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All Contents © 2019The Kiplinger Washington Editors
By the editors of Kiplinger's Personal Finance
| April 2017
We have doled out a lot of good advice over the 70 years we’ve been publishing Kiplinger's Personal Finance magazine. So in many ways it was easy to come up with 70 ideas on how to create wealth. But when our editorial staff submitted nearly 300 ideas, the editors had to roll up our collective sleeves and distill the advice into absolute gems.
In this slide show, we offer advice on how to build, protect and enhance your wealth, time-tested strategies to help you keep your eye on the ball, and our top tips for finding value, so your hard-won wealth doesn’t leak out in dribs and drabs. We devote a section to the biggest goal of all -- a secure retirement. And because life isn’t all about making money, we include fulfilling ways to give back. Take a look.
The sooner you start to save, the easier it will be to amass a comfortable nest egg -- thanks to the power of time and the magic of compounding. A 25-year-old who saves $450 a month in a tax-deferred retirement account and earns an average yearly return of 7% will have about $1.1 million by age 65.
If the same investor waits until age 35 to start saving, she’d have to sock away $950 a month to reach roughly the same balance by age 65. Try to save 15% of your income, including any employer match for your retirement plan. If that’s not doable, put away as much as you can and increase the percentage as your income and budget allow.
“Getting started, even if you’re saving 3% of your income or $10 a week, is the critical goal,” says Molly Balunek, a certified financial planner in Cleveland. “Once you see progress, it becomes easier to save 1% more, or $5 more a week.”
If you have a dedicated stash of cash at the ready in case of a job loss or an unexpected bill -- say, for a major car repair or hospital visit -- you won’t have to resort to racking up credit card debt or, say, tapping retirement savings to cover the tab.
Squirrel away at least three to six months’ worth of living expenses in a safe, easy-to-access savings or money market deposit account. (For a more personalized amount to save, use HelloWallet.com’s tool.) Look for an account with no monthly fee, a low (or no) minimum balance requirement and a competitive rate, such as the
Synchrony Bank High Yield Savings and the GS Bank Online Savings accounts. Both recently yielded 1.05%.
For the slow-and-steady way to get rich, take full advantage of your company’s 401(k). You can contribute up to $18,000 ($24,000 for people 50 and older) in 2017 to this pretax account; your employer may kick in another 4% to 6% of your pay, or even more. Many companies enroll employees automatically, at a contribution rate of, say, 3% of their salary. But aim for 15% of your income, including the company match, from the beginning of your career until the end. If you have to cut back for a few years -- say, to buy a house or pay college bills -- try to kick in at least enough to get the full company match, and boost your contributions later to get back on track.
Teachers typically have access to 403(b) plans, which carry the same terms and benefits as 401(k)s but generally lack the breadth of investment options. Public-sector workers may be offered a 457 plan, which is also similar to a 401(k) plan but has a higher contribution limit for people within three years of normal retirement age, usually defined as the age when they can collect unreduced pension benefits.
Another surefire wealth builder is a Roth IRA. You fund this account with after-tax dollars, so the pain is up front. The payoff? Withdrawals are tax-free if you’re at least 59½ and have held the account for at least five years (you can always withdraw your contributions tax- and penalty-free). You don’t have to take required minimum distributions from a Roth, as you do with traditional IRAs and 401(k)s, allowing you to withdraw the money strategically or let it grow and leave it to your heirs. And because withdrawals from a Roth aren’t reported to the IRS as income, they won’t increase the taxes on your Social Security benefits or trigger the high-income surcharge on Medicare Part B or Part D.
You can contribute up to $5,500 a year to a Roth ($6,500 if you’re 50 or older) in 2017. The allowed contribution starts to shrink if your modified adjusted gross income is more than $118,000 ($186,000 for married couples filing jointly) and disappears altogether at $133,000 ($196,000 for joint filers).
Earn too much to qualify for a Roth? Your employer may offer a Roth 401(k), which has no income limits and carries the same contribution cap as a regular 401(k).
Roths aren’t just for grown-ups. One of the best ways to help your children or grandchildren build wealth is to get them started early with a Roth IRA. Children of any age who have earned income from a job can contribute up to $5,500 to a Roth IRA (or their earnings for the year, if less), and you can give them the money to get started. Not all brokerages let children open Roths, but several -- including Fidelity, Charles Schwab and TD Ameritrade -- offer custodial Roths with little or no investing minimum and no IRA maintenance fees.
