Michele Clark
Clark Hourly Financial Planning - Chesterfield, MO Advisor
17295 Chesterfield Airport Road, Suite 200
Chesterfield, MO 63005 USA
Work 636.375.1813
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Employer Retirement Accounts: 2013 Contribution Limits

October 26th, 2012

An excellent way to save

What is my favorite feature of investing in your retirement plan at work?  No, it’s not the employer match, well alright it is the match, but a very close second is the fact that it is automatic!

The Elephant

Because companies are doing away with pension plans, saving for retirement can seem like an impossibly huge task.  But as the old saying goes “How do you eat an elephant? One bite at a time.”  Having a little money taken out of each paycheck and deposited automatically into an employer sponsored retirement account is taking that one bite at a time.  Eventually you will get that Retirement Elephant eaten.

Change in contribution limits

Each year the IRS announces if there are changes in the maximum contribution limits to employer plans due to cost-of-living increases.  Why is that important to you?  Because you can take bigger bites; and get that Retirement Elephant eaten sooner.  The catch is, depending on the instructions you set up for 2012, you may need to take action and contact your Human Resources department to let them know that you want to increase the amount you are investing in your retirement plan.  This is the month that HR usually wants to hear from you about these decisions, so the timing is right.

401(k), 403(b), 457, and SARSEPs

The 2013 maximum contribution limit is $17,500, an increase of $500 over 2012.  Be sure to contact your company to take advantage of the opportunity to put more money into your plan next year!  If you are 50 or turning 50 in 2013 you have the opportunity to add additional money to your employer sponsored retirement plan each year in the form of a Catch-up Contribution, the amount for 2013 is $5,500 the same amount as last year.  However, please check to make sure you are taking advantage of this opportunity; it is common for me to find that new clients are not doing this, and have often never even heard of a Catch-up Contribution.  But now you have, and you can take full advantage of it!

SIMPLE plan

The maximum contribution limit also went up for the SIMPLE, it will be $12,000 in 2013 whereas it was $11,500 in 2012.  If you are 50 or turning 50 in 2013 the Catch-up Contribution for SIMPLEs in 2013 will be unchanged at $2,500.

What to do

Check to see what you are contributing to your employer sponsored retirement plan, if you want to “put the max in” as I so often hear, make sure that you do that by adjusting the numbers for the new 2013 increases.

If you are over 50 or will turn 50 in 2013, make sure that you take advantage of the Catch-up Contribution which allows you to put additional money in the account.

If you are not “putting in the max” make sure that you are getting at least the full amount of the match from your company.  This needs to be balanced with having an emergency fund/savings account.

Once you have gotten to the point of getting all of the match, and establishing the appropriate emergency fund for your family, you need to evaluate all your goals and make sure that you deploy any extra cash among those goals in a way that fits with your priorities and values.

A hint for increasing your retirement savings – each time you get a raise, increase your retirement account contribution by one percent.  You will not even feel the loss, because it is money you didn’t even have yet.

Take action today, and you will be that much closer to retirement!

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Should we pay off our mortgage?

June 29th, 2012

“We have a lot of cash in our savings account.  Should we pay off our mortgage or invest the money for retirement?”

When you give financial advice “by the hour” you get asked questions like these.  And the answer is… it depends.

It depends on;

* your attitude about owing money

* how much of a nest egg you have accumulated for your retirement because you will need cash to pay bills after you stop working and therefore stop getting paychecks

* what other financial goals you have and if you are on track to achieve them

* what interest rate you will pay on the mortgage and the assumed rate on the investments, and other assorted mathematical inputs

“Should we pay off our mortgage?” is a question that is more than a math calculation.  After the math is figured, take it a step further and think about how you will feel during retirement with and without a mortgage payment.

No mortgage in retirement

I have never heard anyone say they regret paying off their mortgage.  And there are ways to tap into a portion of the home equity if needed.  However, many retired folks have shared with me that they wished they had been wiser in their approach to mortgage debt so they didn’t have a mortgage while retired.  I have sometimes noticed during an initial meeting when I meet with a couple who have a mortgage, they seem more concerned about market fluctuation than other couples who do not have a mortgage.

