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Budget Items That Shouldn't Be Overlooked

Use this link to read full US News article featuring comments by Michael Alexenko

http://money.usnews.com/money/personal-finance/articles/2015/06/16/what-people-never-budget-for-but-should

 

Family support. Even if you're firmly in the "don't bail out a struggling adult child or relative" camp, you might find yourself pulling out your wallet if a child's ex fails to pay child support or a sibling faces foreclosure. "Family support is an area for which most people don't want or don't want to think about to budget," says Michael Alexenko, a financial advisor and president of Royal Asset Managers in St. Charles, Illinois. "They don't want to think about the potential financial hardships for children, grandchildren, nieces, nephews, siblings or parents, and that keeps them from making a reasonable plan about the possibility that some assistance will be required." That's not to say you must lend financial support, but if you keep a cash cushion for these types of situations, you can make decisions on a case-by-case basis instead of feeling guilty about not being able to help. "The larger the family, the greater the likelihood that someone will be in need for whatever reason," Alexenko says. "It's great if you don't have to spend it, but it's probably not a bad idea to leave a line item out there just in case."

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529 College Savings Plans are Easy to Start and Offer Irresistible Benefits

Written by Michael Alexenko, CFA.

If you’re a resident of Illinois and you’re undecided about what is the best way for you to save money for your child or grandchild’s college education, then your doubt can end now.   The Illinois Bright Start plan is by far your best choice. Furthermore it’s easy to establish, has great investment options and delivers advantageous tax benefits that should not be forfeited.

Hopefully you’re reading my comments prior to having opened a 529 plan through a bank or retail brokerage operation. If so then your first step in setting up a 529 plan for your child begins at the www.brightstartsavings.com website. This will help you avoid a totally unnecessary 5% sales commission charged by a broker who would do very little work to earn it. On top of that you might lose the exceptional generous tax benefit from the plan if the broker steers you into another state’s plan.   If by chance you do have a broker sold plan that is offered by another state you should take action to transfer the plan to the Bright Start program and you’ll capture some state income tax reduction. Unlike some other states, Illinois allows you to transfer funds from other states’ plans and permits tax deductibility on the originally contributed transferred amounts. See the website for the allowable amounts.

There is no need to have anxiety about how to invest the funds you’re setting aside. Investing for a 20+ year time horizon does require some investment rebalancing and risk exposure adjustment but thankfully the investment options offered in the Bright Start program put the portfolio management duties on auto pilot.

I would recommend that most people select the age based indexed portfolios for their accounts. Using this choice a person is able to automatically match the investment time horizon with compatible risk exposure. For beneficiaries less than 6 years old the age based portfolio invests 90% of assets in stocks and gradually becomes less aggressive as the time for needing educational funds draws near. Once college begins the age based portfolio has made a transformation from an aggressive growth strategy to a low risk capital preservation plan. The best thing about the changes made to the investments is that it is completed without the need for the custodian to have involvement.

Choosing the indexed portfolios will give you access to low cost quality Vanguard mutual funds. The average cost for investing over the lifetime of the account is about .19% which is about 30% of the cost of the “blended portfolios” which are the program’s alternative selections.

If you run into problems setting up your 529 plan you’ll find the Service Center reps to be very helpful. Contact numbers are on the website. If you still have questions give me a call and I’ll be happy to assist.

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What Percentage of Your Income Should You Invest for Retirement Security?

Written by Michael Alexenko, CFA.

10% is a good round number and if surveyed one that most people would likely choose as the figure that sounds right. It turns out that the consensus rate comes pretty close to getting the job done. It’s more accurate for the younger individual who is 40+ years away from retirement. If a young lady in her twenties uses a disciplined 10% rate for monies strictly earmarked for retirement investments then she’ll be putting herself on the right path.

For the person who is 15 years away from retirement who was a poor saver in his younger years, the 10% figure may be insufficient to achieve financial security.

As with any rule of thumb, the 10% benchmark comes with a number of assumptions.   The first is to ensure that you invest. You need to set aside your investment dollars and truly invest them. Funds can’t sit in a bank account yielding .05%. The funds should earn an average rate of return of around 7.5%. This would permit the investor to have a balanced growth portfolio that could have more risk in his early years and gradually evolve into a more conservative portfolio as he ages.

Other critically important variables are: the need to avoid interruption of the savings sequence, Social Security, employer matches and avoiding spendthrift debt accumulation.

Consistent employment is one of the best ways to ensure your timely retirement. If you have prolonged periods of unemployment you stop nurturing your nest egg and early spending of your savings happens. Nothing will derail your successful retirement plans faster than this issue. Keeping the paychecks coming, is rule #1 when it comes to savings rates and retirement planning in general.

Another variable that is somewhat out of our control involves the ability of our government to fulfill 100% of its Social Security promises. If that program fails to deliver then the 10% figure likely will be inadequate. For the moderate to higher wage earners, Social Security can still account for over a third of their projected retirement spending need.

