Author Archives: Claire Harrison

Claire Harrison
Claire Harrison is a Campaign Manager at blooom. A high-fiver, thinker, and coffee drinker, Claire loves the Oxford comma and clean design. She’s werkin’ hard to help people learn about their retirement savings and how easy blooom is to use.

Q3 2019 PastCast: Mild Temps. Dense Fog. Earmuffs.

 

Here’s all you need to know. (If you’re in a rush.)

  • US stocks rose nearly 2% in July, declined nearly 2% in August, and then rose nearly 2% again in September. In other words, if you look simply at the start and finish of the quarter, stocks did practically nothing, despite weeks of sharp, sometimes nerve-racking ups and downs in between.
  • As expected, the Federal Reserve cut interest rates in hopes of boosting a slowing economy that continues to be impacted by global trade uncertainty.
  • Despite talk of recession, further interest rate cuts, no end in sight to trade tensions with China, and more political scandal and election uncertainty in Washington, most fundamental economic figures remain strong, as we enter what is often one of the strongest quarters of the year for the economy and the stock market.
  • Pro tip: If reviewing performance of any investment account, make sure you understand the context of the time frame you are evaluating, especially when we’re talking short periods of time (which you really shouldn’t be doing very often!). For example, 1-year performance can be much different than year-to-date performance, particularly when you look back on the most recent 9-12 months we’ve experienced. For more on this, keep reading…

And now for the long(er) version…

While there were plenty of ups and downs in between, the last three months left US stocks almost exactly where they were to begin the quarter. There were more headlines of possible recession, the largest single-day spike in oil prices ever after an attack in Saudi Arabia, more China/US trade “Will they? Won’t they?” talk, interest rate cuts, and now even a Presidential impeachment inquiry by Congress (in case you haven’t heard). The outlook for any of this getting sorted out by the end of the year, is foggy at best.

Despite all of this, the historic bull market in US stocks has held strong and there are still very few fundamental economic signs that we are currently in, or nearing, an actual recession in the coming months.

August was probably the biggest test of investors’ will-power, as we saw several significant declines during the month, that had the feel of a pre-recession crash for some. Yet, here we are in October, basically unchanged from the end of June.  

While the stock market was essentially flat for the most recent quarter, we can also look back much further and see that major US stock indexes are currently sitting about exactly where they were on this same day LAST YEAR! 

Although the stock market has risen close to 20% for 2019 so far, that isn’t the full picture your returns are likely telling you. Confused yet? Good. Stay with me. Visuals to come.

 

Short-term performance: It’s all how you look at it. 

As we enter the 4th quarter each year, we often notice an uptick in clients looking for help understanding their returns for the year so far. A common question we get from clients goes something like the following:

“Hasn’t the stock market been doing extremely well this year? If so, why am I noticing that my account is only up 2% this year, when my co-worker was talking about getting 15-20% on his/her account?

When logging into any 401k account, many will stumble upon a return percentage, front and center, with a “YTD” or “year-to-date” reference next to, or below it. Others may find a percentage with “1-year” next to or below it. 

  • Year-to-date The performance of your account from January 1st of the current year through today (or the most recent business day).
  • 1-year – The performance of your account over the last 12 months.

While you might assume these two numbers should be similar, there are times when adding or removing just a few months from the equation can end up showing you VERY different results, which in turn will make you feel two very different ways about how your account is doing. 

Let’s start by looking at the year-to-date returns of US stocks for 2019 so far, as measured using the S&P 500 Index…

Year To Date Change

19% is actually the best 9-month start to any year since 1997. Not too shabby. But now let’s look at the 1-year returns for US stocks. See if you notice the reason for the huge difference…

1 Year Change

S&P 500 Index: Oct. 1, 2018 – Sept. 30, 2019

As you can see, when we zoom out wider to a 12 month view, one of the worst quarters for stocks in the last decade suddenly comes into the picture. That downturn at the end of 2018 ends up erasing a huge chunk of the gains you saw on the YTD chart. 

