Money Management

Your parents may be counting on you more than you think. But with the right information, and a little help, you can be prepared. Here’s how. 

Over the next decade, it’s estimated that 1 in 7 Americans in the so-called “Sandwich Generation” will need to provide financially for both minor children and dependent parents simultaneously. And with the price of everything from childcare to adult daycare on the rise, it can be easy to be caught in a pinch between two generations. Fortunately, taking steps today can prepare you and your family’s personal finances for the future.

1. Start on solid footing

Will your parents rely on you financially in retirement? If you’re not sure, you’re not alone. Most savers are thinking about funding only one retirement, not two. The best laid plans are grounded in a firm understanding of the facts, and having a candid conversation with your parents about their financial status is a vital starting point.

How we spend today can foreshadow how we will spend in retirement. If your parents don’t have a budget, encourage them to create one. If they do have a budget, compare what they’re spending today with what they can expect to earn in retirement. Consider Social Security benefits and pension payments as post-retirement income. If spending exceeds retirement income sources, retirement accounts can be an important supplement.

Next, understand your parents’ net worth. Consider whether they have assets in accounts that can be tapped in retirement, and whether those assets are invested appropriately. Likewise, you should understand whether your parents are carrying large amounts of debt that will last through retirement. Funding monthly living expenses can be hard enough without balancing growing debt payments.

2. Expect the unexpected expenses

Pre-retirement spending is a good place to start when planning for post-retirement expenses. However, there are some important post-retirement expenses that may not show up today.

Medical expenses are a major component of every American’s financial plan. While Medicare Part A is free, most Americans will need supplemental coverage, which can cost thousands of dollars every year. Additionally, 70% of Americans can expect to have a long-term care stay in retirement, and whether you pay out of pocket or purchase long-term care insurance, the cost of this care could blindside a senior.

3. Don’t be afraid to seek help

Talking with a loved one about their financial situation can be difficult, but you don’t have to do it alone. Engaging a fiduciary financial planner can be one of the most helpful ways for families to plan for their financial future.

Financial planners consider both the qualitative and quantitative factors when helping clients plan for retirement, allowing retirees and their families to be confident in their financial situation. In addition to providing an objective voice in the financial conversation, a planner can quantify unknowns and offer actionable recommendations to get you or a loved one on track toward financial security.

Understanding your parents’ financial plan today can help you avoid unexpected financial burdens later in life. Begin the conversation by looking at hard data, and then consider the costs of medical care in retirement. Ask for help if you need it — the services of a financial planner could go a long way toward setting you and your parents up to succeed financially.

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Dave Ramsey isn’t a fan of airline miles or travel rewards credit cards. Find out why you shouldn’t listen to his advice on this subject. 

Many people listen to Dave Ramsey for financial advice. Unfortunately, while he does provide good guidance in some areas, his advice about credit cards and travel rewards is way off the mark.

Ramsey doesn’t think using travel rewards, such as frequent flyer miles, is worth it. In a recent response to a reader, he wrote that airline miles are “virtually impossible to use,” and that he has “never met a single millionaire who pointed to credit cards and airline miles as the reasons for their financial success.” Only “broke, middle-class people” who think they gamed the system, according to Ramsey.

It’s the kind of condescending advice worthy of an “okay, boomer.” And the problem isn’t just how Ramsey phrases it, but that he’s completely wrong. If you travel often, listening to Ramsey about travel rewards is the worst thing you can do.

Airline miles aren’t impossible to use

Despite what Ramsey says, it’s actually easy to use airline miles. You can earn miles when you travel by signing up for an airline’s frequent flyer program. Or, if you want to earn miles on your everyday spending, there are airline credit cards you can use.

When you want to use the miles you’ve earned, you just:

Go to the airline’s website.Check the “Use miles” option on the flight search.Search for flights.Pick the one you want and pay with your miles.

That’s how you do the virtually impossible. It’s exactly the same process as booking a flight on the airline’s website. The only difference is that you select the option to use miles during your flight search.

Millionaires use rewards credit cards, too

Ramsey loves to claim that only broke people care about credit card rewards and travel points. The data doesn’t support that view.

