Q. I use miles for international flights only, preferably business class. I have never upgraded before. Which strategy is the best: buying an economy ticket and using miles to upgrade to business, or using miles for an economy ticket and paying for the upgrade to business class?
A. One of the best uses of miles is to upgrade to business class or first class.
Unfortunately, for your question, I cannot give a definite answer, because depending on where and how you book your ticket, it may have some upgrade restrictions, and depending on your elite status, you may or may not get the upgrade when you want it and for the flights you want.
There are travel consultants available to find the best way to redeem your miles, just Google them.
After setting aside three to six months of expenses in an emergency fund, saving for retirement should be your top priority. After all, you can probably get loans to pay for children’s education, a house, a car, or other financial goals. But beyond Social Security, you’ll likely need to fund your own retirement paycheck.
In general, in order to reach your long-term retirement savings goals you may need to save 10% to 15% or more of your earnings each year. Here are eight tips, not necessarily in order, to help you save more and smarter this year. Depending on your situation, you might consider some or all of these.
1. Get the full company match.
If you have a 401(k), 403(b), or governmental 457(b) plan, and your employer offers a matching retirement contribution, take advantage of it. In addition to receiving the company match, you get the added potential benefits of any tax-deferred growth and compounding returns.
Let's say, hypothetically, your company offers a match of 50¢ on every $1 you contribute, up to 3% of your salary. If you make $60,000 a year and contribute 3% or $1,800, and your company kicks in another $900, your annual contribution could add up to $2,700. Assuming a hypothetical compound annual growth rate of 7%, your savings could grow to more than $37,000 in ten years.
2. Contribute the maximum to your workplace savings plan.
Of course, saving just 3% a year is probably not enough to generate the savings you will need to retire, which could be hundreds of thousands of dollars or more for even basic expenses. So, try to contribute the maximum to your workplace savings plan each year. For 2013, the maximum is $17,500; $23,000 if you are age 50 or older.
The rule of thumb is to save at least eight times your ending salary before retirement. Of course, this is only a starting point. Your savings target may be different and you don't need to reach it overnight. For example, by age 35, Fidelity suggests that you should have saved 1X your current salary, then 3X by 45, 5X by 55.
If you think your tax rate will be higher in retirement, consider opting for a Roth workplace savings plan, if your employer offers one. With a Roth, you contribute after-tax dollars, but any earnings and dividends grow tax free, and withdrawals are also tax free if taken in retirement
3. Pay down high interest debt.
If you are paying more than 8% to 10% on credit card or other debt, use any extra savings to pay down the balance. If you have multiple accounts, you should work on the one with the highest interest rate first. Continue to make the minimum required payments on other debts (so you don't get hit with any penalties). When that first debt is paid off, move on to putting your extra money toward paying off the next.
4. Consider a health savings account.
If your employer offers a health savings account (HSA) along with a high-deductible health care plan, consider opening one. It can be a tax-efficient way to save and pay for both current and future qualified medical expenses, including those qualified medical expenses in retirement. Although your out-of-pocket health care costs may be higher depending on your health care needs, your premiums may be lower. Also, some companies contribute to employees' HSAs, and employee contributions are generally made pretax, which means your net after-tax costs can be lower. Contributions can also be made after tax. And what you don’t spend in your HSA in one year can be carried over from year to year to cover future qualified medical expenses, including those in retirement.
HSAs have a unique triple tax advantages that can make them a powerful savings vehicle for qualified medical expenses in current and future years: Contributions, earnings, and withdrawals are all free of federal income taxes. To make the most of your HSA, consider paying for current-year qualified medical expenses out of pocket and letting the full HSA balance remain invested for future qualified medical expenses, including those in retirement. For 2013, individuals can contribute up to $3,250 to an HSA, and families up to $6,450. Plus, there is a $1,000 catch-up provision for those age 55 or older. In 2014, the contribution limits are going up to $3,300 for individuals and $6,550 for families.
5. Weigh deferring compensation.
If your company offers a nonqualified workplace savings plan and you have already explored other workplace options, and if your company offers a nonqualified deferred compensation plan—and you have the means—consider allocating some of your paycheck there as well. You can decide how much to defer each year from your salary, bonuses, or other forms of compensation. Deferring this income provides two tax advantages: You don't pay income tax on that portion of your compensation in the year you defer it (you pay only Social Security and Medicare taxes), and you can invest the money, so it has the potential to grow tax deferred until you receive it.
