7 Ways Moms Can Boost Their Financial Security

This Mother’s Day, focus on your financial future -- and that of your children.
When it comes to the financial relationship between moms and their kids, it’s all about giving -- giving advice, giving a helping hand, giving to charity. For instance, in the Thrivent Financial/Kiplinger Survey of Family Finances, 17% of respondents cited their mother as being most influential in shaping their attitude toward charitable giving, second only to faith communities (22%). At 6%, dads were in fifth place.

That squares with other surveys showing that mothers are the most influential source when it comes to teaching money-management skills. A new poll by Charles Schwab found that nearly 60% of women have used the recent economic turmoil to talk to their children more about money management.

At the same time, women express more anxiety about money than men do. In the Thrivent Financial/Kiplinger survey, women were more likely than men to say that they were struggling financially (37% versus 29%) and less likely to describe their financial situation as stable (26% versus 33%). Likewise, in the latest Retirement Confidence Survey from the Employee Benefit Research Institute, men were more confident than women that they would be able to save enough to live comfortably in retirement.

So this Mother’s Day, maybe moms should take a break from giving and spend a few minutes taking stock of their own finances so that they can bolster their financial security and that of their children. Take these seven steps to start the ball rolling.

Talk things out. When asked in the Thrivent Financial/Kiplinger survey what they would change about their spouse or partner financially, 29% of women confessed that they’d like him to earn more. But 21% said they wished he would discuss money issues more frequently. Too shy to start what may be an awkward conversation? At least sit down together to write down your goals and see whether you’re on the same page. Or schedule a money date to discuss financial issues.

Start saving for retirement. Small amounts put aside when you're young grow into great gobs of cash when you're older -- and lay the foundation for financial security and independence. Take the case of two people -- one who saved $3,000 a year for ten years (or $30,000) in an individual retirement account (IRA) between the ages of 20 and 30 and then stopped, versus another who began saving at age 30 and faithfully contributed $3,000 each year for 36 years (or $108,000) until retirement at age 66. Assuming an 8% annual return, the person who started saving earlier would accumulate about $778,000, compared with roughly $602,000 for the individual who started later (see our How Much Will Your Savings Be Worth? calculator).

If you’re in the workplace, sign up for your employer's retirement plan, and aim to contribute at least enough to qualify for any employer match. You can't afford to turn down free money. In 2010, you can contribute up to $16,500 to a 401(k) or another employer-based retirement account, or $22,000 if you’ll be 50 or older by year-end. And never cash out your company plan if you switch jobs.

Set up your own retirement account if you’re not covered at work -- or even if you’re a stay-at-home mom. For women, one of the great features of an IRA is that you can have one even if you don’t have a paying job, as long as your husband is employed. In 2010, he can contribute up to $5,000 of his compensation ($6,000 if you’re 50 or older) to an account for you, in addition to squirreling away $5,000 (or $6,000) in his own IRA. You can open either a traditional IRA or, if you meet income requirements, a Roth IRA (see Why You Need a Roth IRA)

Not only does this give stay-at-home mothers their own retirement stash that they can invest and control, but it also doubles the tax breaks and savings power available to you as a couple.

Buy plenty of life insurance. Once you have children, life insurance becomes a family priority because your kids would suffer financially if you weren’t around to provide for them. Women who are stay-at-home mothers and who are almost completely dependent on their husbands’ income are particularly vulnerable. But even working moms could be at a serious financial disadvantage if they were left to bring up a family alone.

As a rough rule of thumb, figure that insurance coverage should equal eight to ten times your total household income, including any coverage you have through your employer. (For a more precise estimate, use our insurance calculator.)

Although women are most often the ones who benefit from life insurance, don’t underestimate your own importance and value -- financial and otherwise -- in supporting your family. If you have a paying job outside the home, add together both your income and your spouse’s to figure your total need for coverage, and divide it proportionately between individual policies on each spouse.

To keep things both simple and inexpensive, buy term life insurance. You can buy several hundred thousand dollars’ worth of coverage for just a few hundred dollars per year. To price policies -- especially if you have medical issues -- go to AccuQuote (www.accuquote.com) or call 800-442-9899 begin_of_the_skype_highlighting 800-442-9899 end_of_the_skype_highlighting. It’s one of those financial tasks that will take you only 15 minutes (see Recipes for Quick Financial Fixes).

