Personal Finance

In the middle years, save for retirement before you pay tuition

FAMILY PLAN: Rico and Kayln James teach their daughters Ven, 8, and Phoenix, 12, about finances.
FAMILY PLAN: Rico and Kayln James teach their daughters Ven, 8, and Phoenix, 12, about finances. NICK SWYTER

Kayln and Rodrico “Rico” James, both in their early 40s, started saving for retirement less than 10 years ago. They feel like they are playing catch-up.

“I am from a single-parent home in the Deep South where people got a job, kept it and retired,” said Kayln James, now of Miami. “There was no one who encouraged me to save for retirement.”

Rico James, a freelance television and video producer, and Kalyn, who works in corporate sponsorships at the Adrienne Arsht Center for the Performing Arts and hosts the PBS show Art Loft, began taking advantage of an employer retirement savings plan about eight years ago.

“Retirement is something that’s always on my mind. My parents simply did not speak to me about that, so I started very late,” Kayln James said. “There is this underlying stress because I feel like I’m so far behind. I joke and tell my friends I’ll be working until I’m 100.”

James said she also is concerned about saving for college for their children, Phoenix, 12; and Zen, 8. She knows there are opportunities for them to earn scholarships, as she did when she was Miss Alabama in 1993 and pulled in more than $50,000 in scholarships.

The kids, who have their own income as models, now have retirement accounts, Kalyn James said. “I opened a retirement account for each of them,” she said. Her kids shouldn’t have the same retirement stress she feels.

The second third of your professional life, ages 35-54, can be an exciting but fearful time when reviewing personal finances. Financially, people can feel tugged in many directions: planning for their children’s college, saving for their own retirement, and perhaps juggling the needs of aging parents. But the middle years are a good time to examine your priorities and get back on track, financial experts say.

Create a budget, make a plan, and allocate the money to what is most important to you, said Miguel Horvath, a certified financial planner with Horvath & Horvath in Miami. “Look at your income and your expenses, and make sure you have money left over at the end of the month,” he said. “If you don’t, you have to figure out a way to reduce your expenses, so that you can save.”

Jack Patterson, a Coral Gables certified financial planner, said the people prepared for retirement come in three camps: 1. They have a big pension. 2. They were good investors. 3. They lived beneath their means. If they are a combination of those three, their future is even more secure, he said.

“This group is starting to get settled and they’re making a little money,” Horvath said. “Now it’s time to think about long-term saving. They should be saving for retirement and paying off debt.”

Patterson, Horvath and other experts suggest these steps:

▪ Maintain your priorities: Use common sense and look at the big picture, Patterson said. First, reduce debt that carries a high interest rate. “Some people will put money in the bank, earning very low interest, and have a credit card with a 15- to 20 percent interest rate,” he said. “It doesn’t make sense. You have to pay the credit card off.” If you can afford it, Patterson said, pay off the balance each month.

Second, save enough in your 401(k) to take advantage of the employer match.

Third, have a six-month emergency fund. “You don’t want to have to do something drastic, like put living expenses on a credit card or take a balance transfer,” Patterson said.

▪ Think before upgrading: If you want a bigger home, can afford it and still pay off your mortgage before retirement, go for it, said Ana Cela Harris, a certified financial planner and estate attorney with Cela Advisors in Miami. “There’s nothing like the peace of mind of having a roof over your head with no mortgage,” she said.

Patterson advised using good judgment when choosing how fancy a lifestyle you want. An entrepreneur or sales person with higher income potential may be able to take on more house than they currently can afford, with the expectation that their income will grow. But for those whose income is capped, buying above one’s means can leave them in a precarious position, he said.

“The people I see struggling are the ones who want to upgrade [to] have a big house,” Patterson said. “The desire to have all this real estate really zaps people of money. That’s the biggest hurdle people have to a comfortable retirement.”

Horvath recommends that you keep your housing expenses to no more than 24 percent of your total gross income.

