Questions and Answers: I Answer Subscribers Most Pressing Questions!

Well, the old mailbag is filling up again so I’m back with another round of questions and answers! These questions come from subscribers and if you would like to submit a question to have answered, just subscribe to the blog via the sign-up forms to the left and you’ll receive a link where you can submit your questions.  Now, here’s the latest round of Q&A:

Question: What is the best way for someone over 50 who has had their retirement wiped out by medical bills to start again?

Answer: First let me say that I’m sorry to hear that your retirement funds were depleted due to medical bills and that I hope you are on the road to recovery.  There’s no “best way” to rebuild your funds. I think some general ideas are to start saving a large percentage of your paycheck, contribute the maximum amount to your employer’s retirement program and also look for ways to conservatively invest a portion of your savings. I can anticipate your next question – how much is a “large percentage” of your paycheck? You realistically have about 15 to 20 years before you’ll need to start taking withdrawals. If it were me, I would determine what sum I would need to have 20 years from now to safely withdraw 4-5% annually without affecting the principal. Then, just do the division to determine how much you need to save annually, and subsequently, monthly to arrive at that sum. It will mean sacrifices but hopefully your past the age where you “need” shiny things. There are countless examples of people building wealth later in life and with small incomes, so it can be done. Work hard at it and you can get there. Best wishes.

Question: I need a home equity loan to pay off credit cards, and to do some home improvements. Where should I start?

Answer: You’re probably not going to like my answer. I don’t know the specifics of your situation, but something about taking out a loan to do home improvements when you already have credit card debt just doesn’t sound good to me. I’m going to take a guess and say that you probably want to do the home improvements and that you justified getting a home equity loan to fund them by reasoning that you could also payoff some of your credit card debt? Don’t get me wrong, paying off credit card debt is a good thing. However, I would encourage you to take a deep breath and ask yourself if the home improvements are really critical? Is upgrading the counter tops really necessary at this point or can you live with the current ones just a little longer while you get yourself out of debt? Give yourself a reality check and determine your priorities. Remember, money is a seed that can be planted to earn more money. When you spend your money unnecessarily you are throwing your seeds away.

Question: How do I know my husband and I are saving enough for retirement? Is there a formula to use as a guideline?

Answer: Spend some time reading the material in the Resources section of the blog and you’ll find some answers there. Also, there are a lot of retirement calculators available on the Internet and I highly recommend that you run your retirement numbers with several of them (not just one, but take an average of a half-dozen or so). I agree with most financial literature out there, that a conservative withdrawal rate of 4-5% annually is a good yardstick. Obviously if your desired retirement income necessitates a larger withdrawal rate, then you need to adjust the target fund size accordingly. My advice is not to fool yourselves. Yes, some expenses will be lower in retirement but some will be higher. It’s much better to estimate conservatively and be pleasantly surprised with a surplus than to use faulty assumptions and struggle later in life.

Question: Can I start a retirement plan for my children?

Answer: I love this question. Yes, you are allowed to open a retirement account in your child’s name, but the child must have eligible compensation. If so, you can choose between 2 types: Traditional – taxes are paid when the money is withdrawn (at your child’s then-current rate). Roth – taxes are paid before you put money into the account, so withdrawals of contributions are tax-free. Money grows tax-free while in the account in either case. Now back to why I love this question: Setting-up a retirement account for your child can be a great teaching tool to show them the value of savings and to get retirement planning into their heads early-on. Good for you.

Question: What are the best funds to pick for my 401k?

Answer: I get asked this question frequently. I can’t tell you which funds to invest in your 401k. What I can say is that it’s a good use of your time to aggressively research the individual funds and make subsequent selections based on factors like your risk profile, time until retirement, performance and asset allocation. When evaluating performance you should compare management fees as well. The sobering fact is that the vast majority of mutual funds underperform the very benchmark the industry has set for itself, the S&P 500.  The best funds are generally the ones that  have low fees and that produce a satisfactory return over many years, not the funds that went to the moon one year only to crash back to earth the next year. Keep all these things in mind when you are making selections.

Question: I am getting ready to buy a house. Am I better off using the money I have for a down payment, or should I pay off some debt?

Answer: I personally think it would be better to pay off debt and start home ownership with a clean slate, than it would be to just add more debt on top of existing debt. Being a homeowner comes with many planned expenses and also a few unplanned expenses. I’ve seen many people get into financial trouble because they are house poor. I don’t know the makeup of your existing debt but assuming it’s credit card debt, it’s hard to get rich when your money is running away from you at a 19-20% clip. I think it is a good idea for a person to get their debt house in order before they get other houses in order.

Be free. Nothing else is worth it.

Financial Freedom Monty Campbell

Want even more answers to questions about achieving financial freedom? Check-out these articles from the blog archives:

Is Your Money Thermostat Stuck On Comfortable?

How Bad Do You Want To Succeed?

Is There A Formula For Success And Happiness? Insights From One Of The Oldest Studies Of Mankind