I Froze My Credit – Here’s Why

When Equifax allowed the Social Security numbers of 145 million people to fall into the hands of thieves last year, I froze my credit at the three major credit reporting agencies to help prevent someone from stealing my identity. It wasn’t difficult, it didn’t take long and it was very cheap. Here’s why and how I did it, and what it means.

It seems now that these data breaches happen so often I think we’re all numb to it. I’m certainly guilty of complacency and make more than my share of “the Russians did it” jokes and then go along with my daily activities. But, having your Social Security number fall into the wrong hands can have serious consequences. Someone can steal your identity and run up large amounts of debt; they can file a false tax return and claim a refund; they may even try to use your health insurance to get medical care without paying for it. While freezing your credit isn’t a silver bullet, it is the best tool available to keep identity thieves at bay.

Why freeze your credit

A freeze prevents potential lenders such as a mortgage company or a credit card company from viewing your credit history. As a result, you can’t get a loan or a new credit card but neither can a fraudster who wants to borrow in your name. You can, however, temporarily un-freeze your credit in order to apply for a loan when you want.

How to freeze your credit

The process was actually quite simple – even for me. Log in to each of the three credit bureaus – Equifax, Experian and Trans Union. They will have a button on their site for credit freezes. Simply fill out the form to make it happen. It took me less than half an hour to complete all three. At the time, while Equifax was free because they were still feeling guilty, it cost $10 at each of the other two. The freeze lasts until you either permanently or temporarily un-freeze it. They will provide you, of course, with a PIN. Keep that PIN in an important place as you will need it to un-freeze your credit.

Note: If you’re married, it’s important for both you and your spouse to freeze your credits separately. Yes, you’ll have to pay the $10 again but, as we often apply for credit like mortgages together, this will close both the front door and the back.

Applying for a loan

I recently bought a new car – see https://lexingtonfinancialplannerblog.wordpress.com/2018/06/08/plan-these-6-steps-to-get-a-good-deal-on-a-new-car/ if you’re interested in learning how to get a fair deal when buying a new vehicle.

I used the Honda low financing offer so they had to perform a credit check to complete the process. I asked them which credit bureau they used and they told me Trans Union. So, I simply called Trans Union and un-froze my credit – just with them – for three days. (They told me I could un-freeze for between 1 and 30 days) Since I had my PIN handy, it was simple and took about 5 minutes. Now, the un-freeze cost another $10 but Congress recently passed a law that prevents the credit bureaus from charging a person to un-freeze their own credit so that charge should go away in the future.

I definitely don’t fall into the category of an overly cautious consumer. I never purchase the extended warranties on cars or appliances, for instance. In fact, I get a kick out of telling the salesperson I believed them when they told me how reliable their product is, so I certainly don’t need any extra protection. I took this step of freezing our credit, however, because the consequences of having our credit stolen are just too steep a price to pay not to.

Invest for Tomorrow and Today

I recently read stories about two people who took entirely different approaches to their finances and investments and, as a result, ended up in two entirely different places. I’ll take a leap here and say that neither result is what you want. Here are their stories and my suggestion for a third, better approach, to enjoying today while investing for your future self.

First, Grace lived what appeared, from the outside, to be a sparse, meager existence with no frills and little, if any, fun – at least the way most of the people I know would define fun. Orphaned at age 12, Grace never married, never had any kids, lived most of her life in a modest, one-bedroom house and worked her entire life as a secretary. (And, yes, back when she worked they were still called secretaries) Her sparse lifestyle made the revelation upon her death in 2010 that she had left $7 Million to charity all the more surprising. $7,000,000? Where the heck did that come from?

Well, there wasn’t any fascinating story of a get-rich quick scheme or an inheritance. Grace lived beneath her means, not much to begin with, saved and invested it and saw it compound for 80 years by investing in the stock market. She was the epitome of the Millionaire Next Door. The only problem, in my opinion, is she never seemed to enjoy the fruits of her good habits. In fact, even if she had no desire for worldly possessions or adventure, she didn’t even experience the joy of giving all that money away since it went to charity after she died. What a shame!