A financial adviser can help you blaze a path to financial success -- especially when you’re starting out or facing a complex financial situation. A certified financial planner (CFP), for example, offers guidance in strategizing retirement savings, allocating or managing investments, creating an estate plan, and performing other tasks.
At napfa.org, you can search for a fee-only adviser, who avoids conflicts of interest by accepting no commissions from selling investments or other products. If you need extra assistance with tax planning, look for a certified public accountant (CPA) with a personal financial specialist (PFS) designation at aicpa.org.
You don’t need deep pockets to get help. At GarrettPlanningNetwork.com, search for planners who charge hourly rates and require no asset or income minimum. Independent outfits, such as Betterment and Wealthfront, as well as full-service firms, such as Charles Schwab and Fidelity, offer online “robo” adviser services, which provide low-cost, computer-generated advice and portfolio management.
Good credit helps you get the lowest interest rates and best terms on a credit card, mortgage or other loan, and your credit history may even affect your job prospects, insurance rates, and ability to get an apartment or cell phone plan. Generally, a credit score of 750 or higher (on a 300-to-850 scale) is considered top tier. The most important credit-building step is to pay all of your bills on time.
Another score booster: Keep the amount that you owe on your credit cards as a percentage of their overall limits (known as your credit utilization ratio) as low as possible. On each card, use no more than 30% of your limit, and keep the ratio to 10% or less on each card if you plan to apply for a loan soon.
Once you’ve established a bank account and started to participate in your employer’s retirement savings plan, take your wealth-building program to the next level by opening a brokerage account. That will allow you to invest in individual stocks and exchange-traded funds, which most people can’t do in their 401(k), as well as no-transaction-fee mutual funds. You’ll need $2,500 to open an account at Fidelity, our top-ranked online broker; Charles Schwab requires just $1,000, which is waived if you sign up for automatic monthly deposits of at least $100.
You’re more likely to accrue wealth if you have specific goals and a plan to reach them. That means coming up with short-term goals, such as paying off debt, buying a house, and saving for a rainy day or a vacation, as well as long-term goals, which may include funding your retirement and your children’s college education.
Make your goals specific and realistic. “Instead of saying that you want to save for your child’s education, say you want to have $50,000 saved for your child’s education in 15 years, and you’ll get there by depositing $200 a month into a 529 savings plan,” says Roger Ma, a certified financial planner in New York City.
Live within -- and ideally below -- your means. By resisting the temptation to buy a big house or expensive cars, you can invest in things that will create long-term wealth, such as stocks and real estate.
Want to move ahead in your organization or switch to a more lucrative job? Keep your skills sharp and never stop networking, says Mary Eileen Williams, a career counselor and author of Land the Job You Love: 10 Surefire Strategies for Jobseekers Over 50. An updated LinkedIn profile is critical because most employers use the website to vet potential candidates, Williams says. And learning new job skills doesn’t have to cost a lot of money. Khan Academy, a nonprofit website, offers video tutorials on everything from statistics to computer programming.
Your local community college may also offer career-advancement courses. Considering an advanced degree? According to Payscale.com, nurse anesthetists, MBAs in business strategy and chemical engineers earn the highest salaries after graduate school; graduates with master’s degrees in education and human services earn the lowest pay.
Another secret to success: Spend half an hour a day learning about your job, industry or a dream you’re pursuing. More than 95% of self-made millionaires spend at least 30 minutes every day reading materials related to their careers or self-improvement, says Tom Corley, a certified financial planner who spent five years researching the habits of wealthy people for his book Rich Habits.
Owning a home is one of the best ways to build wealth. You can still lock in low mortgage rates, and Uncle Sam offers a helping hand in the form of tax deductions for mortgage interest and property taxes. Ideally, you’ll put down at least 20% of a home’s purchase price, which allows you to avoid private mortgage insurance. The bank may be willing to lend you more than you can comfortably afford.
To avoid feeling house poor, however, figure out how much of your monthly budget you can devote to a mortgage payment and still have enough left over for retirement and college savings, travel, and just plain fun. And note that the maxim “Buy the worst house in the best neighborhood” doesn’t pay off.
