by Derek Sisterhen on May 6, 2010
Once upon a time, people would go to work for a company for many years, retire with a nice pension and health care benefits to last the rest of their lives. Once upon a time, kids could go to college without incurring mortgage-sized student loans.
The good ol’ days.
“Sandwich Generation” is the term used to describe the folks in our country with aging parents and children on the cusp of higher education. The squeezing effect – or sandwiching – sounds like the ringing of a cash register: aging parents may not be prepared to live out their lives financially and the expense of raising children and transitioning them to college can be overwhelming.
If you’re already feeling the squeeze, it’s time to buckle down. There are conversations that need to occur with both sides of the sandwich.
For aging parents, it’s time to get real about their financial and physical situation. Do they have enough cash flow for rising medical costs? Will they need to be relocated or require an assisted living arrangement? Would you (or a sibling) be providing some level of care – physical or financial – as a result? Should your parents’ ability to make clear, rational decisions diminish with age, who will step in to help?
For children on the verge of leaving the nest, it’s time to reveal the realities of life on the outside.
Do your children understand how a budget works? Do they have an accurate understanding of the cost of living? Kids know how much music downloads, clothes, and lunches at their favorite restaurants cost, but they might not know what it takes to keeps lights on, water running, and a roof over their heads. Have you set expectations for life after college? If your children return home, is there a timeline in place for them to move out on their own? What expenses will they be responsible for when back in the nest? Do they avoid taking on new debt?
Just because you’re caught in the middle doesn’t mean you’re stuck between a rock and a hard place. You can work out of the sandwich – start with some proactive conversations today.
by Derek Sisterhen on March 11, 2010
I joke often that, in spite of my degree in finance and career in the banking world, had I just read the Book of Proverbs I would have gotten a much better – and much cheaper – financial education. In this series I’ll highlight a few key principles from Proverbs that you can apply to your finances today.
“A faithful man will be richly blessed, but one eager to get rich will not go unpunished,” is written in Proverbs 28:20.
I’d like to tell you about an exciting opportunity a lot of people like you are talking about…
Ugh! I can’t stand the pitches – whether from people who corner me in a hardware store or from goofy infomercials with horrible actors – for a product, service, or “opportunity” that promises to deliver untold amounts of money with little or no effort.
Give me a break.
You don’t have to look far into the various layers of our economy to find people who’ve been burned by trying to get rich quickly. What I admire in this proverb, is the word “faithful.” When you commit yourself to a discipline of saving money over a long period of time, you are acting in patience and faithfulness.
A brief review of the performance of the stock market shows that those who invest regularly with a long-term time horizon (meaning they don’t jump in and out at the latest fad investment), tend to earn an average return around 11% annually. One recent study showed that the typical day trader – eager to get rich – will average around 7%.
Losing out on 4% might not seem like punishment.
If you invest $200 a month for 40 years at 11%, you end up with $1.7 million; if you invest $200 a month for 40 years at 7%, you end up with $525,000.
Losing out on $1.2 million is punishment to me.
Staying faithful to a disciplined, balanced investing strategy is part of being a good steward, and will surely help you avoid a million-dollar slap on the wrist.
by Derek Sisterhen on December 1, 2009
A recent Bank of America Merrill Lynch study set out to determine whether Americans are actually saving enough money. In the 40 years that followed World War II, Americans typically saved between 6 and 10 percent of their after-tax income. Somewhere around 1985 that figure began to drift south, dropping below zero in 2005 as we spent more than we made with the help of easy credit.
Even the worst abusers of debt knows the best way to build wealth over the long run is to save money; this is no mystery. Economists seem to be on board with this concept again; however some of them are of the opinion that Americans could potentially save too much money in the aftermath of the recent recession. (I’m convinced that opinions are like armpits: everyone has them and a lot of them really stink.)
Save too much money?
John Maynard Keynes came up with “the paradox of thrift,” an economics concept that says if everyone saves money in times of recession, demand for goods will drop. As demand drops the economy stalls, causing a whole host of other problems. Consumer spending drives two-thirds of our economy, so this saving business is no laughing matter.