Now, the story of Richard. As the father of a friend of mine used to say when he screwed up, “Well, at least you can serve as a bad example.” Richard is, indeed, our bad example. After reaching the pinnacle of his profession – a profession that should have taught him better – as head of one of the major investment bank’s international units, he retired in his 40’s. Ostensibly to pursue personal and charitable interests he apparently only focused on the personal. Two homes – one of them 20,000 square feet with a $66,000 per month mortgage – and a lavish lifestyle led him in the opposite direction of Grace. So, the same year the former secretary died and left $7M to charity, Richard the Harvard-educated investment banker, declared personal bankruptcy.

Well, the middle ground here is as big as Texas so where should we aspire to land? If you’ve read the description of this blog you already know I subscribe heavily to the ethos of the Millionaire Next Door.

Wealth is not the same as income. Wealth is what you accumulate, not what you spend. If one earns a high income and spends it all, one isn’t getting wealthier, just living high. So, those of us who live beneath our means, save our money and invest properly get wealthy the old-fashioned way: steadily, over many years.

My Suggestion

Incorporate short-term, or even regular, goals into your financial plan. Recently, some clients wanted to include saving for every-other-year international trips. Great idea! So, first we determined how much they should pay their future selves – for retirement, etc. Then, we included a regular contribution to a separate account for their trips. A separate account means they won’t dip into it because it’s marked for travel. And saving a relatively small amount but, on a regular basis, means it will add up to their goal of a major, overseas trip when it’s time to go.

Don’t be Grace and surely don’t follow Richard’s lead, invest for tomorrow and today at the same time. After all, most of us won’t accumulate Grace’s $7 Million without planning to do so. Then again, maybe $5 Million is enough for the future and we’ll plan for some great experiences along the way.

Plan These 6 Steps To Get a Good Deal On a New Car

I recently bought a new car and the process was downright enjoyable compared to yesteryear – because I was prepared. In contrast, I have a distinct memory of Lisa and me buying a Honda Civic about a quarter century ago and negotiating – and walking out of the dealership twice – for about 5 hours until we finally struck a deal. When we were signing our young lives away the dealership manager brought me an umbrella as a nice gesture. I told him, “If I’d known there was an umbrella in the deal, I would’ve signed a long time ago.” Well, if looks could kill this blog would have to be ghost-written.

Today, buying a car can be quite simple with much less stress – if you do your homework ahead of time. Here is what I did and my suggestions for how to prepare yourself.

Plan Your Budget

As always, plan to continue “paying yourself first” by saving the amount from your financial plan into your workplace retirement account – 401(k), 403(b), etc. After that, what amount can you afford to pay per month? Let me be quite clear, you don’t want to negotiate with the dealer based on what your monthly payment will be, but it is important for YOU to know what you can afford within your budget.

Research Vehicles and Features

I am proud to say we have never owned a minivan. Because, of course, I am WAY to cool for that. But, I will be quick to add, they are absolutely perfect for many. Similarly, I have never owned a truck but they are perfect for many. The key is finding and buying what is perfect for you.

First, avoid looking at manufacturers’ or dealers’ websites to get information at first. Instead, research at Edmunds or Consumer Reports to get their analyses of vehicles as well as reviews from others who have bought them.

Determine The Market Price

This used to be the hard part. Back when we bought that Civic 25 years ago the only way to negotiate was from the sticker price down. And when you finally had a deal there really wasn’t any way to know if you’d reached a fair price or not. Today, through the magic of this internet thing, you can go to Kelley Blue Book or Edmunds and determine not only the invoice of the car to the dealer but the average purchase price of people near you. For instance, I bought a new Honda Accord, because I’m boring after all, and Kelley Blue Book could tell me what other people were paying within a 60-mile radius of my zip code. Now, that’s the average price – meaning some people paid more and some people paid less – but it’s probably fairly indicative of what a fair price is.

