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State of Personal Finance

State of Personal Finance

Each year, the Journal of Financial Planning publishes an article entitled "Personal Finance Year in Review".  The article contains a bevy of interesting and useful information.  I thought I would share a few of the highlights with you.

Background

Personal Finance is by its nature a very broad and general topic...the uniqueness of each individual's situation necessitates of gargantuan umbrella to cover the landscape.  Some areas are more mundane than others - auto insurance deductibles just don't read as well as an increase in the 2019 Roth IRA Contribution...or at least to me anyway.  Nevertheless, much is happening in the realm of personal finance about which you should be well-aware.

Interesting Facts Uncovered in Research Studies


Support of Adult Children.  Merrill Lynch and Age Wave concluded after surveying 2,500 parents with adult children that a full 80% of them are providing some sort of assistance to their progeny.  Moreover, and somewhat disturbing, a good portion of the respondents reported that annual support payments exceeded their own yearly retirement savings contributions.  Let me say that again, some parents are giving more money to their children than they are saving into their own retirement accounts. (Source)

  • Resilient Asset Management thought:  the cruel logic of retirement:  parents come first - is bitter to some.  Simply put, your children can borrow for college and just about anything else (see below).  You, conversely, cannot generally borrow in a meaningful way for retirement.  Thus, your financial well-being must come first in the hierarchy of financial priorities.  Children, for whatever one may think, are extremely durable and resourceful.

Retirement Savings.  The 2018 Retirement Confidence Survey by the Employee Benefit Research Institute concluded some interesting facts about retirement savings.  Here are some details (Source):

  1. Only 64% of workers report having any (more than $0) in retirement savings.
  2. Among this 64%, 45% had less than $25,000 saved and a further 26% had less than $1,000 in their account - that is, roughly 16% of ALL people have less than $1,000 in retirement savings.
  3. Only 21% had saved more than $250,000
  4. 4 in 5 (80%) workers plan to work in retirement - in practice, only 34% of retirement-aged people actually work.

Resilient Asset Management thoughts:  

  • I admit there are exceptions; however, this survey clearly shows a lack of retirement savings amongst the population in aggregate.
  • It is difficult to save too much for retirement...save until it hurts and prove me wrong!  
  • If one's plan is to "work it out" in retirement, it seems prudent to have a contingency option -  80% of people plan to work in retirement, though less than half that number actually do.
  • The ability to work is taken from people sometimes and it is usually unexpected when it happens.  Virtually no one plans ahead for a debilitating accident.  
  • A starting solution to this dilemma is to put your foot on the savings gas pedal at all times...meaning when you get your first paycheck - and don't take it off!  
  • Then, plan on working a few years longer than normal - perhaps to 65 or 70...this will increase your Social Security payout while allowing your assets to keep growing while you are gainfully employed.  After age 70, maybe or maybe not, but don't depend on it.
  • Also, DO NOT discount the importance of Long-Term Disability Insurance....the ability for an individual to work is usually his/her largest asset, so insuring it is generally something to consider, especially when you are young and have family depending on your income.

Financial Health.  The Center for Financial Services Innovation conducted their inaugural "Financial Health Pulse Study".  The Center defines Financial Healthy as being all of the following (Source):

  1. Spend less than income
  2. Pay all bills on time
  3. Sufficient Liquid Savings
  4. Sufficient Long-Term Savings
  5. Manageable Debt Load
  6. Prime Credit Score
  7. Have appropriate insurance
  8. Plan ahead for expenses

Of 5,019 survey responders, here are the results:

  • 28% are "Financially Healthy" as described above
  • 45% had sufficient liquid savings
  • 37% had sufficient long-term savings

Resilient Asset Management Thoughts:

  • If you don't have an Emergency Fund, get one...it's that simple - credit cards are not a viable financing option.
  • Pay your bills on time, every time...your credit score is heavily influenced by it.
  • Use debt sparingly, and NEVER with a credit card.

Key Financial Trends Across the Playing Field


Life Expectancy.  Life expectancy in the United States has declined for two years in a row for all people except women ages 65 and over.  The decrease in life expectancy overall is attributed to the ballooning of drug-related deaths amongst younger adults. (Source)

Consumer Debt.  2018 saw an avalanche of new consumer debt via unsecured loans, which are generally used to consolidate higher-interest credit card debt while avoiding "tapping" home equity.  Financial Technology companies originated 36% of these types of loans in 2017 versus less than 1% in 2010 (Source).

  • Resilient Asset Management thought:  Debt is debt is debt whether it comes from a bank, a credit card, somewhere on the internet, or an app on your phone.  Borrow money with the intent of paying it back or don't borrow at all.  If you can eat it or wear it, don't finance it.

Car Purchases.  Average new car loan terms (Source):

  • Payment:  $523 with 
  • Total Loan:  $31,453
  • Repayment Period: 5 years, 9 months.  