A study by The Motley Fool Ascent on the credit card habits of the wealthy found that millionaires are more likely to use travel cards. Specifically, it found that 49% of millionaires have travel credit cards, compared to just 23% of those with a net worth under $1 million.

If you’re interested in real-life examples, there are millionaires who have been open about using travel cards. Ramit Sethi, star of How to Get Rich on Netflix, is one of them. He has a reported net worth of $25 million and says there are three credit cards he uses, including two travel cards.

Ramsey’s statement that no millionaire ever credits airline miles for their financial success is also a poor argument. Sure, you’re probably not going to find anybody who literally became a millionaire through airline miles. But airline miles can help you save money that you can then use to improve your finances.

Let’s say you use miles to buy airfare that would’ve otherwise cost $500. You’re now able to invest an extra $500 in the stock market this month. After 20 years at an 8% annual return, that $500 is now worth $2,463.20. Those travel savings can add up.

It’s not you against the banks

Ramsey also often argues that you’re not going to beat the banks that issue your credit cards. These are multibillion-dollar companies, they know what they’re doing, and you’re not going to beat them at their own game.

But it’s not a zero-sum game with you against the bank, where one side has to lose. If you always pay your credit card bill in full, you’ll avoid interest charges, which means you can come out ahead from credit card rewards. The bank still makes money, as it gets a small percentage of each transaction in processing fees, which are paid by merchants.

When used correctly, travel credit cards and airline miles are fantastic ways to spend less on travel expenses. I travel all the time, I frequently save thousands of dollars thanks to my points and miles, and I’m not the only one. Don’t let Ramsey’s extreme take make you miss out on a chance to travel for less.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.

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Financial advisor Suze Orman believes a popular retirement planning rule is dangerous. See what she says and find out if you should listen to her warning. 

Having enough money for retirement is important, but it can be hard to figure out how much is enough. To make it easier, many retirees go by the 4% rule. It says you can safely withdraw 4% of your retirement portfolio in the first year, and then adjust it slightly from year to year based on inflation.

Based on that withdrawal rate, you’d need to save 25 times the annual income you want in retirement. For example, if you want to have $50,000 per year in retirement income, you’d aim for $1.25 million.

Not everyone is in agreement with the 4% rule. One vocal critic is financial advisor Suze Orman, who says it “doesn’t work anymore” and even called it “very dangerous.” Here’s why she isn’t a fan and if it’s a good idea to follow this retirement planning rule.

Why Suze Orman doesn’t recommend the 4% rule

Orman gave her thoughts on the 4% rule in an interview with Moneywise. She believes it should be lowered to at least 3%, and she says retirees should try to “take the least amount possible out of a retirement account, not what everybody says will work.”

There’s nothing wrong with that advice, but Orman’s criticism of the 4% rule itself doesn’t make much sense. The rule doesn’t say you need to withdraw 4% of your retirement savings. It only recommends that as a safe withdrawal rate.

Orman may not think that 4% is a safe withdrawal rate, and she goes over some doomsday scenarios where it could fail. What if there’s an extended bear market? Or what if you need long-term care and don’t have any insurance to cover it?

However, she doesn’t explain what makes 4% “very dangerous,” or why she feels that it should be lowered to at least 3%. Instead, her advice is that you forget about retiring at 60 and taking Social Security at 62. Work until “at least 70 or longer” to give your assets more time to grow.

Is Orman right about retirement planning?

Truth be told, Orman’s retirement advice sounds like a nightmare. Work until you’re at least 70. By the way, the average U.S. life expectancy is now 76.1 years, according to the CDC. If the average American does it the Orman way, they get to work about 50 years, have five or six years of retirement, and then die.

There’s debate on the effectiveness of the 4% rule, but it at least gives you a target. Orman only suggests grinding away so you can build as much retirement savings as possible, but waiting to retire just so you can save more is bad advice. You don’t need to have as much money as possible. You just need to have enough.

