Once upon a time, people retired from their first real job. They had a nice pension to live on. Housing values held. College grants funded their kids’ education.
In today’s troubled economy, though, layoffs are common, pay cuts are routine and reductions in benefits are cutthroat. Housing values have tanked along with stock portfolios, and some college grant offerings have gone downhill.
Welcome to “the new normal.”
Steve and Lisa Provost of Cooper City and their 11-year-old son, Jared, have been hit with a hard dose of the new reality in the past three years. Steve was laid off twice from his job as an elevator mechanic before he took a pay cut to work as an elevator inspector for Broward County.
“When you first get married you struggle, and here you are, 20 years later, starting over and struggling again,” Lisa Provost said. The Provosts stopped frills like eating out and family vacations to cut expenses. They raided their retirement savings to keep their mortgage current.
“We’re still trying to rebound by living frugally,” Lisa Provost said. “It has taught us to tighten our belts and remove the extras.”
But hope is on the horizon.
Local financial planners have some tough love and sage advice for individuals in every income bracket who are trying to steady the course navigating an economy bludgeoned by a global debt crisis, high unemployment and extreme market volatility.
“There is so much uncertainty. You have to control what you can control — which is how much you spend and how much you save,” said Matt Saneholtz, president-elect of the Financial Planning Association of Greater Fort Lauderdale.
Margaret Starner, senior vice president of the Starner Group of Raymond James and Associates in Coral Gables, said the secret to being in good financial shape is to plan.
“People need to take stock of their finances and make a plan,” she said. “Once they have a plan, they know what to do and it’s so much easier.”
Of course, personal circumstances vary greatly and there is no one-size-fits-all on financial advice, but here are answers to common questions from the experts:
Q. I’m making less money and the cost of living is increasing. Should I still “pay myself first?”
Yes, by cutting spending, said Charles Sachs, a certified financial planner and vice president at Evansky & Katz Wealth Management in Coral Gables. “Most folks are grossly under-saved for retirement.”
Look at ways to trim everyday expenses, such as eliminating the daily coffee or finding cheaper auto insurance or phone service, and you can start funding your retirement without anything more out of pocket, he said.
“If it’s $3 a day they can save from not buying a coffee or by getting a less expensive cellphone plan, that’s $100 a month, or $1,200 a year. In 10 years they’ll have $12,000,” Sachs said.
Early savers also get the benefit of compounding interest, although these days interest rates are rock bottom.
“There’s nothing like starting in those early years,” he said. “You can never reclaim that.”
Q. How can I use credit cards to get me over the hump?
Using credit cards that offer reward points or cash back is fine if you don’t carry a monthly balance, said Saneholtz, a certified financial planner with Tobias Financial Advisors in Plantation. Otherwise, they should be a last resort.
“People should not use credit cards to get themselves over the hump without a thorough examination of their budget,” he said. Cut unnecessary spending first, then only use credit cards on a short-term basis to get must-haves, such as food.
Check sites like www.bankrate.com to find cards with no annual fees and a no-interest introductory rate.
“When the zero percent interest rate ends, be aware that the rate could skyrocket from 0 percent to 20 percent,” Saneholtz said. At that point, consider transferring the balance to a new card that offers a 0 percent rate on balance transfers.
Maximize rewards by choosing cards that match your spending. For example, if you use a card for groceries, look for a card that gives extra rewards at grocery stores.
Q. How do I budget for a furlough?
Furloughs emphasize the importance of living within your means and creating an emergency fund to prepare for times in need, Saneholtz said.
A temporary furlough is effectively a salary cut, which means you have to plan for less income. Look at what expenses you can cut. A reduction in expenses could be enough to offset the reduced income, he said.
“Remember there is good and bad in everything. If you are already in debt…it may give you time to look for another job,” Starner said. “You can go home and sulk or look at it as an opportunity.”
Saneholtz said if you get advance notice of a furlough, “turn it into a positive by lining up a temporary job or volunteering in an industry that could give you experience in your field or lead to a new career.”
Q. The stock market is tanking. Should I still max out my 401(k) contributions to take advantage of the match?
Continue to max and more, if you can, said Howard Kramer, a certified financial planner and president of H.A. Kramer and Associates in Plantation. The stock market is actually looking good, if you have a long time horizon.
“It is ‘on sale’ and for those who will be working for 15 years or more, they should continue to maximize contributions to retirement plans,” said Kramer, past-president of the Financial Planning Association of Greater Fort Lauderdale. “If the stock market goes down, the price goes down, but you’re buying more shares for your money. When prices go up, you will have more shares.”
If you’re close to retirement, you should protect your accumulated savings in conservative investments, Kramer said, but continue your investments into equities, so you can take advantage of price fluctuations in the market.
If you’re close to retirement, take your accumulated savings and protect it in a conservative investment, Kramer said, but continue your investments into equities, so you can take advantage of price fluctuations in the market.
Q. I need to raid my savings. What should I empty first — my 401(k), regular savings, college or retirement account?
First cut unnecessary spending. “Look at how much you are eating out or shopping for clothes, anything that is not critical to daily living, to see what can be cut,” Kramer said.
If you have to raid, look first at college savings — not 529 or prepaid plans that are not as liquid — but stop any extra going into the cookie jar. Next in priority are non-retirement savings. Your last resort should be retirement accounts, which can hit you with penalties, depending on your age, and taxes if you take early distributions.
Q. How much of an emergency fund do I need to prepare for possible job layoffs/retraining periods?
“Before the recession, the standard was three to six months, now I would say nine months,” said Elaine King, a certified financial planner and managing director of wealth planning at The Lubitz Group in Miami.
Your emergency fund, designed to cover your expenses for a period of time if you lose your job or other primary source of income, should be based on how much time you can afford to be out of work before going into debt, she said. One client, a disciplined saver with a paid-off home, doesn’t need as much as the client who has four kids and a house note, said King, president of the Financial Planning Association of Miami-Dade.
“The more dependents you have, the bigger the emergency fund you need,” she said.
King said when clients complain about putting nine months worth of savings into a money market account paying less than 1 percent, she offers this strategy: Put half into a money market, and half into a secure short-term investment such as a treasury bond or bill to get a better return.
Saneholtz advises clients to keep their entire emergency fund in a money market. “The key is to shop rates,” he said. “If you do your research online, you can find FDIC insured institutions with online savings that generally pay higher than local banks.”
Q. Should I budget for training in case my job is eliminated?
Even if you have a job, you should take courses to stay current in your field and stay abreast of new technology, King said.
“It is very competitive out there and taking courses will lower your risk of not finding your next job,” she said. “Most of the jobs Americans are losing are being outsourced to other countries. That’s another reason people need to train on technology. We’re not only competing with the U.S., but with the world.”
Take courses at a community college or online, where you can often find free webinars, King said. Check to see if your employer pays for continuing education. Try LinkedIn groups in your profession to network and learn about training, she said.
Q. College costs are rising, and grant programs such as Bright Futures are decreasing their benefit. How should I be saving?
Here’s the tough love part: Don’t be afraid to have your child foot part of the college bill, Sachs said.
“Young adults have their entire lives in front of them to pay back school loans,” he said.
Sachs said that may sound harsh, but “parents need to make sure they save for their retirement, and if kids need to foot some of the college bill, so be it.”
Source: http://www.miamiherald.com/2011/10/28/2477314/navigating-your-finances-today.html
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