Recalculate your life-insurance needs at various points in your life. You may need more coverage, for example, if you have another child. On the other hand, once your children finish college and are less dependent on your income, you may need less insurance -- or none at all.

Write a will. In the absence of a will (intestate, in legal-speak), your state’s one-size-fits-all estate plan kicks in, and it may not be tailored to your needs or your children’s. For example, as the surviving spouse, you may get only a fraction of your husband’s assets, with the rest going to your children. If you and your spouse both die, the state decides who will raise your kids.

With a will, you call all these shots. You can divide your property just about any way you like and design creative trusts for your children that distribute money at specified ages, for example, or tie assets to specific purposes, such as paying for college. Review your will after the birth of each child.

Choose a guardian. Think of a will as a way to protect your most precious assets -- your children -- if something should happen to you and your husband while the kids are still minors.

Parents are often tempted to rely on informal guardianship arrangements -- “My sister has agreed to take care of our children if we aren’t around.” But an informal arrangement doesn’t have the legal standing of a formal guardianship.

And if both you and your husband should die without having formally named a guardian, the courts will decide who’s going to rear your kids. It’s possible that a judge could choose the one relative you wouldn’t want. Worse, a family battle could ensue, and the cost of a court fight would come out of your estate -- that is, your kids’ pockets. You can avoid all of these hassles by naming a guardian in your will.

Get your fair share. Just as important as setting up a will is reviewing the beneficiary designations on insurance policies, pension and profit-sharing plans, IRAs, 401(k)s, and other retirement plans. These assets go to whomever you’ve named as beneficiaries; they’re not covered by your will.

If you fail to update beneficiaries, you could find yourself in the position of Caroline, who was unexpectedly widowed at the age of 32. Before Caroline and her husband met, he had named his mother as the beneficiary of his retirement account and had never bothered to update the papers after he married. When he died, there was nothing Caroline could do to get access to that money for herself and her young daughter -- except depend upon the kindness of her mother-in-law. That’s yet another reason to take financial matters into your own hands.

Source

67 and Bankrupt: Are the Kids to Blame?

Larry and Abby are in their late 60’s. They are broke, about to lose their home and there is nothing they can do about it.
But it didn’t have to be this way.

10 years ago, they had over $500,000 saved on top of the two rental units they inherited when Larry’s mother passed away. At the time, Abby owned a successful small business and had a comfortable income. Everything looked like peaches and cream.

So what happened?

Patrick happened.

Pat is their son. He borrowed money from his parents seven years ago to open his auto repair business. Pat was a great mechanic but a horrible business person.

Larry and Abby just wanted to help their boy. They convinced themselves that the money their were forking over was just a loan. They were sure Patrick would pay them back some day.

But as the days passed, the likelihood of seeing that money again grew smaller and smaller.

He slowly drove the business into the ground.

But each time he feel deeper into the hole, Larry and Abby were there to bail him out. They were sure that all Pat needed was a little more working capital.

Of course, this enabled Pat to amass even greater debt. Within three years he exhausted all his parent’s savings. They had to sell all the real estate they inherited and they refinanced their home as well. Even after going through all that, Pat was left with debts of over $300,000 including $150,000 to the IRS.

He was much too proud to close the business. He was determined to make it successful – even if it meant spending every last dime his parents had.

So was Patrick to blame for Abby and Larry’s financial destruction?

Not in my opinion.

Abby and Larry volunteered to become an ATM machine for Patrick. Nobody put a gun to their heads. But that wasn’t really the root problem.

You see, the reason they wrote blank checks to Pat was because they didn’t take the time to think about what impact their decisions would have on their own financial future.

They were very mindful about their spending – except when it came to supporting their kids.

Pat needed money.

They wrote him a check.

It was automatic – and it was ridiculous.

Abby and Larry put their heads in the sand. They didn’t pay attention to their own financial plan. In fact, they didn’t have one.

Sure they had assets and income. But even though their estate was worth over $2.5 million at the high point, it didn’t last long once they started writing checks for $50,000 every other month to keep their kid in business.
I know this is an extreme example. You might not be sending huge amounts to your children….but the amounts don’t matter. And it also doesn’t matter how your kids spend the money you give them. I don’t care if they use your money to open a successful business or go to Harvard. If you can’t afford it then you can’t afford it. Period.

