Money Blue Book

This is a guest post from Marc Pearlman.

Back in the early to mid-1990s I made my living by sitting in front of computer monitor with green and red glowing pixels that flashed stock and commodity prices. I was an off-the-floor stock and commodity trader, and in my world, green and red meant everything. Green meant I was making money, and red meant I would be drawing out of my savings to pay for monthly expenses.

Fortunately for me, I was given some sage advice from a wealthy mentor of mine who was about 25 years my senior and knew of an obstacle that I was likely to encounter. I still remember his wise words: “Kid, make sure you put money into an account you can draw from when times are lean–and expect some lean times. It’s part of the game.”

Even though I heeded his advice, there was one thing I didn’t account for: the feeling I’d have when trekking to the bank to withdraw those savings. While I had been diligently depositing money in my high yield savings account specifically to be drawn on when needed, the mental anguish of seeing my balance decrease–sometimes month after month–was one of the biggest challenges I had to overcome as a trader.

From Retirement Saving to Retirement Spending: Getting Past the Anxiety

Fast-forward 16 years: now I manage other people’s money for a living. I’m on the phone with a client in his mid-60s who recently retired. He asks me if taking $10,000 out of one of his accounts to purchase a timeshare is going to throw his retirement savings into a flat spin.

I remark that he could buy ten such timeshares without making much of a dent in his financial resources. But thinking back to those down months from my trader days, I quickly add, “I think I understand where your mind is and what you may be feeling. The retirement transition is a little bit like buying an umbrella and then worrying it will get wet when it rains.”

Learning how to develop the retirement spending mindset is a major challenge for many retirees. There’s already a lot of change when you retire: a shift in routine, of people you spend time with on a daily basis, maybe even a new home in a new city.

Add to the mix a wrenching shift in habit from saving for 35 or 40 years (or more) to actually spending down the funds carefully grown in that retirement account–no wonder it’s a jolt. Seeing that balance drop month after month, even if you’ve planned for it, is profoundly unsettling.

Another issue is that many people who enter retirement now have access to the most money in a lump sum that they’ve ever had in their lives. This alone can bring a suite of emotions, from fear and paralysis to greed.

You may have gone over financial variables in retirement planning over and over through the years–average lifespan, rates of return, annual income needs, and so on–but nobody prepared you for these particular mental adjustments.

How to Combat Retirement Spending Anxiety

The upshot is that these feelings are normal, and there are strategies you can use to ease yourself into retired life:

• Set up a “retirement bucket.” This strategy simulates the consistency of earning a steady income. With your “retirement bucket,” you spill some money into a separate deposit account that you access for regular expenses. You might accomplish this with a scheduled transfer on the first of each month from a high-interest online savings account to a linked checking account, for instance. The retirement bucket method provides stability, creates a natural budgeting mechanism, and shields you from the dread of treating your retirement funds as an ATM.
• Test-drive retirement. You may have long imagined what life you’ll lead in retirement, but the truth is, you won’t know until you get there. You might find yourself drawn to different activities than you expected and budgeted for. This is the “human factor” of retirement planning that no computer model can simulate. For example, I have clients who eat out more frequently now that they are retired because they have more free time to socialize. By all means, estimate your fixed expenses before retirement, but get into the swing of retired life for a few months before locking into a budget.
• Set a deadline. That said, don’t let fear of handling a large sum of money (especially in uncertain economic times) lead you put off budgeting forever. If making big decisions about retirement spending frightens you, let yourself have a few months to just get used to your new life. But set a precise date in the future to revisit decisions, or several milestones spaced out if you prefer–something to make sure that you take some thoughtful action in a timely manner.
• Blow your money–but just a little. Some new retirees have the opposite reaction to financial anxiety–they convince themselves that they deserve new cars, designer shopping sprees, and luxury vacations. Deserved they may be, but these large purchases come at a great cost if done on an impulse. If you’re worried you may be the type to come back from the Porsche dealership with a big case of buyer’s remorse, try this: take a very small percentage of your retirement money and go blow it on something frivolous. It could be that you just needed to get that impulse purchasing out of your system, and this way you can satisfy that impulse without doing yourself some major financial damage.

Above all, I encourage new retirees to view money as a tool. When we make financial decisions out of emotion, we often satiate an emotional need at the expense of good financial judgment. Unless you can identify the emotion driving that financial judgment and adjust accordingly, all that careful number crunching, planning, and forecasting from your working years can become meaningless.

Marc Pearlman is the author of the Positive Money Mindset and host of the popular radio show Your Money Matters! For more about Marc, visit marcpearlman.com or www.Yourmoneymattersradio.com.

Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Marc Pearlman, Representative. Your Money Matters! radio show and the Securities America companies are unaffiliated.

Usually when I open my credit card statements, my eye goes right to the line that tells me how much I made during the past month in cash back and credit card rewards points. Recently, though, something else caught my eye when I opened my monthly statement: the brand-spanking-new statement format mandated by the Federal Reserve.

As of July 1, credit card issuers were required to conform with new rules approved by the Federal Reserve Board to protect consumers from what many have seen as unfair (or at least unclear) practices by the card issuers.

The new statement does a lot of things right–it’s now abundantly clear, for example, just how long it’ll take you to pay off even a small balance if you just send in the minimum payment required (and how much interest you’ll rack up in the process). Closing one of the classic traps of card usage that have ensnared many, the new statements must tell cardholders up-front just how much their credit card rates will jump and how much the late fee will be if you’re late with your payment. And interest fees and fee charges of all types are now labeled clearly–you’ll be able to see at a glance whether that zero percent balance transfer transaction was correctly implemented.

FiveCentNickel.com has a nifty infographic with mouseover highlights of the new changes:

Although it seems like we already cut a pretty good share of income from our paychecks to satisfy federal income tax demands, most of us had better brace ourselves for a rise in our 2011 federal tax returns as the federal deficit is on track to hit new highs.

Many tax cuts enacted by President Bush in 2001 and 2003 are set to expire in 2010. These cuts were designed to help all income levels: America’s low-, middle-, and higher-income workers. The Tax Foundation summarized some of the major changes to the tax code during the last decade:

• lowered key federal tax brackets (28% to 25%, 31% to 28%, 36% to 33%, 39.6% to 35%) and created the 10% federal tax bracket
• doubled the child tax credit to $1,000 per child
• made more married couples eligible for the earned income tax credit (EITC) and raised the standard deduction for joint filers

More Uncertainty Than in Years Past

As the United States budget deficit hits astronomical levels, we have good cause to worry about what “paying our fair share” means. Usually, a number of tax provisions are legally tied to inflation–and as there’s not been too much of that lately, you might think the projected tax provisions won’t move much.

That was the case for the 2010 income tax bracket projections. But for 2011, the triple whammy of the deficit, the recession, and scheduled expirations to previous tax code changes makes for some uncertainty. As of this writing, how Congress is going to address the expiration of those significant tax cuts and credits has not yet been resolved.

What’s the 2011 tax year outlook? Let’s take a closer look at what to expect in 2011 for federal tax bracket income ranges and other changes.

2011 Projected Federal Income Tax Brackets

Tax experts feel that the brackets we’ve grown accustomed to are going to increase to pre-Bush administration levels or at least begin adjusting in that direction, though the recession has put a dent in President Obama’s ability to simply let the tax cuts of the last decade lapse. Among the major changes proposed, is raising the top two federal tax brackets back to 36% and 39.6%.

Policy experts at groups like the Tax Foundation have come up with projections for 2011 federal income tax brackets for various filers. Here are their estimates for 2011 tax bracket income thresholds for married and single filers, assuming that the tax code supports what has been laid out in President Obama’s budget.

Federal Income Tax Brackets For 2011–Based On Taxable Income Ranges

Again, this assumes that the highest two federal tax brackets move back to their pre-Bush tax cut levels of 33% and 35%, respectively. We’ll make updates if the IRS comes out with different official numbers.

Other Federal Income Tax Projections for 2011

Other 2011 tax year predictions from experts, mostly based on scheduled changes, include:

• Standard deduction increase: The standard deduction should increase from $5,700 to $5,800 for single filers and from $11,400 to $11,600 for those married filing jointly.
• Revival of the estate tax: For people who die after 2010, the federal estate tax will be revived with an exemption of $1,000,000 and a maximum rate of 50%. But Congress is widely expected to take action on the estate tax issue in 2010–too late to catch some estates that have, by pure luck of timing (for their tax burden, anyway), escaped estate taxes entirely.
• Increase in long-term capital gains rate: The long-term capital gains rate had temporarily been decreased to 15%; it’s meant to go back up to 20%, though filers in the 10% and 15% federal tax bracket will likely be subject to a 5% capital gains rate.
• Qualified dividends: In 2011, dividends may be taxed as ordinary income based on your highest marginal tax rate; another likely scenario is that they will follow the long-term capital gains rate of 20% for federal tax brackets of the 25% marginal rate and higher.
• Child tax credit: The $1,000 credit per child may go back to $500 for 2011 unless the higher credit is extended.

