing. Then, here comes the irony, the company will agree to disclose information better. Exactly, what kind of fine print and buried contract language will be used for that will be up to the company.

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