In Zillow Talk: Rewriting the Rules of Real Estate, Spencer Rascoff, CEO of Zillow, and Stan Humphries, chief economist, write that the data prove you should “buy a decent house in the right neighborhood.” What’s the right neighborhood? The most expensive one where you can afford a home that is not in the bottom 10% of listings by price. Homes in the bottom 10% don’t appreciate as well as homes in the top 90%.
Too many parents sacrifice their own wealth by raiding their retirement savings to pay for their kids’ college. Or their children graduate with large student-loan payments to go with their sheepskin. If you set aside money in a 529 college-savings plan every year starting when your children are born, you’ll have a big chunk of the tuition bill saved when they’re 18.
They can use the 529 money tax-free for college costs, and you may get a state income tax deduction for your contributions. Go to SavingForCollege.com for more information about each state’s rules. If your state doesn’t offer a tax break, check out Utah’s plan, which features low-cost Vanguard funds and FDIC-insured accounts.
Your home may be your biggest asset, so make sure you have enough insurance to protect it from disasters. Review your policy to see if your dwelling coverage is enough to rebuild. (Your insurer may inspect your home, or you can get an estimate for $25 at e2value.com.) Let your insurance company know about any major improvements that affect the value.
Check the amount of coverage for your possessions, and consider buying a rider to cover special items, such as jewelry. Add insurance for sewage back-ups (typically $130 for $10,000 of coverage), and consider flood insurance if you’re concerned about that risk (ask your homeowners insurance agent for a price quote, or go to FloodSmart.gov for additional information).
The most important part of your auto insurance policy is the liability coverage, which protects your assets and future earnings if you are liable for injuries and damage as the result of an accident. State liability coverage requirements are usually inadequate; most people should get coverage to pay at least $250,000 per injured person and $500,000 per accident. Also make sure you have uninsured-motorist coverage (and underinsured-motorist coverage, in states with inadequate liability limits). That can pay for damage to your car, medical expenses and lost wages for you and your passengers if the at-fault driver does not have insurance.
Most families with typical risks should also safeguard their assets and future earnings with an umbrella policy. You can boost your auto and home liability protection by $1 million with an umbrella policy for about $200 to $400 per year. Make sure you have at least as much liability coverage as your net worth.
Life insurance would replace lost income if you or your spouse died early. One rule of thumb calls for buying at least eight to 10 times your gross income, and you can get a refined estimate by using a life insurance calculator (such as the one at LifeHappens.org). A 20- to 30-year term policy, which has no savings component, is best for most families. The policy would likely cover you until your kids are out of college, you pay off your house or you stop working.
You can compare rates for several insurers at AccuQuote.com. If you need insurance longer—for example, if you’re supporting a child with special needs -- consider a permanent insurance policy, such as whole life or universal life, which builds cash value. (Note that premiums for permanent coverage tend to be much higher than for term insurance.)
If you become disabled and unable to work, you don’t want to be forced to raid your retirement savings or incur expensive debt. You may have some disability insurance through your employer, but employers’ policies typically cover just 60% of income, with a $5,000 monthly maximum, and don’t take bonuses and commissions into account. Plus, payments from employer disability plans are taxable.
Calculate how much your policy will pay out every month, compare that with your monthly expenses, and consider buying an individual policy to fill the gaps (see Why You Need Disability Coverage). You may be able to cover up to 85% of your income, and payouts from individual disability policies are tax-free.
Instead of using HSA money to cover current medical bills, let the money grow long term and cover medical costs out of pocket. Keep your receipts for eligible medical expenses you incur after you open the account and withdraw the money later -- even in retirement.
To set up an HSA, you need an eligible health insurance policy with a deductible of at least $1,300 for individual coverage or $2,600 for family coverage. You can contribute up to $3,400 to the HSA for individual or $6,750 for family coverage, plus $1,000 if you’re 55 or older. Your contributions are tax-deductible (or pretax if they’re through your employer), and the money grows tax-deferred.
You can’t contribute to an HSA after you’ve enrolled in Medicare, but you can use the money already in the account tax-free to pay premiums for Medicare Part B, Part D and Medicare Advantage, plus a portion of long-term-care premiums based on your age.
The best way to build wealth over the long haul is to invest in stocks. U.S. stocks, as measured by Standard & Poor’s 500-stock index, have returned about 10% per year compounded. Stocks are notoriously fickle and volatile over the short term, and after their long ascent, they are due for a breather or possibly a full-fledged bear market. But with interest rates still in the gutter, stocks will almost certainly outpace bonds and cash-type investments (for instance, savings accounts and money market funds) over the next decade and beyond.