Determine the Value of Your Trade-In

I know that I could get a higher price for my used car if I sold it myself but I’ve always traded it in because it’s just easier. Either way you choose, however, it’s important to know the value of that trade-in. Again, Kelley Blue Book can tell you the approximate value of your car. Two keys here: 1) Be sure to select the Good category, rather than Excellent, when it asks the car’s condition. Most cars fall here and better not to over-estimate the value; 2) Look at the Trade-In Value, not the value if you sold it yourself. The trade-in value will be less but that’s what you’re doing.

Research Financing

Since you’ve budgeted the monthly payment, look for attractive financing options. I purchased my last Accord through Honda Finance with an interest rate of 0.9% for 60 months. That’s practically FREE money! In fact, the difference between an interest rate of 5% and 0.9% on a $25,000 car over 60 months is $2,760. There are many car manufacturers that are offering deals similar to this now – take advantage of them.

At this stage, if you question your ability to get a loan, you might want to get pre-approved for one. You now have an informed idea of the price you can expect to pay for the new car. Subtracting the value of your trade-in from the price will produce the amount you expect to finance. So, plug in this amount at the interest rate you expect to pay and you can determine your monthly payment and can submit that to your bank or credit union for pre-approval. Remember to include an estimate of sales and use tax plus the destination charge charged by the dealer, you can’t negotiate that away. In Kentucky, sales and use tax is based on the difference between the sales price and the trade-in value of the deal, by the way. These can be financed too and I almost always do.

Test Drive and Negotiate

You, of course, can test drive a car anytime during this process. I always wait, though, until I’m pretty sure what I want and what I’m willing to pay before I test drive. Assuming the car drives how you’d hoped and it’s what you researched, time to negotiate.

Now, my experience in recent years has been vastly different than that of 25 years ago. After the test drive we go to the salesperson’s desk and they ask me what I think is fair for the car. At the same time, someone else in the dealership will provide a trade-in value for my used car – what they’re willing to pay me. I say, “I think $XX is fair for the Honda Accord I’m considering.” The salesperson says, “Where did you get that number?” I say, “Kelly Blue Book.” The salesperson then calls up the site right there and turns the monitor so we can both see the screen.

Now, some dealers automatically add options such as mud flaps and all-weather floor mats to all new cars and attempt to charge you for them. That kind of a package can be priced at about $1500. I’ve found you can usually negotiate that cost away since you didn’t ask for it in the first place.

Finally, the key to reaching a deal is to get BOTH the price for your new car and the trade-in value to the number, or close, you researched. It is easy for those two numbers to get conflated or to get focused on the final monthly payment, but it is vital to negotiate those two numbers separately. Because, if you get those two right, the monthly payment will be just as you’ve already calculated and for the amount you were pre-approved. Remember, if you don’t get the deal you think is fair, don’t fall in love with the new vehicle. You can always walk away. In fact, if you walk away more than once, you might even get a new umbrella out of the deal.

 

 

The Healthcare Tax Break You May Be Missing

Healthcare planning and retirement planning are as inseparable as catfish and whiskers. Get this, an average 65-year old man will need $131,000 in retirement to cover just premiums and prescriptions – the average woman, $147,000. These are expenses that could blow up one’s retirement plan. Learn here how a Health Savings Account may be just the solution while offering generous tax advantages.

Health Savings Accounts (HSAs) are extremely flexible as they offer triple tax advantages: 1) Contributions are tax-deductible or taken out pre-tax of your paycheck; 2) They grow tax-free; 3) Withdrawals for qualified medical expenses are also tax-free. So, they are like a traditional IRA and a Roth IRA combined in one investment account. Plus, after age 65 you can take withdrawals for non-health expenses if you just pay normal income tax on the amount. As a result, there’s no risk in saving more than you’ll need for healthcare and having it go to waste.

