As we have discussed, April is Financial Literacy Month, so there will be a lot of personal finance advice in the media. As promised, in this column, as promised, we will look at some advice from AARP.
Here is some 2019 “Time-Honored Financial advice with a Twist,” from aarp.org. It’s familiar, but still great advice, although I tend to like to see people save more.
1. To protect yourself in case of financial emergencies, keep at least six months’ worth of living expenses in the bank.
The reasoning: An emergency fund is just-in-case money set aside to cover a job loss, a medical problem, car woes or another costly shock. Financial planners recommend having enough such cash set aside to support yourself for several months — anywhere from three to 12, depending on your circumstances. Six months — the length of time it commonly takes to find a new job — is generally viewed as a good number. However, older working people, who tend to have longer periods of unemployment after a job loss, may want to stash away 12 months of living expenses, if possible. This also applies to retirees who depend on money pulled from their retirement accounts. Having 12 months of cash on hand reduces the risk of being forced to withdraw money out of investments when stock or bond prices are down.
2. Before retirement, allocate 50 percent of your household’s annual after-tax income for needs, 30 percent for wants and 20 percent for savings. These ratios help you achieve a three-way balance among everyday essentials, enjoying your life in the present and planning for the future. Fifty percent goes toward things you must have, such as food, housing and insurance. Other purchases — up to 30 percent of your spending — are wants, whether they’re vacations, meals out or premium cable channels. The final 20 percent goes toward savings or, if necessary, debt repayment.
3. Set aside 1 percent of your home’s value each year for maintenance and repairs.
Big-ticket maintenance projects, such as a roof replacement or house painting, aren’t annual events, but they’re expensive. To make sure you’re covered, annually budget 1 percent of your home’s value for these. That’s $2,500 a year for a home worth $250,000. If you don’t use it one year, you can use it the next year. However, if you have an older house, or if your home is in need of work, you may have to budget more, perhaps two percent of your home’s value.
4. When you buy life insurance, get a policy that will pay seven to 10 times your current annual income upon your death.
If you die early, your partner or family will require lots of cash to compensate for the years of earnings you were expected to provide. That said as a rule of thumb, you can be more specific in order to make sure that your survivors can meet their actual needs, such as being able to cover mortgage payments and the kids’ college tuition, pay for health care, and have sufficient income to live. Life insurance is an estate planning tool that can be an important part of your estate plan, so work with your professionals to make sure that you are using the tool correctly if there is a need for life insurance.
5. As you prepare for retirement, plan for your ongoing expenses to total 80 percent of your preretirement income.
The reasoning: Once the kids are grown and work-related expenses disappear, the annual cost of living could go down. And though in the past you may have set aside a chunk of your income for retirement savings, after you’ve retired, well, that line item will likely disappear. When budgeting for retirement, pay attention to your expenses, not your income. Identify your specific monthly spending needs. Then create a cash flow plan to cover them, and leave some wiggle room for spending spikes. Commuting expenses may be gone, but retirees often drop more on travel or need to hire extra help at home. What’s more, retirees’ expenses tend to vary, often rising in the early years, dropping in the middle years and then climbing if health issues arise, so keep critically revisiting you budget. One thing people often forget to include is taxes generated by retirement plan withdrawals, which become mandatory at age 72 now.
On a different subject, we have all been hearing the stories of many Americans missing credit card, car loan, rent and mortgage payments, or making those payments late, directly or indirectly because of the pandemic. Similarly, although there have been some prohibitions and moratoriums, we have also…