Here are two reasons why “the paradox of thrift” doesn’t hold water in our current world:
First, when people stop spending money on goods and services, prices fall. This is basic supply and demand. As the prices fall, there will be buyers who enter the market and spend money on a particular item.
Second, even though the money is being saved, it isn’t removed from the economy. When you save money in your bank savings account, the bank lends that money to others for business development. Likewise, you can save by investing in new or longstanding companies. Either way, you’re stimulating the production of goods and services and creating jobs for those companies.
So, you’re actually helping the economy by saving your money. (Those of you stuffing cash in mattresses are not; you’re actually losing money when you account for inflation, but that’s another conversation).
by Derek Sisterhen on September 24, 2009
We received some good questions after last week’s article, “He Taxes Me, He Taxes Me Not.” This week we’re providing the answers.
Based on the way I’m currently investing, I have some questions about SEP IRAs and Roth IRAs. Can I open a SEP Traditional IRA and contribute to this even if I contribute to a Roth IRA? Is there any benefit to having a SEP Roth IRA (I’m not even sure this can be done)? If I can only invest in one type of IRA annually, which is the best alternative – a Roth or SEP Traditional?
-Kent in Atlanta, GA
Hi Kent,
Wow! These are some great questions! Here are some answers:
You can open a SEP IRA and continue contributing to the Roth IRA. The reason for this is that the business contributes to the SEP IRA while the individual contributes to the Roth IRA. I know that seems a little unique because in a sole proprietorship, the business is the individual, but from an IRS perspective, SEP IRA funds come from the business revenues, not the personal income of the individual.
There is no such thing as a SEP Roth IRA; as a matter of fact, the IRS pretty explicitly states that a SEP IRA cannot be in any way, shape, or form associated with a Roth IRA.
If choosing between investing in a Roth or SEP IRA, depending on your anticipated tax bracket in retirement I typically recommend the Roth IRA first, then supplementing with the SEP IRA. All signs are pointing toward higher income tax brackets in the days ahead. While we don’t know what they’ll look like 20 – 30 years from now, we do know that we can build tax free savings by going the Roth route. From a tax liability management perspective, I would always like to take a lower income tax hit today for tax free savings in the future. The SEP IRA defers the tax liability until you withdraw the funds in retirement.
Thanks for your questions, Kent!
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by Derek Sisterhen on September 17, 2009
As the economy continues to lumber along in an upward direction, Americans are throwing open the storm shelter doors. Surveys of retirement plan participants show that investors are trading out of conservative investments and back into stock mutual funds.
For many years, conventional wisdom for investing for long-term wealth building held that you should pile every penny possible in traditional IRAs, 401(k)s, and other tax-deferred accounts. The assumption was that when you stopped working, you’d likely slide into a lower tax bracket. When you withdrew your funds from those investment accounts, you’d pay lower taxes on them. Conventional wisdom doesn’t always hold in unconventional times. Enter the Roth IRA.
The Roth IRA is perfect for spreading out the impact of taxes in your retirement years. With a Roth IRA, you pay your taxes upfront on the dollars you contribute. That means you pay today’s income tax rate. When you withdraw the funds in retirement, they’re completely tax free. Tax FREE!
With the tax cuts from the Bush Administration expiring soon and new taxes on the horizon, the Roth IRA may be exactly what your long-term wealth building plan needs. Many financial advisers are currently recommending a minimum of 30% of a person’s retirement portfolio be held in a Roth IRA.
Since there are tax implications for putting money in a Roth IRA, it’s important to know the rules. This year, the maximum contribution amount for individuals under age 50 is $5,000 (if over 50, you get an additional $1,000). Likewise, there are income limitations on Roth IRAs: individuals making more than $120,000 and married couples making over $176,000 aren’t able to contribute. However, in 2010 anyone will be allowed to convert existing retirement dollars to a Roth IRA without limitations.
When planning long-term investment strategies, always start with the goal of making money. From there you can protect those gains from taxes, and the Roth IRA is a great tool to help in that effort.