How do you know you can afford the support you give to your kids? Have you ever said “no” to your kids when they asked for financial help? How did that impact your relationship?

If you are on the receiving end of this, do you have an obligation to your parents to discuss the ramifications of their support?

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The Best Ways to Boost Your Retirement

This is a guest post from Robert Brokamp of The Motley Fool. Robert is a Certified Financial Planner and the advisor for The Motley Fool’s Rule Your Retirement service. He contributes one new article to Get Rich Slowly every two weeks.

With the S&P 500 still down more than a third from its 2007 high, we’re all a little unsure about our retirement plans these days. So it’s time for some good old-fashioned elbow grease. A little effort now should make for a lifetime of security and peace of mind. And the first step is to run your numbers through financial calculators to estimate whether you’ll have enough saved to kiss the boss goodbye. (Metaphorically, of course.)

The calculators’ answers are important information. But what’s even more useful is changing the variables to see what most improves your chances for success. A retirement plan has a lot of moving parts — how much you save, where you live, when you start taking Social Security benefits — and some decisions will have a bigger effect on your nest egg than others.

The factors that have the biggest impact on a retirement plan vary from person to person. But to demonstrate how you can fiddle with your factors to analyze your own plan, let’s examine the retirement prospects of a hypothetical worker — whom we’ll call Hilda, as I’m a sucker for good German names — and see how dialing her numbers one way or the other changes her projected retirement income. Here are Hilda’s particulars:

Age: 55
Marital status: Single
Current income: $60,000
Desired retirement age: 65
Desired retirement income: $45,000
Estimated age at death: 95
Current savings: $100,000
Annual contributions to retirement accounts: $6,000
Assumed annual return on investments: 8%
For our analysis, we’ll use the “Am I saving enough? What can I change?” calculator found among the retirement calculators at The Motley Fool. Once you’ve entered your numbers and hit the “results” button, the calculator provides the number of months that it estimates your savings will last given your desired retirement income. In Hilda’s case, here’s the calculator’s analysis: “Your living expenses after retirement will be fully funded for 127 months.” Divide by 12, and you see that her money is expected to last 10.6 years. Unfortunately, that’s not good enough. If she wants to retire at 65 and expects to live until 95, she needs her money to last 30 years, or 360 months.

So what should Hilda do? Here are her options and possible outcomes, adjusted a single factor at a time.

Save More
Hilda’s current saving rate is 10% of her income. What if she ups that to 15%, or $9,000 this year? According to our calculators, that will make her income last 155 months — an additional 2.3 years. That’s a fine first step, but it still has her running out of money in less than 13 years.

Let’s say she, through a drastic lifestyle reduction, managed to contribute the maximum to her 401(k), which in 2009 is $22,000 for someone age 50 and older. That would supersize her portfolio enough to last an estimated 322 months, much closer to the 360-month mark. But she probably can’t save 36% of her income. She’ll have to look at other options.

Spend Less in Retirement
What if Hilda decides she can live on a retirement income of $40,000 instead of $45,000? After all, she’ll no longer be stuffing her 401(k) or paying Social Security and Medicare taxes (7.65% of each and every paycheck), and her income-tax bill will drop, too. Maybe she’ll also have eliminated her mortgage by then.

Dropping her annual income requirements by $5,000 adds 51 months (4.3 years) to her portfolio’s estimated lifespan. Not huge, but not negligible, either. However, Hilda feels this would be cutting costs a little too close. She wants to look at other possibilities.

Retire Later
What happens when Hilda continues to save just 10% of her income but retires at 68 rather than 65? In that case, she’d have three more years of saving, a higher Social Security benefit (because of her higher lifetime earnings and her beginning benefits later), and she’d need her money to last just 324 months.

In this case, her money would last 255 months, or 21.3 years. By retiring three years later, she’s doubled the longevity of her portfolio. But it still won’t last until age 95. However, if she retires just one more year later — at 69 — the calculator estimates her money will last longer than she will, which is the goal of any retirement plan.