But a deferred compensation plan is not for everyone—and the rules are complex—so you'll want to weigh the pros and cons carefully before signing up.
6. Consider deferred variable annuities.
If you've taken advantage of your tax-advantaged workplace savings options and contributed to an IRA, but still want to save more, you might want to consider deferred variable annuities. Deferred variable annuities typically allow you to invest in funds that hold stocks and bonds—and any earnings grow tax deferred. Unlike some of the options mentioned above, there are no IRS limits on how much you can invest in an annuity.
To maximize your savings potential in an annuity, it is important to choose one that is low cost, as investments in annuities are subject to insurance charges in addition to fund charges. When you're ready to withdraw from an annuity, any earnings (in addition to any pre-tax contributions) are taxed at ordinary income tax rates (plus any Medicare surtax, state and local taxes). Also, keep in mind that any taxable amounts withdrawn before age 59½ may be subject to a 10% IRS penalty.
7. Remember other savings goals.
It's also important not to overlook saving for your other goals, such as college. Among the best ways to save for a college goal is a 529 college savings plan, which is a tax-advantaged plan designed to pay for qualified higher education expenses, and a Coverdell Education Savings Plan. For both types of accounts, qualified distributions are federal income tax free. See the college savings tool below to explore saving for an education goal.
8. One last thought
To make it easier to stay on track with your savings goals, consider transferring some of your paycheck automatically to your chosen savings vehicles, be they workplace savings plans, HSAs, IRAs, annuities, or even taxable accounts.
Here are the three easy steps:
1. Grab a blank sheet of paper and a pen. Switch off your phone and shut your laptop.
2. Now answer this question.
“What will your customer say to her friends tomorrow to recommend you, or your products and services?”
Don’t respond to anyone else’s emergency until you’ve answered this question and written it down.
3. Then go do what you have to do to make her say that.
Q. Is there an easy way for me to decide which individual life insurance policy is for me - Term of Permanent life?
A. Yes, if you get the essence of the different types of products:
Term insurance - the least expensive kind of individual life insurance, is designed for income replacement, where a benefit will be provided for those who are relying on your income, like your children or spouse. It’s a cost-effective way for families to insure against the passing of a wage earner.
Whole life and universal life - they are two types of permanent insurance policies which build up cash values over time and are more expensive. Permanent insurance is typically used for the transfer of wealth, which might be more relevant later on in life when you’re trying to protect your estate.
Q. What factors affect my credit score and to what extent?
A. There are multiple factors that affect your credit score:
Q. How long information remains on my credit report:
A. See below for a few scenarios:
Q. How different types of credit are defined:
A. See below
Get your free credit report: https://www.annualcreditreport.com/cra/index.jsp
Q. I plan to sell my big house as I retire in 5 years and move into a smaller one. How to look at this transaction from the financial perspective?
A. The largest expenditure in a retiree's life is housing. It's a good idea to exchange a large house to a smaller retirement home if you want to control your retirement expense.
Let's run some high level numbers to see the savings:
If your large house is worth $500,000. And you plan to sell it and buy a smaller house at $250,000.
You need to factor in about 10% of your old house's price for closing and moving related costs, that will be $50,000.
Your net cash gain is $200,000 (=$500,000-$250,000-$50,000).
Using the 5% rule of thumb for retirement income calculation, you will generate $10,000 additional income per year.
If we use the rule of thumb of 3.25% for property tax, insurance, utilities, and maintenance costs of maintaining a house, the bigger house would cost you $16,250 per year; while the smaller house would cost you $8,125 per year. The difference of the two is $8,125.
In summary, this exchange transaction will net you additional $18,125 per year.
Q. I will be 50 years old by end of this year, I heard many retailers offer discount for seniors. Is 50 viewed as a senior? Where to find discounts for seniors?
A. No one wants to be old, but there are some unexpected benefits when you are old. Try the following ways to get as much as possible from your age!
a. Join AARP. You are qualified to join AARP once you reach age 50 (annual fee $16).
b. Try American Seniors Organization. It's similar to AARP.
c. Search Seniordiscounts.com (it has over 250K discount offers from retailers). Similar websites include allseniordeals.com, free4seniors.com, and sciddy.com.