▪ Choose retirement over college savings: Don’t sock away money for college at the expense of your retirement. “Nobody is going to lend you money for retirement,” Harris said, “but the kids can get loans for college.” Once you are retired, if you can afford it, you can help pay off those education loans, she said.

“It’s tough to say put the kids in debt, but at the end of the day, if you put everything towards college, then your kids have the burden of taking care of you,” Patterson said.

If you do have extra funds, Patterson recommends investing in the Florida Prepaid Plan, which pays for future college expenses at today’s rates. If you have a lot of cash flow, or if your child wants to attend an out-of-state school, you also may want a 529 Plan, a tax-deferred account for higher education expenses.

Harris favors the 529 Plan over the Florida Prepaid, because of the potential for greater returns and more control. Some clients also use the 529 as an alternative retirement savings plan. If you don’t use it for qualified education expenses, there is a 10 percent penalty, but if you run the numbers, it’s less to pay the penalty than the taxes that would have been collected all along, Harris said.

▪ Plan for aging parents: Most people don’t have an open dialogue with their parents about money, Patterson. But you have to have those tough conversations.

You want to know if you are going to be hit with the unexpected, Harris said. But if your parents don’t want to talk about their finances, accept that it’s out of your control, she said. Be there emotionally and physically, but look for resources to help them before bankrolling their care. “It’s not going to do you any good to spend all of your money taking care of your elderly parents, then shift the burden of your care to your children,” Harris said.

Talk to your parents about getting long-term care insurance for themselves and putting an estate plan in place, Horvath said.

▪ Look into long-term care: Once you turn 50, you should be thinking about long-term care insurance, because the price rises as you age, Patterson said. Long-term healthcare costs can devastate your savings during retirement. “This is where most seniors go broke,” he said. Long-term care insurance is “a must — you have to find a way to budget that in,” Patterson said.

Horvath said he recommends looking into long-term care starting in your mid 50s.

Harris is more cautious. She thinks long-term care is too expensive for the 35-54 age group. “I’m not convinced that the long-term care insurance is really going to take care of your needs when the time comes,” she said. “It’s about the cost versus benefit. It’s really expensive, and you have to see what it covers — everything is supplemental.” Look at the cost and see if it’s worth the benefit to you, she said. Consider your family history and longevity.

▪ Review your insurance needs: Life insurance has a specific purpose, and you want to make sure you’re going to use it for that purpose, Harris said. It’s necessary when you have kids, up to college age. If you rely on two incomes, you need it as income replacement until retirement. Harris said she doesn’t believe in carrying life insurance to leave a windfall for the children, “because you are paying it during your lifetime, and it’s taking away from saving for other things.”

As you get older, your insurance needs generally decline, Patterson said. Your assets should grow, and you should have resources to replace your income when you retire, he said.

The industry standard is to buy 10 times your annual income. “Be sure to subtract whatever life insurance your employer provides from what you need to buy,” Patterson said.

As for disability insurance, it also is important to ensure income replacement if something happens to the major breadwinner. “You should have disability insurance on the primary earner until you reach retirement or the kids are through college,” Harris said. Though Social Security has a disability component, it is extremely difficult to qualify, Patterson said. Aim for replacing 65 to 75 percent of your income with a policy.

▪ Catch up on retirement savings: Harris said most people have not saved enough. “This is a huge problem, and sometimes the more people make, the more they spend,” she said. “People think they’ve earned it — they worked hard, and they want to play hard. That’s why you need somebody guiding you and pushing you to save.”

Patterson advises not to rush to pay off your mortgage and skip out on retirement savings. “If you have a low-interest debt, less than 6.5 percent, pay the minimum and funnel that extra money to a 401(k) to take advantage of the employer match,” he said. “Then fund a Roth IRA, to take advantage of tax-free growth and withdrawals after retirement.” The 2015 contribution limit for 401(k)s is $18,000; the catch-up contribution limit for employe 50 and over is $6,000. For IRAs, the limit is $5,500, with an additional $1,000 for those 50 and over.