Start investing with low-cost exchange-traded funds, such as iShares Core S&P 500 (symbol IVV), which tracks the S&P 500, or Vanguard Total Stock Market (VTI), which follows a benchmark that includes nearly every U.S. stock. You can rev your engines with a sector ETF, such as Vanguard Information Technology ETF (VGT) or Guggenheim S&P 500 Equal Weight Health Care ETF (RYH). But don’t invest money you’ll need soon.
You may not know if an ID thief has struck or when a mistake is marring your credit record. To check, go to AnnualCreditReport.com and order your credit reports from the three major credit bureaus (Equifax, Experian and TransUnion). You can get a free report from each bureau once a year. Pore over each one for mistakes, such as variations on your name or accounts you never opened. If you find an error, file disputes with both the lender and the bureau(s) that reported the error, preferably by certified mail so you can create a paper trail.
On a more regular basis, monitor your credit score for unexplained dips that could signal something fishy is going on in your credit report. If your bank doesn’t offer a free FICO score, look up services that do.
Cleaning up after identity theft can be costly and time-consuming. Worse, ID theft may prevent you from getting credit, at least until you finish the painstaking process of cleaning up your credit files. Rule one: Don’t carry your Social Security card in your wallet or give out your Social Security number unless you’re sure it’s needed, and shred unneeded documents that include the number.
If a thief has already stolen your SSN, he may try to file a tax return in your name and collect a refund. To deter such an attempt, submit your tax return as early as possible. Watch out for calls or e-mails from crooks posing as representatives of your bank, the IRS or other entities in attempts to collect your personal information or money, and never click on a link in an e-mail or text message unless you’re sure of its source. Password-protect your PC and smartphone, and use strong and diverse passwords for your online accounts, too.
Pat yourself on the back if you already have a will and other estate-planning documents, including a durable power of attorney (which lets the person you appoint manage your finances and legal affairs) and health care power of attorney (which gives a trusted person the authority to make health care decisions on your behalf if you can’t). Now make sure these documents reflect current circumstances, including the birth of a child, a divorce or a move to a new state (see Estate-Planning for Snowbirds). Also review the beneficiaries of your life insurance, 401(k) and IRA.
Do your family another favor by leaving instructions as to whether you want your body to be buried, cremated or donated to science, and let family members know whether you prefer a funeral service or a memorial service, and where it should be held. Better yet, plan and put aside funds for the whole thing yourself (see How to Plan Your Own Funeral). The median price for a traditional, full-service funeral runs $7,180, not including cemetery costs or extras, such as flowers, according to a 2015 report by the National Funeral Directors Association. Prices vary widely even in the same area, however, so check costs at several funeral homes.
The Department of Agriculture says middle-income parents will spend more than $233,000 to raise a child to age 17, and high-income parents will spend more than $372,000. You’ll feel less of a pinch in the pocketbook if you take advantage of family-friendly tax breaks. Parents who pay for child care are eligible for two breaks: a dependent-care flexible spending account and the child-care credit. You usually have to choose one or the other, and for most families, the flex account is a better deal (assuming your employer offers one).
You can set aside up to $5,000 pretax in a dependent-care FSA. (The maximum contribution is $5,000 per household each year, even if both spouses have access to a dependent-care FSA where they work.) That money avoids not only federal income taxes but also the 7.65% Social Security and Medicare tax, and it may bypass state income taxes as well. The higher your tax bracket, the bigger the benefit. If you have two or more kids, you can max out your dependent-care FSA and still take the child-care credit for up to $1,000 in additional expenses. Don’t forget to count all child-care costs (even the cost of summer day camp) for children younger than 13.
Raising financially literate and responsible kids should be part of your estate plan. Be up front about the wealth you have and your plans for it, and make sure your legacy is as much about your values as it is about your bank account. Start teaching budgeting skills at an early age. Have teens use allowance to pay some of their own expenses, and steel yourself to let the cell phone go dark if they fall behind on the wireless bill. Seed an investment account for young adults, and perhaps promise to match a portion of the investment returns. The kids are free to withdraw the money, but parents can’t add to the principal. This shows the power of compound growth as well as the opportunity cost of robbing a nest egg.