Q. Is a certified used car a good deal to save money?
A. Yes. It's estimated that buying a certified 2012 car could save you 15 percent or more compared with the same model as a new 2013 car. In addition, two- or three-year-old vehicles just returned from a new-car lease can be good candidates for a certified used car.
Savings can be especially big if the current model has been redesigned. For instance, the midsize 2013 Ford Fusion SE sells for $23,085, according to Kelley Blue Book. But a 2012 certified Fusion with a four-cylinder engine and 15,000 miles is priced at $17,534 -- a savings of $4,551.
The best value is a certified program sponsored by the manufacturer, which will also set requirements on which parts of the car must be inspected and repaired if needed.
To make sure you are getting the best deal on a certified car,follow these steps:
Q. Which tool can help me conduct a good stock focused research?
A. Bloomberg is the one used by pros, but if you can't afford the $20.000 per year fee, try YCharts, a new web-based service that is aiming to be the cheaper version of "Bloomberg".
YCharts is especially useful for someone to research data to craft portfolios. It costs $50/month for the "Gold" version and $200/month for "Platinum" version. The tool is entirely online, and although it's not quite perfectly real time in some of its data - YCharts is about 10 to 15 minutes behind Bloomberg, but if your goal is on wealth management than real-time stock trading, that may not be an issue.
For most ordinary investors, I recommend you using Morningstar to research mutual fund research and YCharts for equity research.
Q. I am considering purchasing a Term life insurance, but not sure how much do I need. Is there a rule of thumb for Term life coverage amount a family needs?
A. Below is a methodology you can consider:
When choosing a term life insurance policy, it is important to select a coverage period that best fits the time in which income replacement is needed. You pay level premiums (payments that do not increase) during the coverage period. When selecting a coverage period you may want to pick a period that is at least as long as the number of years in which your beneficiary can afford to retire.
I recommend using the DIME method to estimate the amount of term insurance you need:
Add up the above amount, you will have a range of numbers for the insurance coverage you need.
You can also use our free online insurance amount calculator to do the estimation.
Q. I already have Group Life insurance from my employer, do I still need to purchase individual Term life insurance on my own?
A. When you have a family, it is extremely important to keep everything in perspective. That includes planning for them in the event of a death.
Fortunately, there are a few ways to go about protecting your loved ones. By combining the advantages of different insurance products, you can help ensure that their future quality of life and goals stay within reach—without placing undue pressure on you today.
Just as it may be important to diversify an investment portfolio, choosing a few different life insurance options can offer you a broader range of coverage opportunities. After we review the different types that are available, you'll have a better understanding of how each one works and the potential role they could play in your overall protection strategy.
Step one: Review your group life insurance options
Employers own the group policy and offer coverage to eligible employees, either at no cost as part of an employee benefits package, or as an elected benefit, at a group rate. It’s important to understand that for employer-paid or -provided benefits, the employer determines coverage limits, controls the policy, and can change or discontinue it at any time. Unless provisions within the policy allow for it, this type of coverage will end when you separate from service with your employer.
Group insurance rates are based on the makeup of the group of employees or members who are covered and, when coverage is provided to all eligible employees, do not take into account the health issues of any particular individual. So, there is no individual health assessment—or personal underwriting—involved. Group life insurance rates are based on both the volume and risk profile of the entire group.
Typically, employers will make some baseline level of life insurance coverage available to all eligible employees. Sometimes an employer will make additional optional life insurance coverage available that the employees must elect and pay for themselves. In these situations, there may be an amount available without evidence of insurability (proof of good health) when an employee first joins the company, but coverage must be elected right away, often within 60 days of employment. The employee may elect coverage at a later date but, if so, he or she will generally have to demonstrate evidence of insurability, much like with an individual life insurance policy.
Step two: Consider individual life insurance coverage
Individual life insurance is most often purchased to insure one life. Some individual policies may include additional lives (typically children) through a policy rider.
Individual life insurance can be temporary (for example, term) to cover a certain number of years, or permanent (for example, whole life) which is intended to provide coverage until a person’s death. Permanent policies typically have a savings element that is referred to as a cash value. The cash value of a policy accumulates over time as premiums are paid. For both temporary and permanent forms, individuals must go through a health assessment (underwriting) to determine coverage eligibility and cost.