By simply changing the starting point to last October, the resulting percentage drops by more than 16%. If this was an investor’s account and not the S&P 500 index, which of these two numbers do you think they’re going to share at the water cooler? Probably not the 2.15% number. So what is the average investor supposed to do with this information? 

 

The lesson… None of this actually matters

Getting caught up in the 9 month or 1 year returns of an account that should be globally diversified (not just US stocks/bonds) for the long-term, is just a recipe for more unneeded stress in your life. 

The longer our timeframe gets, the more we see that the shorter periods are basically meaningless. But don’t take our word for it. Here are several return numbers for US stocks using numerous timeframes, for all periods ending 9/30/2019:

US Stock Returns:

1-day: +0.50%

1-month: +1.72%

1-year: +2.15%

5-years: +50.93%

30 years: +1,505%

 

First and foremost, it’s important to remember that a properly diversified portfolio should contain much more than just US stocks. But just for fun, let’s say you’re retiring today (congrats!) and looking at a chart of your nest egg balance over the last 30 years. You see that over the past 30 years, your diversified portfolio was able to grow by about 1,500%, hypothetically. On any chart showing that growth, you’re likely to see many peaks and valleys along the journey to today. 

Now ask yourself this. Do any of those small, or even big dips in this imaginary chart upset you right now? My guess is, no. But in the moment, each decline may have actually felt like true doom and gloom.

 

The road to retirement is the scenic route.

What happens in one month or one year is just a small bump in the road when you’re able to eventually look back on your journey to retirement. The road to get there is never a straight line. It’s more of a winding scenic route. So why bother worrying if you have a proven long-term strategy in place?

Take it all in along the way if you want, but stay focused on the destination. As long-term, disciplined investors, we understand that we don’t get to build the road we travel. The market does that for us. We just need help finding, and then staying on, the best route for us. 

We may get frustrated or tired here and there and take an exit that throws us off course, thinking we know a better way. But then we learn from each detour and find our way back on the path that’s best for us. Or at least, that’s the idea.

 

In Summary: Ear muffs!

Our 24 hour news cycle has a daily impact on stock market movements. That’s undeniable. But the noise of one day, one month, or one quarter, fades into the next and markets sort through the chaos over time. 

It’s precisely BECAUSE the market is so chaotic in the short term, that patient long-term investors benefit and are able to experience better outcomes than those that let the noise of the world distract them. 

Whatever it is you need to do to get your hands on some metaphorical noise-cancelling headphones, do it now. With a Presidential election and potential impeachment proceedings around the corner, the noise will only be getting louder from here. Your future self (and specifically his/her ears) will thank you.

 

 

 

————————

 1. As measured by the S&P 500, per CNN Money https://money.cnn.com/data/markets/sandp/

2.  Total return includes reinvested dividends. Source: https://dqydj.com/sp-500-return-calculator/

Source for all charts: CNN Money https://money.cnn.com/data/markets/sandp/

 

The information is provided for discussion purposes only and should not be considered as advice for your investments. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed. Investors should consider their ability to continue investing through periods of fluctuating market conditions.

Read More

3 Ways to Screw Up Your 401k (And How To Avoid Them)

Your 401(k) offers a pretty effortless way to build up enough money for a comfy retirement at home, out of state, or maybe on a beautiful island somewhere.

The money comes off the top of your paycheck before you even see it, you often get free money from the boss (thanks to an employer match), and there are tax benefits. Taxes are put on hold until you withdraw the money in retirement, when you’ll likely be in a lower bracket.

But retirement accounts aren’t foolproof. It’s easy to get snagged by pitfalls that could wind up costing you thousands of dollars in penalties and lost earnings.

Avoid these common and potentially very costly 401(k) flubs.

1. Not contributing enough

To receive the maximum benefit from your retirement account — the fattest possible nest egg,  grown through investments — you want to put the maximum amount into your account each year.

The 2019 limit on 401(k) contributions is $19,000, or $25,000 if you’re 50 or older. (That additional $6,000 is called a catch-up contribution, designed to help those who missed out on saving more when they were younger.)