Do you qualify?

People who obtain health insurance through a High Deductible plan qualify for an HSA. For singles, a plan with a minimum deductible of $1,350 and a maximum total annual out-of-pocket expense of $6,650 qualifies. For families, the deductible minimum is $2,700 and the max out-of-pocket expense is $13,300. If your health insurance plan meets that criteria, you may establish and contribute to an HSA. If you change employers or health plans to a non-high deductible plan, you can still use your HSA, you just can’t contribute to it at that point.

Those who have very good health insurance options through their employers, like the University of Kentucky, won’t have access to an HSA. Self-employed individuals, small business owners, members of law firms or contract lobbying firms and non-profit associations, however, often use High Deductible plans because the premiums are more reasonable than their other health insurance options. Those individuals should consider establishing an HSA.

Contributing to an HSA

In 2018 the contribution limit for individuals is $3,450 and $6,850 for families. And, unlike a Flexible Savings Account, you don’t have to spend what you contribute each year. In fact, an HSA is really an investment account for health care – you contribute a certain amount each year, invest it appropriately for when you expect to need the money for qualified health expenses and watch it grow – tax free – until you need it. For instance, if 45-year old Monica contributes $298 per month, or $3,585 a year, to an HSA until she turns 65, earns an average of 7% per year on her investments, she will have accumulated that $147,000 the average woman will need for healthcare premiums and prescriptions in her retirement. That’s just an example, any amount will help toward future expenses.

Should you establish an HSA?

First, before establishing an HSA, investigate the options the plan offers for investments. Does it offer the opportunity to invest in a variety of stock and bond mutual funds? If so, great, proceed saving. If the plan simply parks your hard-earned dollars in a money market account earning .1%, it’s then just a good opportunity to save for a large medical expense you expect to incur in the next 2-3 years. It is not, however, a good option for saving for medical expenses in retirement.

Second, while extremely flexible, an HSA should be viewed only as a supplement to your 401(k) and your traditional IRA and Roth, especially if your employer matches your contributions to their sponsored retirement plan. After those, an HSA is an excellent way to save and invest for what we must assume will be pricey healthcare expenses later in life. Even if you don’t save the amount Monica is, having a fund with “extra” healthcare dollars in it can really pay off when you need it.

 

Target Date Funds Offer False Sense of Security

Not unlike formal living room furniture and nuclear weapons, target date funds are only to be used in case of a dire emergency. Target date funds are offered as investment options within a lot of retirement plans as low risk investments but, are they? Here are some flaws of TDF’s.

For background, a Target Date Fund (TDF) is a fund that combines so-called growth investments with fixed-income investments in a mixture that is supposed to be appropriate for investors who plan to retire in a certain year. So, presumably a TDF for people planning to retire in 20 years will invest in a riskier mixture than a TDF that is structured for those planning to retire in 5. The theory being a person farther away from retirement needs the growth assumed with more aggressive investments and a person close to retirement needs safer investments that have less chance to decline in value soon before they will need those investments for income. Thus, a TDF implies this investment is all one needs in your retirement plan and, rather than you worrying about which investments to choose, the TDF supposedly does all that for you.

TDF’s are certainly better than stashing your savings in a money market funds earning next to nothing. But, aside from that, your choices are usually much better than that.

False sense of security

All TDF’s “mixtures” of investments are different and many may have you invested more aggressively than you’re comfortable with, or realize, close to retirement. A recent review of more than 40 TDF families showed the percentage of stocks in the funds designed for those retiring in the current year ranged from about 25 percent to about 75 percent. 75% in stocks months before you retire? Are you kidding me?

Target date funds give people a false sense of security that they can stop thinking about their investments altogether because the fund will take care of them. In fact, the Wall Street Journal cited a survey by Alliance Bernstein of 1,000 workers where most “mistakenly believed that using target-date funds would guarantee that their retirement income needs will be met.” Holy financial planning, Batman, that’s scary!