In this case, unlike with group life insurance, the individual controls the policy and chooses the coverage amount, term (if applicable), and any optional extra coverage (riders). Typically, an individual policy stays in force as long as the owner continues to pay the premium, or if there is enough of a cash value in the policy to sustain it. Also, unlike with group policies, the individual life policy is portable, so, regardless of your employment status, a benefit will be provided as long as the contract is in force when you die.
Group vs individual coverage
The chart below details some of the major differences between group and individual life insurance. Understanding these differences will help you see how each type of insurance might help play a role in your own financial plan.
Weighing the pros and cons
Typically, for people who do not pass preferred underwriting guidelines for individual coverage, group life insurance is an attractive option. Purchasing additional coverage—beyond what is provided as an employee benefit at group rates—will help these individuals meet their full life insurance need. But that may require an individual medical exam, which may prohibit coverage at a potentially favorable group rate.
Alternatively, for individuals who are in favorable health and meet the preferred underwriting guidelines for individual coverage, it will likely be in their best interests to meet their full life insurance needs with an individual policy, because their health status may qualify them for more favorable pricing than the employer’s group rate.
Even if group life insurance covers three times a person’s salary, it may not be enough. That’s because it takes a lot more to replace lost income over a number of years. In fact, according to Fidelity's estimate, an individual who is approximately 25 years from retirement and looking to replace a before-tax income of $100,000 would need approximately $1.4 million of term life insurance.
It’s important to have an individual policy to help cover your insurance needs. This way, if you’re either out of work for a while, or change jobs and can’t get the same level of coverage through your new employer, you will have a policy in place to protect your family.
Step three: Layer your life insurance coverage
For many people, combining—or layering—the best aspects of each type of insurance can help them build a protection plan that is right for them.
A layered approach, using both group and individual coverage may be the best way to tap into the advantages of each and form a solid life insurance plan because by doing so, you diversify your coverage sources to meet your total life insurance needs. This allows you to blend the benefits of a group life insurance policy’s ease of attainment with an individual life insurance policy’s portability and control.
Use group coverage as your small base layer, then you might add an individual insurance layer, based on your budget, and what you might need at different stages of your life.
Of course, what goes into that individual layer could change over time. Many people fill the largest part of their individual insurance need with term life insurance, given the lower cost.
Since term life insurance is designed for income replacement during your working years, you may not need it if you can afford to retire. Based on your budget and the possible need to transfer wealth at some point, you could also add a layer of permanent insurance now while you are in good health or revisit whether you may need to add permanent insurance later in life.
If your plan is right, individual insurance will be about 80 percent or more of your total coverage.
Ultimately, what you hope to create is a life insurance program that not only fits your budget, but includes key ingredients to help serve specific purposes within your financial plan.
Q. Where to save my emergency fund?
A. Every family should have 3-6 months emergency fund because life happens. There are four choices you can consider, each comes with its advantages and disadvantages:
1. Credit Unions
Credit unions tend to have higher interest rates and lower fees than banks, but hopefully you live near one or qualified to open a Credit Union account.
2. Big Banks
Big banks tend to encourage automatic saving plans, and its fee schedules tend to be more transparent, but the drawbacks are big banks typically charge higher fees and offer lower rates, as they do offer great convenience.
3. Small Local Banks
Small local banks charger less fees and impose lower minimum requirements compared with big banks, but their network is more limited.
4. Online Banks
Online banks tend to be aggressive in acquiring new customers, but one has to be mindful of their fees. For example, if you don't use the online bank's service for 6 months, you might find a $10 a month charge!
4. Make sure you have enough insurance.
Insurance can be great protection against the unexpected, but it’s wise to evaluate your needs annually to make sure you have the right amount of insurance in the right places.
Life insurance may be a good place to start. If your family is growing, you might want to increase the amount of your insurance to protect your loved ones from a devastating loss of income. On the other hand, most people find that as they get older — and their net worth climbs and their children reach adulthood — they need less life insurance. The considerations surrounding disability insurance are similar.
Without coverage, an injury that keeps you out of work for a week or a month could snowball into a serious financial issue if you don’t have enough savings to support yourself.
Odds are you’ve spent long hours finding the right auto or homeowner’s insurance. But what about disability insurance, which would replace lost income if you were unable to work?
