As the TJMS comes to an end, so does Mellody Hobson’s Money Mondays column. Today’s column will be the last. Many thanks to Mellody for helping our listeners over the years make their very best financial decisions with her tips, pointers and advice. Here are 5 of her top tips that should help you live your best financial life.
And from all of us at the Tom Joyner Morning Show, we thank Mellody for all her contributions to helping African-Americans achieve their financial goals.
Start. Don’t stop. There are big advantages to starting to save and sticking with it, Tom. The primary one is compound interest. Warren Buffett once called compound interest the eighth wonder of the world. Every day you put off saving, you are missing out on the power of compound interest, and the foregone returns can be eye-popping, Tom. Consider this: if you invested $250 a month when you were 25, by the time you reach 70 you would have contributed $135,000, but due to the power of compound interest, you would have $658,788 in your account. Wait just 10 years to start saving the same amount, and you end up contributing $105,000 but your balance when you are 70 would be $345,072. That’s a difference of $313,716! So start now. And don’t stop.
2.DON’T STEAL FROM YOURSELF
Don’t cheat. Taking money from your retirement account comes with several downsides. One of the great benefits of a 401(k) account is the tax benefits, but these benefits only apply if you play by the rules and keep your money in the account. If you withdraw money before you have reached 59 and a half, those withdrawals are subject to income tax and an additional 10% early distribution penalty.
Taking loans from your retirement are not much better. Many people who do take out loans end up stopping or lowering their contributions to their retirement account while they pay back their loans. Not only does this mean you are saving less money, you are missing out on the potential earnings on those dollars. Finally, the interest you pay on any 401(k) loan is double taxed. Since loan payments are made on an after-tax basis, interest on each payroll loan payment is taxed first then and again when you take distributions in retirement. So the best thing you can do is resist the temptation and do not touch your retirement savings.
3. RETIRE LATER.
Longer is better when it comes to staying in the workforce. Many Americans are financially unprepared for retirement, and will face a serious income shortfall. The problem will only grow with longer life expectancy and rising healthcare costs, but staying in the workforce a few years longer can reap big rewards. Not only will you benefit from the additional earnings, it reduces the period of retirement without wages, reducing the savings you will need to maintain your standard of living. Finally, it boosts your Social Security payments. People who delay Social Security benefits from age 62 to age 70 could see a 76 percent increase in their lifetime payments! Taken together, the benefits of staying in the workforce longer can really add up in retirement.
4. PUT YOURSELF FIRST.
If the oxygen mask drops in a plane, you are advised to help yourself first, then the person next to you. A survey by Bank of America/ Merrill Lynch found that nearly 3 in 4 of parents put their kids needs ahead of their own retirement. The same survey found nearly 80% of parents give some financial support to their adult children – those in college or beyond. What is more, the sum of that assistance comes to a whopping $500 billion annually, double the amount that parents contribute to retirement accounts every year! And that is just parents and their kids – it doesn’t include other family members or friends. Remember that you are the only one that can prioritize your financial well-being.
5. WHERE THERE’S A WILL, THERE’S A WAY
Will it. (Write one now!) Between one-half and two-thirds of American adults don’t have a will, and that can mean a world of hurt if something happens to them. If you don’t make any formal estate plans, then decisions about your property, you medical care and your final arrangements will be made by others. Property will be divided and distributed at your death according to the process specified by state law. Any medical decisions will fall to individuals specified by law as well. And the decisions made may not reflect your values or your priorities. So, to protect your family and loved ones, you need to have a will that specifies a number of things.
First, determine what property and assets you wish to leave to family, friends, or charities, and how they will be distributed. You have to be specific here. If you want to pass along your grandmother’s earrings to your daughter, spell it out.Second, if you have children, specify who you wish to act as guardian for them. Third, determine who will be your executor, the person who will manage your estate at death, pay debts and taxes, and distribute remaining property as you specify.
Fourth, specify how outstanding debts and taxes should be paid, and whether you want to cancel any debts still owed to you. Finally, make sure that your will is accompanied by documentation of important financial information, such as bank accounts and insurance policies, and that copies are held by a known responsible party, which could be a lawyer, accountant or the executor of your estate.
Mellody Hobson is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.