TDF’s only consider your date of retirement

Planning for one’s entire financial future involves many variables – your standard of living and it’s cost, your life expectancy, your family income, responsibilities to your children and, of course, the returns generated by your investments. Unfortunately, a vital flaw of target date funds is they take only one thing into consideration when choosing the investments within the fund – when their investors supposedly plan to retire.

But, what if one invests in a TDF assuming you’ll retire in the year 2030 but then, life gets in the way, and your son takes a couple of extra years to finish college and your daughter needs a little help early in her career and, lo and behold, that 2030 goal now becomes 2035? So, rather than still investing for some growth to make up for some leaner saving years, your TDF has you invested in extraordinarily safe, low-return investments because it assumes you will retire that year and should be taking less risk. This scenario may very well leave you short when it’s time to take income in retirement.

TDF’s assume you have no other investments

Depending on one’s circumstances, it’s certainly not unusual for families to have their savings invested in a variety of accounts. Traditional IRA’s, Roth IRA’s, Joint(husband and wife) accounts, each spouse with a workplace retirement plan, etc. Another real flaw with TDF’s is they naturally assume the investor has 100% of their savings in this one investment vehicle. As a result, your total portfolio may actually be taking too much risk or too little because you are essentially blind to how the TDF is invested. Let’s say you have $250,000 in a TDF in your workplace retirement plan and another $250,000 invested in an IRA – how can you be sure they are working in concert to help you achieve your goals?

Conclusion

We taught our kids from an early age not to hate, so I won’t write I hate TDF’s. In fact, they are much better than just allowing your savings to languish in a money market fund earning next to nothing. But, too many people choose them because they believe their decision-making ends with that one choice. As always, reaching whatever life goals you have depends on a solid financial plan supported by a well-thought out investment strategy. On their own, TDF’s offer neither.

The Story of the $9 Million Secretary

Earlier this week, the New York Times ran a front-page story on Sylvia Bloom, the recently deceased legal secretary from Brooklyn who bequeathed $6.24 Million to help disadvantaged students afford college. Ms. Bloom was the epitome of the Millionaire Next Door and readers of this blog know I believe strongly in the ability of us “regular folk” to become one too by following a few simple rules: 1) Live beneath your means; 2) Save for your financial independence; 3) Invest; 4) Get wealthy the old-fashioned way, steadily over many years.

The Times article described Ms. Bloom’s relatives as shocked that she had amassed such a fortune. She never talked about her wealth because, according to her niece, “I don’t think she thought it was anybody’s business but her own.” In other words, her wealth wasn’t amassed to impress her friends or to purchase expensive earthly possessions. She, apparently, wasn’t motivated by nice cars, fancy vacations or a large, Manhattan apartment.

We will probably never know what truly motivated Ms. Bloom, but we can learn from her wealth accumulating strategy. “She was a secretary in an era when they ran their boss’s lives, including their personal investments,” recalled her niece Jane Lockshin. “So when the boss would buy a stock, she would make the purchase for him, and then buy the same stock for herself, but in a smaller amount because she was on a secretary’s salary.” Morgan Housel from The Motley Fool says, “…you can build wealth without a high income, but have no chance without a high savings rate, it’s clear which one matters more.” Ms. Bloom didn’t make big money, but she still accumulated big money.

A child of the Great Depression, Ms. Bloom and her husband, a firefighter, lived modestly and, according to her niece, “…she knew what it was like not to have money.” I suspect that she was motivated to save money for the same reason a lot of us are – because savings offers some peace of mind in a very unpredictable world.

I won’t ever discount creature comforts like a nice home, a functional car or a fun vacation – those things are important. But, savings provides us value too, the value of control of our time. It’s not easy to measure something that we probably won’t use until years later, but how valuable is flexibility? The flexibility to maybe take a few years off work when your kids need you the most; the flexibility to maybe take a job with a lower salary but more purpose; the flexibility to maybe leave a lasting legacy of a college education for people you will never meet – like Sylvia Bloom did.