In the case of injury or illness, it can be a lifeline — whether you’re laid up for a week or more than a year. Beyond replacing income, the right policy can help you pay for disability-related costs that aren’t covered by health insurance, from specialized medical equipment to home-based medical care. Without coverage, an injury that keeps you out of work for a week or a month could snowball into a serious financial issue if you don’t have enough savings to support yourself.
If you are looking for the lowest cost insurance providers in your state, please contact us, we are a national independent insurance broker, we will find the lowest cost insurance carriers for our clients everywhere in the U.S.
3. Name beneficiaries for your investment accounts.
No matter your age or net worth, designating a beneficiary for investment accounts can be as important as writing a will, but it is much less complex. Assets in a 401(k) plan, traditional IRA, Roth IRA, or SEP or SIMPLE IRA pass directly to the beneficiaries you've designated with your account custodian, trustee, or plan administrator. Furthermore, your beneficiary designations can supersede any accommodation you have made in your will for your retirement account (see transfer-on-death registration discussed below). Remember to name beneficiaries on all these retirement accounts.
No matter your age or net worth, designating a beneficiary for investment accounts can be as important as writing a will, but it is much less complex.
For employer-sponsored retirement plans like a 401(k), if you’re married, keep in mind that most plans automatically designate your spouse as the beneficiary unless you name another beneficiary(ies) and your spouse has consented in writing.
Designating a beneficiary, or beneficiaries, on a nonretirement account, such as a brokerage account, may establish what’s legally known as a "transfer-on-death" (TOD) registration for the account. For an individual account, this allows ownership of the account to be transferred to a designated beneficiary upon your death. Perhaps most importantly, and in many instances, a TOD registration allows an account to pass outside probate, enabling your beneficiaries to avoid the time and expense of the probate process. As with all accounts, estate taxes may still apply. Be sure to consult your tax adviser.
Marriage, divorce, birth, and death are the four big events that can affect your beneficiaries, so if you have experienced any of these in your life, remember to take a look at your beneficiary designations and see whether you need to make any changes.
2. Save on taxes as you save.
Some investment accounts offer a double dose of tax advantages. For instance, contributions to 401(k)s, 403(b)s, IRAs, and health savings accounts (HSAs) may reduce your current taxable income — saving you cash this year. Also, any investment growth in these accounts is tax deferred — saving you money while you are invested. In the case of HSAs, withdrawals used for qualified medical expenses could be triple tax free: tax-free contributions, earnings, and withdrawals.
Contributions to 401(k)s, 403(b)s, IRAs, and health savings accounts (HSAs) may reduce your current taxable income—saving you cash this year.
What's more, because saving in these accounts can help lower your adjusted gross income, they may be able to help you avoid reaching the income limits for additional tax credits and deductions, like the student loan interest deduction or the personal exemption. That’s a reason why we think a top financial priority for most investors should be to take advantage of IRAs, 401(k)s, and other workplace saving plans.
1. Review your investing goals — or create some.
You probably have a few big things you’re saving for—a house, new car, a child’s education. For instance, if you have your eye on a new house or your children’s education, you might want to make some adjustments to reflect the current real estate picture and tuition costs.
Check your investment mix. Does it still meet your needs and preferences? Did market performance lead you to have more money invested in a particular area of the market?
Also, look at specific investments and see whether they continue to make sense for you. If you invest in mutual funds, check to see whether any of them have changed their objectives or “style.” If you own stock, look at the companies’ current picture and prospects, and decide whether they justify keeping it.
If you have your eye on a new house or your children’s education, you might want to make some adjustments to reflect the current real estate picture and tuition costs.
If you haven’t already done so, make sure you have a mix of stocks, bonds, and short-term investments that you consider appropriate for your investing goals. Take into account your financial situation, tolerance for volatility, and when you will need the money you are investing.
For instance, you may want to allocate a greater portion of your investments to stocks—which historically have offered the highest potential for growth over time—the longer you have to invest and the greater your tolerance for risk.
On the other hand, if you’ll need the money in just a few years—or if the thought of potentially losing money makes you too nervous—consider a higher allocation to generally less volatile investments such as bonds and short-term investments. By doing this, of course, you’d be trading the potential of higher returns for the potential of lower volatility.
Q. I know when interest rates go up, bond prices will fall. Given that everyone expects the Fed to raise interest rates soon, what is a good Bond strategy now?
A. Consider the following strategy in today's volatile bond market:
PFwise's goal is to help ordinary people make wise personal finance decisions.