The general post-retirement rule is to draw from taxable accounts first: When you sell investments in a taxable account, you pay tax only on the profit, and if you’ve held the investments for more than a year, the profit is taxed at the long-term capital-gains rate, which tops out at 20%. But you may get an even sweeter break: In 2017, married couples with taxable income up to $75,900 and single people with income up to $37,950 are eligible for a 0% capital-gains rate. (President Trump’s tax reform plan would retain the 0% capital-gains rate; under the House Republican tax reform plan, the lowest hit on capital gains would be 6%.)
With pretax accounts, every dollar you withdraw is taxed at the ordinary income tax rate of up to 39.6%. Generally, it’s best to tap such tax-deferred accounts after your taxable accounts, letting Roth IRAs -- which aren’t subject to required minimum distributions—ride to take advantage of tax-free growth. There are lots of exceptions to these rules of thumb, so consult an adviser if you’re not sure what’s best for you.
Don’t let recurring charges nibble away at your assets. Households with two cell phones, a landline, and a cable and internet bundle spend a whopping $2,700 a year, on average, on those services, according to a Consumer Federation of America report. Consider sharing a phone plan with family members and dropping your cable plan in favor of using an antenna to get over-the-air channels and signing up for streaming video. You may also find you’re not getting your money’s worth out of, say, your satellite radio or audiobook subscription. And don’t overlook hidden fees, such as hotel resort fees, airline charges and bank fees, which can add up to big bucks. You can look up resort fees at ResortFeeChecker.com and airline fees at Kayak.com. Search for low-fee checking accounts at FindABetterBank.com.
Kiplinger expects inflation for 2017 to be a still-modest 2.4%, up from 2.1% in 2016. That’s nowhere near 1970s-style runaway levels, but it’s enough to merit some inflation protection in your portfolio. One good option: Treasury inflation-protected securities. The principal value of TIPS is adjusted to keep pace with increases in consumer prices. Buy TIPS directly from Uncle Sam at TreasuryDirect.gov. Another inflation fighter is Fidelity Floating Rate High Income (FFRHX), which invests in loans that banks make to borrowers with below-average credit ratings. The interest rates adjust periodically in response to changes in short-term rates, which are likely to rise as inflation accelerates. Commodities should also perform well as inflation heats up. For exposure to commodities, consider Harbor Commodity Real Return Strategy (HACMX). For more on staying ahead of inflation, see Inflation-Proof Your Assets.
About one-fifth of U.S. retirees are expected to have estates that top $390,000, according to the banking and financial services organization HSBC. If you are the beneficiary of parental largesse (or you win the lottery), start by doing nothing. Stash your bounty in a safe place, such as a savings or money market account, for six months to a year. That will give you time to come up with a solid plan to get the most out of your good fortune. It will also give you time to assemble a team of advisers to help you manage your money.
Your team should include a financial planner and a certified public accountant or enrolled agent. Depending on the nature of your windfall, you may also need help from a lawyer and an insurance professional. Resist the temptation to tell your boss to take your job and shove it. Windfall recipients often underestimate how much money it will take to replace their income. Plus, once you quit, you’ll stop earning income that contributes to your Social Security benefits -- which you may need if your investments go sour.
Playing it safe with a diversified mix of stocks and bonds can help your portfolio stay afloat during bad times and improve your long-term returns. If you have at least 10 years until retirement, for example, hold 70% of your portfolio in stocks and 30% in high-quality bonds. A mutual fund can work nicely, too. Vanguard Wellington (VWELX), a member of the Kiplinger 25 (the list of our favorite mutual funds), holds about two-thirds of its assets in stocks and the rest in bonds, and it has an annualized 8.2% return over the past 20 years.
Before delivering modest gains in 2016, stocks in developing markets, such as China and India, had lost money in four of the previous five years. But emerging-market stocks still deserve a place among your assets. Not only are the stocks relatively cheap, but corporate earnings in emerging-markets firms are expected to expand by more than 13% in 2017—far more than firms in the U.S. For access to these stocks, invest in Baron Emerging Markets (BEXFX), a Kiplinger 25 fund, or in exchange-traded iShares Core MSCI Emerging Markets ETF (IEMG), which tracks an index.
Wondering if it’s time to sell all of your stocks? Don’t. First, what are you going to do with the proceeds? Cash pays almost nothing, and bonds come with their own set of risks. And how will you know when it’s time to get back in the market? Our advice: Set an appropriate allocation, then rebalance.