At the bare minimum, you should be kicking in as much as it takes to get the full matching amount from your employer. Your company will likely put as much money into your 401(k) as you do, up to a certain percentage of your salary.

It’s not any kind of a requirement, but employers often do it — and not just because it’s good karma. It helps them hire and hold onto talented people (like you!), they have to keep up with competitors who match, and it gets them tax breaks.

On average, companies in 2019 are matching employee contributions to a record 4.7% of salaries, according to Fidelity Investments. Put another way, workers with 401(k)s received an average $1,780 extra from the boss during the first three months of the year — so this is one time that being all matchy-matchy would indeed be considered very fashionable.

2. Contributing too much

Funding your 401(k) is like the bidding on “The Price Is Right”: You want to hit your contribution limit without going over.

If you exceed the threshold, it can be almost as bad as going home from a game show empty-handed — without a new dinette set or billiard table.

IRS rules state that if your contributions go beyond the limit in any year, you have to remove the excess amount from your account by April 15 of the following year. The overage becomes part of your taxable income for the year when you went breezing past the boundary. Any investment earnings on that money become part of your taxable income for the year when you make the withdrawal.

But at least you won’t get dinged with the usual stiff penalty for withdrawing money from your 401(k) too early. More on that in a moment.

If you don’t pull the offending amount out of your account by the April 15 deadline, that money will be subject to double taxation — which is just as ugly as it sounds. The excess is considered part of your taxable income at the time the contribution was made, and then again whenever you eventually do make that withdrawal. Ouch, and ouch.

So, know the limit, and be careful that you don’t break through it.

 

3. Touching the money too early

This is one that snags far too many retirement savers. Raiding your 401(k) too soon gets very expensive, because you can owe federal and state taxes on the withdrawal plus a 10% IRS early withdrawal penalty.

What do they mean by “early”? You’ll get slapped if you touch the money before you turn age 59 ½. (How’s that for an odd birthday?)

Research shows that a third of account holders do cash out early, and that includes most younger workers between ages 18 and 34. People often do it when they change jobs, find themselves out of work, or are suddenly facing a huge car repair bill or other financial emergency.

This is why it’s so important to have emergency savings (enough to cover three to six months of living expenses), in addition to retirement savings. It’s tough, but it’s just part of the whole “adulting” thing.

Note that there are several exceptions to the 401(k) early withdrawal penalty. You might not have to pay it if:

  • You’re disabled.
  • You have high out-of-pocket medical expenses.
  • You lose or leave your job when you’re 55 or older.
  • You want to use the money for higher education.
  • You’re buying your first home.

But, in other cases, think very, very carefully about whether it would be worth it to tap your 401(k), no matter how badly you think you need the money. The consequences can be costly.

 

About the Author

Doug Whiteman is the editor-in-chief and analyst for Wise Publishing, Inc., and its flagship personal finance website MoneyWise.com. Previously, he was an analyst and editor covering mortgages, insurance and related topics for Bankrate.com, and was the consumer news reporter for Associated Press Radio. He has been quoted by The Wall Street Journal, USA Today and CNBC.com, and has appeared on ABC Radio, Fox Business and the syndicated TV show “First Business,” among other outlets.

 

Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.

Read More

3 Ways to Buy Time (Today and in Retirement)

If you asked people what they wish they had more of in life, almost everyone would say “time.” With the hectic pace of our modern lives, finding time to do the things that really bring joy can be difficult. And for many people, spending time dealing with saving, retirement planning, and other personal finance issues ranks right up there with a root canal.

But what if you could buy back that time without sacrificing the benefits of a solid financial plan? Through the power of automation, you can have the best of both worlds—a solid financial future AND getting extra time back to spend with family, friends, or working on your favorite hobby free from the worry of money.

By automating your finances, you can buy time in two ways:

  1. Saving time every month by not having to transfer money between accounts or remember to make contributions to your retirement funds.
  2. Setting up a system to automate your savings goals and get to retirement faster

While saving time today is important, I think even more important is the time you are buying later by setting up an automated system to fund your retirement. If by automating your savings you’re able to save and invest more consistently, your money will have more time to grow and you can even retire years earlier than you otherwise would!