“Don’t be in a big rush to pay off everything. You may have less debt, but you’re not going to have any money,” Patterson said. “Which is better? You have to start balancing out your approach.”

But if you haven’t started, start now, Harris said. “Stop looking at the past. Worrying that you didn’t start sooner doesn’t help,” she said. “Starting now is the answer.”

▪ Figure out where to invest: Determine your risk profile: conservative, moderate or aggressive, Patterson said.

If you have less than $100,000, invest in mutual funds, he said. For portfolios of $100,000 to $200,000, start considering Exchange Traded Funds, known as ETFs, because you have more control and a lower expense ratio. If you have more than $200,000, you can afford to dabble in individual stocks, bonds and have more control, Patterson said.

“But when you’re starting off, you want to keep it simple,” he said. “The more money you have, the more creative you can get.”

Harris likes low-cost options like ETFs, which can offer diversification in one or a couple of funds. “I think that’s the new way of investing,” she said. “Some funds will rebalance for you. Then you can set it and forget it, adjusting if you have an income change, or if your tax situation or the market changes. It’s a pretty passive way of making sure you’re not in anything risky, and that it’s going to be there for the long-term.”

Horvath advised building a diversified portfolio of stocks and bonds, ETFs, and no-load mutual funds. Asset allocation funds, similar to a target retirement fund, have a pre-determined asset mix that is helpful if you are going it alone and don’t have someone to advise you, he said.

“When you’re thinking about saving for retirement, you’re not only investing until you retire,” Horvath said. “People are living longer and longer. If you retire at age 60, you can be in retirement for 15, 20 or 25 years. You want to think about long-term investing.”

▪ Estate planning: Financial power of attorney and healthcare surrogate forms allow you to designate someone to make financial and health decisions on your behalf, without having to go to court, Harris said. The cost is typically $150-$300 per document, she said. A state-approved healthcare surrogate form and living will (which allows you to decline life-prolonging procedures) can be downloaded free from, Harris said.

You can distribute your assets through a will, but a will has to go through the probate process, which is expensive and time consuming, Harris said.

To avoid probate, title your assets with a beneficiary, jointly as “tenants by the entirety” or jointly “with rights of survivorship.” Consider a revocable living trust to distribute assets, which, unlike a will, does not have to go through probate. The final piece of the puzzle is a simple “pour over” will, in case you forget to name a beneficiary or to properly title assets.

The cost of a simple estate plan, which includes the financial power of attorney, healthcare surrogate, living will, living trust and the pour-over will is about $2,000, Harris said.

“Sometimes people think you need a will to name guardians for minor children, and that’s not true,” Harris said. “You can do it through a two-page document called a Declaration Naming Preneed Guardian.” Consult an estate attorney or financial planner to see what is right for you.

▪ Be tax savvy: The way that people get closer to their goals is by thinking about tax-planning, and having a strategy to get consistently-compounding returns, Patterson said.

Tax-deferred vehicles like 401(k)s and traditional IRAs give investors a tax deduction now and allow tax-deferred growth. A Roth IRA will give you tax-free earnings in retirement.

Harris said if you have a high-deductible health insurance plan, you can open a Health Savings Account, or HSA, and save for future healthcare, medical and long-term care costs. “From the income tax perspective, nothing beats an HSA because you get a tax deduction for the contribution, and the money comes out tax-free if used for qualified medical expenses,” Harris said.

This can include home care or a nursing home. “I have clients who let these accounts grow tax-free to use in retirement because we all expect to have medical expenses in retirement,” she said. It’s not linked to retirement, and you can take withdrawals at any time for qualified medical expenses, but the real advantage is its tax-free growth, Harris said.

Annual contribution limits are $3,350 for an individual and $6,650 for a family (HSA holders ages 55 and older can save up to $4,350 for an individual and $7,650 for a family).

Said Horvath, “It’s important to consider taxes and savings, specifically because if you put the money in the right types of accounts, you can achieve some tax savings.” This report was supplemented with information from Bloomberg News.

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