How to Prepare for Your 2011 Federal Income Tax Return

Now is a good time to revisit your tax deductions. Planning ahead with more information means we won’t be left in a lurch come Tax Day, or the opposite pitfall, withholding too much.

The appropriate versions of tax prep software for the 2011 tax year won’t be out for a while, of course, but doing some research on the best tax preparation software can make it . Most software will automatically load in previous years’ worth of tax information, so if you can commit to one side in the H&R Block vs TurboTax debate (or have another favorite entirely), using that software for 2010 is one way to stay ahead of the game for 2011.

A balance transfer credit card can be a useful resource for a credit card debt elimination plan. It allows you to consolidate debt into a single account and may lower your overall interest rate, helping to reduce your monthly payments and pay off your debt more quickly.

Of course, opening a balance transfer credit card on its own won’t make your debt evaporate overnight and shouldn’t be an excuse to spend more–but if you understand what the balance transfer credit card is for and stay disciplined in your debt payments, it can be a very useful tool.

Ten Steps to Debt Reduction Using Zero Balance Transfer Credit Cards

1. Make a list of all of your debts–and add them up. This gives you a clear idea of how much you owe, how much the interest rate is on each debt, and what you are currently paying in monthly interest and minimum payments. Awareness is the first step toward being debt-free.
2. Review the terms of your current debt. If you currently pay little or no interest on at least some of your debt, you may not even need to transfer that part. However, if your existing low interest rate is for an introductory period that is ending soon, you may want to consolidate that debt with the rest.
   
3. Find a low interest credit card that can be used to transfer balances. If you don’t already have one that will work, apply for a new balance transfer card. If possible, select one with at least a 6- to 12-month introductory period, during which the card issuer charges reduced or even zero interest. Apply for a credit limit sufficient for all the debt you want to consolidate at this time.
4. Learn the fees associated with any balance transfer. There are two typical balance transfer fees: an upfront fee at the time of transfer, plus an interest rate to be charged monthly until the balance is paid off. Try to obtain a zero balance transfer credit card, if possible, which may charge only one type of fee during your introductory period–or possibly no fee during the intro period.
5. Read the fine print about your balance transfer terms. Many low interest transfer credit cards will charge you a higher-than-promoted rate if you make any late payments or otherwise violate their terms, especially during the introductory period. This can potentially cost you even more than before you transferred your debt–so be forewarned, plan ahead, and figure out a way to commit to paying on time.
6. Transfer your target debt to the low interest credit card, then review and update your list of debts. Create an overall debt repayment plan based on your budget and income, and commit to pay it all off within your chosen timeframe. Avoid adding new debt and making unbudgeted purchases–and use any unexpected income (a raise, overtime, a side gig) to pay it down even faster.
7. Pay more than the minimum required total payment. As long as you can pay more than just interest on all your debt, you can pay down your debt and eliminate it over time. But it will take more than just the minimum payment to pay off credit card debt within a reasonable timeframe. The Federal Trade Commission’s credit card calculator shows you just how much time you can save by paying down more.
8. Pay down any remaining higher interest debt first. If you were unable to consolidate all debt on your low interest credit card, pay only the minimum monthly amount on your lower interest rate debt, and then put the difference from your planned monthly debt payoff amount toward paying off your highest interest debt faster.
9. Don’t assume you can transfer debt balances indefinitely. When the interest rate on your consolidated debt goes up after the introductory period, you may consider a second balance transfer. While this strategy has worked for some, this usually means you’ll need to obtain a new zero balance transfer credit card. Be aware that too many new accounts can negatively affect your credit score, and that credit card companies may simply stop approving you for the new offers. Ideally, you should just select a decent zero balance transfer credit card with a low ongoing interest rate to begin with to avoid getting caught again in the cycle of perpetual new accounts and transfers.
10. Do something nice to reward yourself. Eliminating the burden of debt is a reward in itself–but don’t forget to find little ways to reward yourself inexpensively along the way. This will help you stay motivated and continue to enjoy life as you should. Once you pay off your debt, do something nice for yourself and your family–and pay cash! It took a lot of effort, but you’ve made it.

Debt Payoff: Keep Your Eyes on the Goal

The purpose of consolidating debt is to make it easier and faster to pay it off–instead of putting it off until it becomes overwhelming. Make paying off your credit card debt the number one priority in your financial life, after meeting your family’s basic needs and commitments. You’ll be relieved to finally live a life without overwhelming debt obligations.