With that in mind, here are 3 easy things you can do today to automate your savings and retirement plan, so you can spend less time worrying about your finances and more time enjoying life.

1. Pay Yourself First by Automating Savings

Saving money is hard enough as it is. I don’t know about you, but if I’m the one in charge of having to set up a transfer from my checking account to savings account every month, more often than not it just doesn’t happen.

Why You Aren’t Saving Money and What to Do About It

There are tons of financial statistics about the sad state of American finances that show most people have a difficult time saving money. Regardless of age or income level, many live paycheck to paycheck.

When left to our own devices, we tend to take the path of least resistance. If our bank account is flush with cash, we spend more freely until it starts to dwindle. Then at the end of the month we look back and wonder where all the money went.

This mindset of saving whatever is leftover after the bills are paid leads to frustration and hopelessness when it comes to saving money. Like a dieter who starts off with good intentions and a solid plan, the temptation to consume proves too great, and eventually he abandons the diet (or savings plan) thinking he is a failure.

But with a simple mindset shift, you can go from spender to saver and hardly even notice the difference. In my own life, I’ve noticed that when I try to do things by sheer willpower, it never goes well. But if I remove the temptation, reaching my goal becomes much easier.

In the dieting example, it is very difficult to stick to a healthy eating plan if you have to reach past the ice cream and frozen pizza to get to the vegetables behind them. Instead, if you remove the temptation (the foods you shouldn’t eat) from the house, it becomes much easier to choose the healthy option.

In the same way, if you set a savings goal and automate the bank transfer, you are removing the temptation of having money to spend in your bank account. So not only are you increasing your chances of success to save money, you are saving time as well!

Tips for Automating Your Savings

Once you spend a little bit of time up front defining your savings goal and the plan for your money, automating that plan is easy and will save you time month after month. Here are a few options to automating your savings so you don’t ever have to touch the money or think about it.

  1. Set a clear savings goal – Whether you’re saving for an emergency fund or vacation, make sure you have a clear goal and timeline that you can control.
  2. Make recurring transfers from your checking account – If you know you get paid every other Thursday, you can set up a transfer to occur right after the money hits your account. This will save you time and brain space so you don’t have to remember to do it – it just happens.
  3. Use direct deposit to divert money from your paycheck before it ever hits your bank account – If you get paid by direct deposit, you can often set up multiple transfers to go to different places. For example, if you want to save 10% of every paycheck, you can set up the direct deposit to put 90% in your checking account and 10% in your savings account automatically.
  4. Set up an online-only savings account at a separate bank than your checking account – One easy way to resist the temptation to spend your savings it to make the money just a little bit harder to access. If you set up your savings account with a separate bank, you won’t see the balance every time you log in to your checking account. In addition, transferring money out of savings usually takes 2-3 days – quick enough if you need it for an emergency, but long enough that you won’t be tempted to spend on an impulse buy.

2. Automate your 401(k) Contributions

Another way to buy time through automation is to set up your 401(k) contributions going into your employer-sponsored plan.

It’s no secret that the average American family is not saving enough for retirement. There is a lot of confusion as to how much you should have saved, but the standard advice is to put 10-15% of your income into retirement accounts. Even if you are saving the recommended amount for retirement for your age, making sure you have a system set up so you can set it and forget it is important.

Most employers will match up to a certain percentage of your salary, so if you’re not contributing at least that much you are throwing away free money! In addition to setting the percentage of your paycheck that goes into your 401(k), you can also choose your asset allocation for each deposit. If you’re not sure what your asset allocation should be, run this check-up with blooom.

For example, in my own 401(k) I split each deposit into 5 different low-fee funds offered by my plan to automatically diversify my investments. If you’re already contributing to your 401(k), it’s important to check what exactly you are invested in. Often if you don’t specifically set up which funds you want to buy, your money will be going into cash or a money market fund which may return only 1-2%. Make sure you are putting your money to work and not letting it sit collecting dust!