Work in Retirement
Unfortunately, Hilda can’t stand the thought of working full-time for more than another decade. However, she’s open to the idea of working part-time for the first five years of her “retirement.” If she earns $30,000 in each of those five years, her portfolio’s life expectancy improves from 127 months to 237 months, or almost 20 years. That doesn’t get her to age 95, but it’s a significant improvement. In fact, for every year she works part-time in retirement, she adds about two years to the estimated endurance of her portfolio.

Quick note: Because Hilda’s “full retirement age” for Social Security purposes is 66, she shouldn’t begin taking Social Security until then if she’s still working. When you begin benefits before your full retirement age but then earn work-related income, your benefit can be significantly reduced.

Tap Home Equity
There are a few ways to use home equity to boost your retirement. Let’s see how Hilda could add these to her calculations.

First, let’s assume that she no longer needs her family-sized home. She actually has some equity in the home, so she sells it, buys a smaller home, and comes out with an extra $50,000. Realistically, given the state of real estate these days, it would take at least a year to sell her house and actually get that $50,000 into her hands to invest. If it earns 8% a year, it would add 58 months — almost five years — to the longevity of her savings. That’s a decent-sized boost, and that’s not counting the lower cost of heating, cooling, maintaining, and paying property taxes on a smaller home.

The other option is a reverse mortgage, which is when a bank pays you money based on the value of your home, and you don’t pay it back until you move. A reverse mortgage on a home currently worth $300,000 could provide a check of $1,200 every month that the borrower stays in the house, according to www.reversemortgage.org. Our retirement calculator doesn’t have an input field for reverse mortgage, but since it operates essentially like a pension, that’s where we’ll add the $1,200. Input “30″ in the “Years you will receive payments” field, and check the “First payment adjusted for inflation” button (but not the others). Click on the results and — voila! — Hilda’s retirement is fully funded.

While that’s encouraging, we should mention that it assumes Hilda’s mortgage is paid off before she takes out the reverse mortgage. If she moves before she passes away, she’ll have to pay off the loan. Plus, reverse mortgages can be expensive. So our preference is to put off taking out a reverse mortgage for as long as possible, perhaps using it only in the case of an emergency, such as needing in-home long-term care.

Change Your Expiration Date
Of course, Hilda’s original retirement plan is perfect as long as she dies within 127 months of retiring. All jokes aside, it’s worth remembering that we’re playing it very safe by assuming she’ll live to 95. According to the Social Security actuarial tables, only 10.3% of 55-year-old women make it to 95. If Hilda’s not in good health or longevity doesn’t run in her family, she might assume she’ll die at age 90. That doesn’t change how long her portfolio will last, but it does change how long she’ll need it to last.

A Mixture of the Factors
We looked at many variables in isolation, but the best solution for Hilda is to tweak several categories to find a combination of changes that she finds palatable. For example, if Hilda downsizes to a smaller home (resulting in a $50,000 investment a year from now), saves $200 more a month, delays retirement to age 66, and works part-time for the first two years of her retirement, her money will last until she’s 95. Considering all her options, Hilda decides these are adjustments she can live with.

The Bottom Line
Retirement calculators are very handy tools, but they’re not crystal balls. The results are based on many variables — such as inflation, investment returns, and Social Security benefits — that we can’t predict and could turn out worse than expected.

How should you handle this uncertainty? Run your numbers once a year, using updated account balances, savings rates, and benefits projections (for example, put in the estimated Social Security benefit found in the statement you receive in the mail three months before your birthday each year).

Also, different calculators provide different results, so don’t rely on just one. For additional opinions, check out:

FIRECalc (FIRE = financial independence/retire early)
The T. Rowe Price retirement income calculator
The ESPlanner (economic security planner)
The flexible retirement planner
TD Ameritrade’s WealthRuler
Despite their shortcomings, retirement calculators do a good job of estimating the value of one decision over another. For Hilda, the variable that had the biggest impact on her plan was retiring a few years later. But it will be different for other people. As one example, boosting a savings rate from 10% to 15% would have a much bigger payoff for younger investors than it did for Hilda, who was already within a decade of her target retirement date.

What will provide the most power to your plan? There’s only one way to find out. Visit a financial calculator and start plugging away.

Source: Get Rich Slowly