To quote Morgan Housel again: “In a world where hard skills become automated, competitive advantages tilt toward nuanced and soft skills – like communication, empathy, and, perhaps most of all, flexibility. Having more control over your time and options is becoming one of the most valuable currencies in the world. That’s why more people can, and more people should, save money.”

 

When You Should File for Social Security

During the 1996 presidential campaign, MTV asked both candidates whether they favored boxers or briefs. Bob Dole, as legend has it, answered “Depends”, as in he was so old he needed their incontinence protection. My answer for when you should take Social Security benefits is the same, it depends. Ultimately, when to file depends on what will benefit you the most in the long term, an answer a good financial plan will provide.

When presenting financial plans for clients we review what they can expect to receive in income from Social Security to cover part of their needs during retirement. Almost without exception, our clients joke that Social Security will surely go bankrupt right before they need it. While one can lose a LOT of money betting on what Congress will ever do, I firmly believe Social Security will always exist – maybe in a slightly different form – and will be an important income source for most of during retirement. So, here are some key things you need to know to help you maximize your benefits:

Social Security (SS) wasn’t designed to replace all of your wages:

As a result, Social Security should not be viewed as your primary source of income during retirement. In fact, we often plan that SS essentially be viewed as supplemental payments to your income from investment assets or pension income. A decent rule of thumb is to estimate you will need to replace about 85% of your pre-retirement income during your actual retirement, at least at first. So, plan to save enough to produce most of that from your 401(k), IRA, etc. and supplement that with SS income.

Your benefits are based on your entire earnings history:

Yes, that 6.2% you pay each pay period to Social Security is what funds most of our benefits. So, your benefit is calculated on your highest 35 years of earnings. If you don’t have 35 years of earnings, your monthly benefit will be reduced.

Do you know your full retirement age for social security?

You can receive Social Security as young as age 62 but you will only receive 75% of your monthly benefit at that age. At what age you can receive 100% of your SS benefit depends on when you were born. For instance, if you were born in, say, 1955 your full retirement age is 66 and 2 months. If you were born in 1960 and later, your full retirement age is 67.

You can benefit by delaying taking Social Security:

Starting at full retirement age, you will earn delayed retirement credits that will increase your benefit by 8% per year up to age 70. For example, if your full retirement age is 66, you can earn credits for a maximum of four years. At age 70, your benefit will then be 32% higher than it would have been at full retirement age – 8% times 4 years.

Social Security benefits may be taxable:

When you begin taking SS may depend, in part, if you are still working because, believe it or not, your Social Security benefits may be taxable at the federal and/or state level. If your adjusted gross income plus half of your Social Security income totals more than $25,000 as a single filer, 50% of your Social Security benefits are taxable at federal ordinary income tax rates. For couples filing jointly, this figure is $32,000. If a couple filing jointly earn more than $44,000, up to 85% of your benefits may be taxable.

Can retired teachers receive their deceased spouse’s Social Security benefit?

As Kentucky is one of the 14 states in the country that do not provide Social Security coverage for teachers, spousal benefits of retired teachers can be impacted. The Government Pension Offset, the GPO, reduces Social Security spousal benefits by two-thirds of the monthly benefit from any government pension the spouse receives for work not covered by Social Security. For example, suppose a teacher receives a $1,000-per-month KTRS pension benefit and is also eligible for $600 per month in Social Security spousal benefits based on her husband’s employment. Under the GPO requirement, the pension offset amount is $660 (two-thirds of $1,000) per month. Since the offset is greater than the Social Security spousal benefit, the teacher receives no Social Security.

A thorough financial plan will examine these factors and more and, ultimately, help us guide you to determine when the best time will be for you to file for Social Security.