One more thing that many 401(k) plans allow you to do is to automatically step up your contributions each year. This is another great way to buy more time in retirement by slowly increasing the amount you set aside every year. If you’re currently contributing 10% but you want to eventually get up to 15%, you can set it to automatically increase 1% a year for 5 years. If you time it when you receive your raise, you won’t even notice the “missing” money.

3. Automate Your Spending

Once you’ve automated your savings and retirement investing, the last thing I’d automate to save time and stress is your bills. Between the mortgage payment, credit card, Netflix, phone, internet, and a dozen other recurring bills, setting up auto-pay is a must to save time (and your sanity.)

It will also save you money if you can avoid late payment penalties for those times you forget a bill is due (it happens to all of us.)

While I am firmly entrenched in the “auto-pay all the things” camp, I understand that some people are a little more wary of allowing creditors to automatically take money out of your account each month. If that is you, I would recommend setting up bill pay through your bank. While this is a semi-automated solution, you get alerts when a bill is due, and the only thing you have to do is click a few buttons to pay. The benefit of this method is you are still in control of when and how much money is taken out of your account.

And if you’re like me and really want to squeeze some extra money out of the bill pay process (to add to your retirement savings of course), I highly recommend getting a good cash-back credit card to earn 1-2% on every transaction.

In addition to that, I use a few of the best cash back apps like Ebates or Drop to stack even more savings on top of my normal shopping. Between these two things, I can generally add an extra $1-2,000 to my savings accounts each year.

While it’s not a ton of money, I look at it as slowly but surely buying back time as I get closer to financial freedom!

 

About the Author

Andrew Herrig is the founder of WealthyNickel.com where he writes about his family’s pursuit of financial independence. He is passionate about helping others build wealth through side hustles, saving money, and wise investing.

Read More

2019 401(k) Contribution Limits

Remember that resolution you had in January? You know, the one about contributing more to your work retirement plan this year? How’s that going? 

As we get set to wrap up 2019, now is a great time to revisit whether or not you are making the most of your retirement account at work. When it comes to your 401(k) or 403(b), you have until December 31st to maximize your contributions, if you can afford to. So what exactly are we talking about when we say maximize your contributions? Here are the IRS contribution limits for 401(k) and 403(b) accounts, for 2019:

Amount YOU can contribute this year

Under 50 yrs young: $19,000

50 or wiser: $25,000 ($19,000 + $6,000 catch-up allowance)

Keep in mind that this is the total amount you can contribute, regardless of what your employer may offer to match. Whether or not you decide to contribute pre-tax, roth, or a combination of both (if your plan allows), the total cannot exceed these numbers for the calendar year. 

If your plan does allow both pre-tax and roth contributions, we generally recommend splitting your total contributions to the plan between each. This allows you to reap the benefits of each and hedge against the uncertainty of your future tax situation and future tax law. 

As a general rule of thumb, if your employer offers a match, we recommend contributing as much as you need to in order to take full advantage of that match, at the very least. An employer match is essentially free money and if you aren’t contributing enough to get the full match they offer, you’re leaving money on the table, which can potentially take years of retirement income away from your future self. 

You still have time! 

As the year winds down, many of you may have an end-of-year bonus or raise coming. Both of those are great opportunities to give your 401(k) a boost toward maxing out your contributions. 

Pro tip:

If you’re not able to maximize your contributions just yet, a great habit to start this year is to simply start small. Consider bumping up your contribution percentage by just 1%. See how that impacts your budget over the next 6 months or so and consider increasing by another 1%. 

Over time, these small incremental changes will help you naturally adapt your budget to your savings goals, instead of the other way around, where savings is the afterthought. “Pay yourself first” is a great motto to live by. Many plans even offer an “auto-escalation” feature, where you can set a specific timeline and increment for automatic increases over time. Check with your plan administrator/HR department at work to see if this is available in your plan. 

 

Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.

