Yahoo Finance 8 Hacks to Ease Your Financial Life
Upgrade your financial planning.
Like the maestros who figure out how to convert a couple of Ikea bookcases into a kitchen island, some financial advisors have secret tools and secret ways to use common tools. Here's a roundup of eight common hacks experts use for financial planning -- and that you can use, too.
Estimate the biggest unknown.
The problem with figuring out how much money you will need in retirement is that you don't really know how long you'll live. Drill down to your likely life expectancy using the calculators at Livingto100.com or BlueZones.com. Use the results to discuss your health with your doctor and your wealth with your financial planner. "Think of talking with a financial advisor like talking with your doctor. Get a diagnosis and a care plan," says Kathleen Hastings, portfolio manager with FBB Capital Partners, based in Bethesda, Maryland.
A new "magic number" retirement income
What if you could gain income in retirement by spending strategically? That's the concept behind Income Discovery, pioneered by information technology executive Manish Malhotra. His model is used by financial consultants affiliated with E*Trade and other firms. Unlike accumulating wealth, which is rife with factors you cannot control, tweaking when and how you tap sources of cash flow is within your control. For example, the structure of accounts, combined with careful timing, can result in additional cash when you withdraw funds in sequence. "By mixing and matching different types of income at different times, you get higher post-tax retirement income," Malhotra says.
Think income stability, not risk tolerance.
The retirement savings industry is so obsessed with growth that retirees' deep desire for stable, reliable income is often overlooked, says Chris Browning, assistant professor in the department of personal financial planning at Texas Tech University. Instead of trying to diagnose your tolerance for risk, figure out how dearly you value a stable income in retirement, he suggests. That means your definition of success is less about a bigger portfolio and more about the mix of assets and products that ensure reliable income.
Rev up your Roth: Part I
A Roth isn't only for retirement, Hastings says. After five years, contributions you have made to your Roth individual retirement account can be withdrawn tax-free without penalty for these additional purposes: up to $10,000 to cover the down payment for a first home purchase, to pay for college and to pay for health care expenses or health insurance if you are unemployed.
Rev up your Roth: Part II
Consider using a Roth IRA to save for your children's college costs, leveraging the option to withdraw your contributions (not what you've earned on those contributions) for tuition, Hastings says. Typically, Roth IRAs are not counted as parental assets on financial aid forms. Or, you could open a Roth IRA for your child, and the child could withdraw the contributions for college, tax-free. But Jared Roskelley, president of Jackson Roskelley Wealth Advisors, cautions parents about setting up a fund for your child in his or her name. "There's a risk. It's a gift. They can do with it what they want," he says.
More fun with Roths
Set up a Roth 401(k), even if you don't think you need one, Roskelley says. The Roth 401(k) has the same contribution limit as the traditional 401(k), which is $18,000. After your Roth 401(k) has been around for five years, an array of options opens up, such as rolling your regular 401(k) into it to diversify the tax status of your retirement savings.
Backfill your health savings account.
If you get hit with a big medical bill early in the year, remember that your account doesn't have to be fully funded the year before you use it for a medical expense. As long as the medical expenses occur in the same year you take the distribution from the health savings account, the account can be funded after the expense occurs, Roskelley says. Of course, you'll need to check the specifics of your employer's plan and related IRS limits.
Stay at home with one exception.
Parents who decide to step out of their careers to care for children or to address other personal responsibilities can still maintain eligibility for Social Security disability benefits by taking on just a little bit of paid work each year, Roskelley says. This is an easy, inexpensive way to cover the at-home partner with a bit of disability insurance without having to pay for it out of pocket.
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