I will just say that I drive a 2004 car with about 122,000 miles (and counting) on it and leave it at that.

Bankruptcy.  Americans aged 65 and up are filing for bankruptcy at triple the rate they did in 1991.  This tragedy is attributed to the decrease in pension income and inadequate savings in its replacement, the 401(k) [Source].  See the first section of this article - save until it absolutely hurts.

Identity Theft.  A breathtaking 30% of consumers were notified of a data breach in 2017 with Social Security Number compromises exceeding Credit Card Number compromises for the first time (Source). 

Resilient Asset Management thoughts:  

  • Consider Two-Factor Authentication when it is offered by a vendor
  • Keep your IT software up-to-date
  • Account alerts and credit freezes are important defenses to consider, especially for active duty military going on deployment.
  • Consider credit freezes for minor children as well...everyone is a target these days.

Unemployment & Wages.  The U.S. unemployment rate is down to 3.7%, the lowest since 1969.  Moreover, wages were up 3.1% for 2017, the largest one-year gain since 2009.  One can interpret these numbers many ways...for the purposes of this article, the numbers are simply the numbers (Source).


General Financial Trivia  


Happy Birthday to the ETF.  25 years ago, the first Exchange-Traded Fund was introduced.

Roth IRA.  The gift that keeps on giving - the Roth IRA turned 20 in 2018.  First available in January, 1998, I vividly remember converting my Traditional IRA to a Roth on the first business day that year.  Thankfully, you could spread the tax burden over 4 years back then - nostalgia!  

Bitcoin.  Hard to believe it turned 10 in 2018.  Tread carefully if you consider this an investment.

The Dow.  The Dow Jones Industrial Average (DJIA) - made up of just 30 stocks - lost its last charter member last year when General Electric finally capitulated.  GE's replacement:  after conquering nearly every major intersection in the United States, Walgreens now resides in the DJIA as well.

Social Security.  For the first time since 1982, payouts exceeded receipts from the payroll tax.  Even worse, the Social Security Trustees predicted the Social Security Trust Fund will be depleted by 2034.  You can read about ALL potential fixes here.

Itemized Deductions.  With the passage of the Tax Cuts and Jobs Act of 2017, 2018 returns (due April 15, 2019) are the first to be filed under the new rulebook.  The number of filers who itemize is expected to fall dramatically due to the doubling of the Standard Deduction.  One interesting by-product will be the impact on charitable giving - will donors want to give as much if no income tax benefit is received...

Medicare.  In April 2018, individuals were assigned unique individual numbers on a new Medicare Card...this program is expected to be complete by April, 2019.  This change will purportedly deter identity theft; however, con artists - a truly conniving lot - seized on this opportunity by charging recipients (i.e. Victims) "activation fees", of course payable in a gift card if you like (Source).

Education Resources.  The Bureau of Consumer Protection (formerly the CFPB) published its on-line list of financial education resources, please have a look at it here.


What's New in 2019


Social Security.  Despite the program's shortfalls described above, here are some changes taking effect this year (Source):

  • The earnings limit (the amount you can earn without impacting your benefit) has been raised to $17,640.
  • To earn a qualifying quarter of coverage, you must earn $1,360 in a 3-month period.
  • The maximum monthly benefit was raised to $2,861.
  • The maximum taxable earnings subject to the Social Security Payroll Tax is now $132,900.
  • The COLA (you know what it stands for if it applies to you) for 2019 is 2.8%

Resilient Asset Management Thoughts:

  • If you are self-employed, consider recognizing some earned income so you qualify for the Social Security and Medicare programs.
  • If you haven't, get on-line and sign-up for an account on ssa.gov - the Social Security Website.  For whatever you may think about Social Security in general, the website is chock full of great information....I am not kidding.

Health Savings Accounts (HSAs).  The deductible required for your health plan to qualify as "high-deductible" remains the same:  Self-only: $1,350; Family: $2,700.  Assuming you qualify, you may now contribute $3,500 (Self) or $7,000 (Family) to an HSA.  Of note, the Flexible Spending Account (FSA) limit is now $2,700...make sure of your eligibility for each before pulling the trigger.

Workplace Retirement Plans.  The maximum 401(k) and/or TSP contribution is now $19,000.  If you are over 50, you are permitted a "catch-up" contribution of $6,000.

Individual Retirement Accounts (IRAs).  The maximum IRA contribution was increased to $6,000 with an addition $1,000 contribution permitted for those 50 and older.

Conclusion

This article covered a wide landscape of personal finance issues.  Obviously, not everyone can meet every standard described above.  However, we can all strive for it.  I suggest  starts picking one or two areas you can improve upon and then addressing them aggressively...the more dire the problem, the more potent should be the antidote.  While you won't see results immediately, it is amazing what you will see happen when you simply put one foot in front of the other.

Comments, criticism, and suggestions are always welcome.  If you would like to provide any or would like to discuss your personal situation with Resilient Asset Management, please contact us here.

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