Mortgage in retirement

There are a few couples that I can remember meeting with that have a mortgage in retirement and they were comfortable with it.  They outlined the math in a logical way and how it made sense for them.   They liked that it left them with more available cash in retirement.  I agreed with them, that it seemed to work for them.

When to pay it off? 

If your last mortgage payment is due after the day you would like to retire, jump on one of the many financial calculator websites and figure out the extra payment you would need to send each month in order to time your last mortgage payment with your retirement date.  You might be surprised to find how little additional money needs to be sent in order to pay the loan off by your retirement date.  How great would that feel?  Be sure to call your mortgage servicer to be certain that you do not have a pre-payment penalty, pretty unlikely, but just in case.  Make sure that you can still afford to make enough of a contribution to retirement accounts so that you can retire on time!  And that you are able to save for any other financial goals that are important to you.

What not to do

What I think is unfortunate, is to see a young couple that has heard that it is good to pay off your mortgage sending every available dollar to the mortgage company – with no emergency fund!  And they have not been saving in the company retirement plan, no savings for vacations or other goals.  A balance is needed.  Get the emergency fund created first!  Then create a prioritized list of goals and send money to each based on your priority.

The mortgage problem

The mortgage problem of having a large mortgage when retirement time rolls around isn’t usually created with the starter home, it usually happens when people move up into a series of bigger and bigger homes or take out cash to remodel.   That is when it is especially important to check to see if you can afford to pay the mortgage off by your target retirement date.

What To-Do?

Write down the approximate date that you would like to retire.

Write down the date that your mortgage payment will be done.

If the mortgage will be done after you retire, satisfy your curiosity and find out how much extra you would need to send in to pay your mortgage off in time for retirement.

You could call your mortgage company and ask them.  Or you could use an online mortgage payment calculator and the amount of principal left on your loan, how many months or years until retirement, the interest rate on your loan and find out for yourself.  Just remember that the monthly payment it quotes you is just the principal and interest, if you have your taxes and insurance escrowed you would add that on top of the principal and interest.

Invest just a few minutes, and you could be on track to having your mortgage paid off in retirement.

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Best Graduation Gift for Boomerang Kids

June 23rd, 2011

College graduation season is here and you know what that means. You have to give up your mancave, junior is moving back home! Boomerang kids are returning home to save money.

Here is a simple idea which will:

1) Allow you to steal a little extra time with your grad before they leave the nest for good

2) Teach your grad to establish a habit of monthly money communication

3) Establish a strategy for your grad to accumulate cash for their own place

Treat the arrangement like a practice run for “the real world” with parents playing the part of the landlord and the grad playing the part of the tenant. On the first of each month the grad pays “rent” to the parents. The parents deposit the “rent” to a savings account for the grad to later use to get their own place.

In the beginning this is about establishing the monthly habits of talking about money with the important people in their life and paying rent, even if the amount is minimal. Then, when the grad has a job, the “rent” should increase making sure it remains affordable. The goals is to eventually get the monthly “rent” up to an amount that is equal to the amount that the grad will be paying once they are out on their own. Do some online research to see what local apartments cost, preferably with roommates.

Agree in advance on a term for the “lease.” Will it be for six months? A year? By the time the “lease” is up on the grad’s childhood bedroom, they should be well on their way to having established a nest egg for a deposit on an apartment and first and last months’ rent. Consider extending the “lease” so they can set aside enough for an emergency fund of six months’ living expenses to set them on a firm foundation.

If you have an especially responsible young adult, let them handle the monthly deposit into the savings account. The real key is to pull out the bank statements and have the monthly discussion about savings and bill-paying. This will establish the habit for future money conversations with roommates and more importantly, one day, a spouse. Savings in the bank and a monthly habit of open communication about money; what a great graduation gift!

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