Read More

3 Ways To Save For Retirement as a Digital Nomad

If you’re a digital nomad, you know that life on the road isn’t always as glamorous as your Instagram account makes it out to be. While the lifestyle certainly gives you more freedom than a traditional 9-5 job, it can also be worrisome. Most digital nomads are contract workers or freelancers. They may not have a steady source of income, and they most likely don’t have company-sponsored benefits like health insurance and a 401(k).

For most digital nomads, life is lived more in the moment, dreaming about the next destination, than it is planning for retirement. But truth be told? It shouldn’t be. If you enjoy traveling, why not start saving for retirement so you can retire young and keep living the nomadic lifestyle?

Here are three ways you can start saving today (regardless of how much you’re making):

1. Become Debt Free 

If you don’t have credit card debt or student loans, we applaud you. Go ahead and skip to number two.

Unfortunately, the average American has $38,000 of personal debt (excluding mortgages). Millennials and Gen Z have $42,000 and $22,000 respectively, most of which is from student loans and credit cards. While we wish we could go back and tell our younger selves “don’t get into debt!” if you’re in it, it’s too late. But it’s not too late to get out of it.

Our biggest piece of advice for you is to get out of debt ASAP. With interest rates upwards of 22%, your debt is increasing by the day and the longer it takes the pay it off the more you’ll owe and the less you’ll be able to save.

Start by calling your credit card company and ask if they’ll lower your interest rate. Even lowering it just a few points can help you save. It’s a competitive market and the worst they can say is no.

You can also look at transferring your debt to another credit card that will give you up to 18 months interest free, refinancing your student loans, or getting a personal loan from companies such as SoFi, Earnest, or Lightstream.

2. Set a Budget (And Stick To It)

If you’re truly serious about saving for retirement, you’ll need to understand your spending habits.

Sit down and review your expenses from last year (thankfully, online banking makes this relatively easy). Sort your expenses into various categories such as lodging, transportation, dining out, grocery shopping, entertainment, insurance, and “other”. How much did you spend in each category per month? It may be more than you think. If it’s too daunting to do this for the whole year, try looking at the past month. There are apps for budgeting you can look into for this!

Once you have an idea of how much you spent per category, start looking for areas you can cut back. There will be fixed costs such as cell phone bills and insurance, but for the more frivolous categories try and find areas to save. Are your restaurant bills averaging $400 a month? Start cooking more! Spending a lot on taxis when you could be taking the metro? Learn to love public transportation.

With your expenses laid out in front of you, set a budget for each category. It’s imperative that the budget be realistic otherwise you won’t stick to it. Your budget shouldn’t blow through your entire paycheck, either. In fact, you should have some money leftover.

With your categories and budget in front of you, add two more categories: savings and retirement. This is where that leftover money will go. Savings is what you can dip into should you be presented with any unforeseen expenses or emergencies, and retirement is the category that should remain untouched outside of investments.

Allot a specific amount of money that you can realistically afford to put into savings and retirement each month. If it’s only $50, that’s okay. Just make a plan and stick to it.

Just make sure you stick to your budget and add to your savings and retirement accounts what you promised yourself you would.

3. Pay Yourself First

Remember those two categories we just told you to add to your budget? Savings and retirement? When you get your paycheck, make sure you put the allotted amount into these accounts first. If not, you may be tempted to spend that money on other things.

We keep stressing the word “realistic” for a reason: if you set goals for yourself that are too egregious, you likely won’t stick to them. Thus, if $50 is all you can afford to put into your retirement account right now, that’s fine. Just make sure you keep yourself accountable and actually put that $50 into the account each month.

If you end up getting an extra gig or finding additional ways to save and bring in a bonus $500 one month, that’s great! But try and stick to your original budget and put as much of that into your savings or retirement accounts as well.

When it comes time to retire, you’ll be glad you put as much as possible aside each month rather than spend it on frozen cocktails in a new city.

 

About the Author

Leigh Kunis is a Top 5 blogger who left NYC two years ago to embrace the digital nomad lifestyle. You can typically find her “somewhere in Europe” writing about travel, digital marketing, and more.

 

Read More
1 2 3 4 12