Orman’s opinion aside, will you have enough if you follow the 4% rule? There’s no clear consensus here. William Bengen, who came up with the rule, says it was based on a worst-case scenario. He has since updated his guidance and says that retirees can safely withdraw 4.7% for at least a 30-year retirement.

Personally, I think the 4% rule is great as a rule of thumb because of how simple it is. Multiply your target income by 25, and you have your retirement savings goal.

It may not work for everyone, especially those who want to retire early. But it will get you in the neighborhood of how much you should save, and you can always save more or be more conservative about your spending in retirement.

How to maximize your retirement savings

In an ideal world, no one would need to work until 70. The good news is that you have quite a bit of control over when you retire. If you save well, you can retire at a much younger age. Here are a few tips that can help you build your retirement savings:

Open a workplace retirement plan if you have that option. If your employer offers 401(k) plans, set one up. This makes it easy to save for retirement, because contributions come right out of your paycheck. Many employers also offer a 401(k) match on your contributions.Use retirement accounts to save on taxes. In addition to 401(k)s, individual retirement accounts (IRAs) also have tax benefits. Traditional IRAs let you deduct contributions from your taxes. There are also Roth IRAs, where contributions aren’t tax-deductible, but withdrawals are tax free.Go with a stock-heavy portfolio for most of your career. One of the most effective ways to build wealth is investing in stocks, as the average stock market return is about 10% per year over the long term. When you’re about 10 to 15 years from retirement, you can start shifting more of your money to bonds to reduce volatility in your portfolio.Be consistent. Whether you can put $100 or $1,000 per month into your retirement savings, make it a habit. Many online stock brokers let you automate investments, which can help you stay consistent.

As you get closer to retirement, you can start thinking about exactly how much money you want to save. The 4% rule gives you an excellent starting point, and you can adjust it from there as needed.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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You’ve probably heard that you shouldn’t close credit cards or your credit score could be damaged — but what about bank accounts? Here’s what to know. 

Chances are good that you have heard closing credit cards is a bad financial move. But, what about your bank account? If you decide you want to change to a different bank, should you keep your account open to avoid hurting your credit score?

Here’s what you need to know.

Closing a bank account isn’t the same thing as closing a credit card

Closing a credit card is bad news for your credit score for a few reasons. You’d end up reducing the credit available to you by shutting down the line of credit. Since credit utilization ratio is an important factor when your score is calculated, reducing credit available hurts your score because you’ll appear to be using a higher percentage of your remaining credit.

The positive account history could also be lost over time (assuming you paid your card on time) and your average age of credit could become shorter once a credit account has been closed. These factors could have an adverse impact on your score as well.

But, when you close a bank account, you don’t end up reducing your credit lines or changing the types of credit accounts you have, or shortening your credit history. Your bank accounts typically are not reported to the credit bureaus so there should be no impact if you shut your account down.

There is one possible exception to this, though. If you close a bank account that has a negative balance and you don’t make things right with the bank, it’s likely you’ll have your account sent to collections and that could then show on your credit record as a delinquency. You don’t want this to happen, so if you are closing an account that has a negative balance because you overdrafted it or because you bounced a check, be sure to bring your balance up to $0 ASAP.

Should you close your unused bank accounts?

Since closing down an old bank account won’t hurt your credit score, should you do it or should you just leave the account open?

In many cases, it’s best to shut down the account if you aren’t going to use it any more. This is especially true if the account charges monthly maintenance fees because you don’t want to pay a fee for an account you aren’t using any more.

Even if the account doesn’t charge fees, just leaving it sitting open without using it could make you vulnerable to someone stealing your account access without you noticing or to unexpected withdrawals from the account that could send it into a negative balance.

You don’t want to be caught off guard to find out your account access has been compromised and you have a negative balance or some old membership has an annual fee that’s withdrawn from the account and pushed your balance below $0.

So, if you are sure you don’t plan to use a particular bank any more, you should seriously consider shutting the account down. Check back over past statements, change any auto withdrawals or bill pays from the account, and let the bank know you will not need it any longer. That way, you won’t have to worry about it — and your credit won’t be hurt by the closure.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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