A variable that has positive implications for the future retiree is the amount of matching investment that employers throw into the mix. Any matching amount contributed by an employer reduces the 10% burden on the individual. However, fully funding your savings at 10% may help to offset the unforeseen unemployment periods or the need to raid savings for other emergency spending requirements.

Lastly, no matter how much you save, it will be difficult to have a worry free retirement if you enter your golden years burdened by high levels of debt. Don’t fool yourself about your true savings rate. If you’re accumulating debt at a faster pace than you’re saving money you have a negative savings rate and eventually the savings you have will be confiscated in order to payoff debt.   In particular keep your eye on your mortgage balance. Rule #2 when it comes to retirement security is to enter retirement debt free including having zero or no significant mortgage balance.

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How to Solve Your Retirement Spending Need

Written by Michael Alexenko, CFA.

If you’re more than 10 years from your targeted retirement date, it might be valuable to simply use some standard rules of thumb that will offer pretty close approximations of what your spending need will be when you decide to retire. Fidelity Investments suggests that 85% of your projected final year of payroll on an after tax basis will get you in the ballpark of your requirement. It appears that is a reasonable estimate based on a few calculations that I’ve made for my own situation and also applying that rule to numerous financial plans that I’ve prepared for clients. Assume you have $175,000 in household income and you have an effective tax rate of 20%.   The 85% estimate would suggest you will need about $10K in monthly sources of cash to achieve your spending goal. My experience in working with many clients in that income category tells me that is a rational appraisal.

For those individuals or couples who are within ten years of freedom from working more specific projections become possible and probably desirable.   To achieve a good answer, the best place to start is to track your current spending. The personal budget worksheet that you can download off this website is an excellent expense tracking device that has a comprehensive list of all of the possible expense categories that a family might be incurring. If you track your expenses for about six months you can get an accurate assessment on what your average costs are in a month. For items that might be non-recurring events like: autos, HVAC or appliance replacement you should be sure to use an estimated monthly average figure for these larger ticket items that might come around periodically.

Once you have budget information you can make some adjustments for how you’re spending might change once you retire. You’ll no longer be commuting to work and you’ll no longer need to save. Also, your housing expense will likely decline either through the payoff of your mortgage or your choice to downsize your home. Areas where you might need to increase allocations would be your vacations, hobbies and dining out.

Without a reasonable estimate of your spending need, it’s awfully hard to draw any kind of conclusion about how much you need to have saved and invested for the future. Completing the budget exercise is an important first step in planning a successful retirement.

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Avoiding Mistakes and Using Good Investments can Help to Build Your Nest Egg

Written by Michael Alexenko, CFA.

There are no silver bullets for increasing your nest egg. Some people think that Wall Street is a rigged game and if they could only find the right person to get them on the inside track that they'll never lose money regardless of how the market is performing. They have to get that fantasy out of their heads.

The best way to increase your nest egg is avoid mistakes. Don't try to time the markets, develop an investment strategy and diversify your portfolio. Make use of some great exchange traded funds (ETFs) that give you access to asset classes that until a few years ago were hard for the individual to invest in. For Real Estate you have (VNQ or ICF), Emerging Markets (EEM or VWO) and International Small Cap (DLS or SCZ). These funds offer great diversification benefits to a long term investor and can help to enhance returns and drive down overall portfolio risk. Rather than trying to find the one stock that is going to make you rich consider adding a Micro Cap ETF, like IWC. Small companies have the greatest growth potential and adding about 2.5% of your total portfolio's total value to IWC could be good for someone trying to boost his/her investments' firepower.

If your employer offers a 401(k) make sure you maximize your contributions, especially if your employer offers even minimal contribution matching. There may be no easier mistake to avoid than this one.

Watch out for excessive investment costs. There is little reason why you can't construct your own quality portfolio for less than .25%. Vanguard and iShares are two companies you need to make maximum use of to avoid the return erosion that high investment costs can cause. If you can't get a straight answer from a broker/financial advisor about how much your total investment costs are then run fast. If you need help building your portfolio then paying no more than 1%-1.25% in total fees and expenses is very achievable with respectable independent firms.

Know your risk tolerance. I saw too many people really rattled in 2008/09 and some decided to sell stock near the market bottom. That's a devastating self-inflicted wound. Realize that losing 20% of $100,000 is $20,000. 20% sounds benign, but when you convert the percentage into dollars it can give you a greater appreciation for what a bear market can mean. Imagine having a $500,000 portfolio that is hit with a 40% bear market and now you're left with $300,000. That's pain that most people cannot stomach. The selling low and buying high offense is hard to commit if you know your true risk tolerance and you implement a strategy consistent with your risk appetite. Having the right investment mix will allow you to sleep well, during good or bad markets.