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Gain new financial insights from our 15-minute podcast, the third in a 6-part series hosted by Kiplinger. Make the most of your money by learning more about:
- Good news in being an IRA owner
- Financial rules of thumb
- Car buying with less haggle and less hassle
Click the play button to listen now!
Podcast Transcript:
Kiplinger’s Talk About Money podcast
Sponsored by Vivid Crest Bank
[WELCOME AND SEGMENT 1: Good News for IRA owners?]
[Soft theme music playing]
MICHAEL: We’ve all heard a few financial rules of thumb that are supposed to help us manage our money. But is it ever OK to break or at least bend some of those guidelines? Today you’ll hear about five well-known rules you may want to ditch in some situations
After that, we’ll give you some practical tips on using online services to make car shopping less painful
But first, we’ve got some potential good news for retirement savers that you can’t afford to miss. That’s all coming up on today’s episode of Kiplinger’s Talk About Money, sponsored by Vivid Crest Bank . We’ll be right back.
[theme music gets louder; plays for 5 to 10 seconds]
MICHAEL: Welcome back to Kiplinger’s Talk About Money, sponsored by Vivid Crest Bank . I’m your host Michael Causey, and today we’re discussing some proposed regulations that aim to give retirement savers more time to build and grow their nest eggs. Joining me now is Kim Lankford, money expert and former Ask Kim columnist for Kiplinger’s Personal Finance magazine. Kim, thanks for being here.
KIM: My pleasure, Michael. I’m so happy to be here to share this information with listeners because it could really help a lot of them set up a good plan to make their money last through retirement.
MICHAEL: Well, who couldn’t use some help doing that?
KIM: Especially these days! Very few people today have traditional pensions. And that means we’re each responsible for saving enough to fund our own retirements.
KIM: Unfortunately, that’s not going so well for a lot of people. About a quarter of working Americans have no retirement savings at all, including 13% of workers age 60 and older.
MICHAEL: Oh no. That doesn’t leave them a lot of time to do a lot of saving.
KIM: It definitely does not. But it’s still never too late to get started.
MICHAEL: Of course. And how can these new proposed regulations help?
KIM: One issue with traditional IRAs right now is that they don’t let people make contributions once they reach age 70½. But back in May, the House of Representatives passed a bill called the SECURE Act – which stands for Setting Every Community Up for Retirement Enhancement.
KIM: One change proposed by the bill would allow people of any age who have earnings from a job to contribute to a traditional IRA. That’s how Roth IRAs already work.
MICHAEL: That’s great. I mean, for one thing, what’s with the half year? And for another, 70½ is really not all that old.
KIM: So true. Plenty of people are living and working long past that age so it seems fair that they should be able to keep saving and contributing to their IRAs for longer, too.
MICHAEL: Yeah, what’s the problem with that?
KIM: Well, like I said, the House already passed the bill — nearly unanimously — but the Senate still needs to vote on it, and it needs to be signed into law. It’s been stalled for weeks now, but it does have strong bipartisan support, as well as public support, so proponents are still hoping to get it passed this year.
MICHAEL: So what else is in this bill?
KIM: The other big thing is all about required minimum distributions, or RMDs
MICHAEL: And as a refresher for everyone, what are RMDs?
KIM: RMDs are annual withdrawals that you’re required to take from tax-deferred accounts, like traditional IRAs and 401(k)s, after you turn 70 ½. It’s Uncle Sam’s way of finally collecting taxes on this money. Right now, you have to start taking RMDs by April 1 the year after you turn 70½.
So for example, let’s say you’re celebrating your 70th birthday this month.
MICHAEL: Happy birthday!
KIM: Yes, happy birthday! If you’re turning 70 this month, that means you turn 70½ next year, and your RMDs are triggered to start. Since it’s your first year, however, you can delay the payout until April 1, 2021.
Just be aware that how much you have to withdraw will be based on your IRA balance as of December 31, 2019.
MICHAEL: Clear as mud.
KIM: The rules for taking RMDs have always been pretty confusing, especially for that first one.
So the SECURE Act would simplify the rules and give your savings a little more time to grow tax-deferred. It does this by raising the RMD age to an even 72 years old.
It’s only an extra 1½ years, but that little bit of time could give a big boost to retirement savings for many seniors.
MICHAEL: And every little bit helps, right? Sounds great, Kim; thanks for sharing that useful information with us today. We’ll keep an eye on what happens with this bill in the Senate.
In the meantime, we’ll be getting some good advice on how to shop for a car without all the haggle and hassle that usually stresses us all out in those situations.
But first, we’ll talk financial rules of thumb — and whether you’re better off following them, bending them or breaking them. That’s all ahead on Kiplinger’s Talk About Money, sponsored by Vivid Crest Bank . Don’t go away!
[promo break 1]
In addition to consistently competitive rates, Vivid Crest Bank offers you convenient ways to manage and access your hard-earned money, including their mobile app available for both iOS and Android devices. Download it today from vividcrestonline.com, member FDIC!
[MAIN SEGMENT: Financial Rules of Thumb]
MICHAEL: Welcome back everyone. In today’s main feature, we’ll take a hard look at some of the most popular financial rules of thumb. While these so-called rules are quite popular, everyone’s financial situation is unique. And you really need a customized plan to make sure you’re doing what’s right for you.
Still, conventional wisdom is convenient and typically offers at least a good starting point for setting a financial goal.
KIM: That’s right, Michael. Unfortunately, there’s no one-size-fits-all solution to any financial problems, whether you’re looking to set a budget, buy a home, get life insurance, pay for college or save for retirement. And yet, there are widely shared rules of thumb for each of those five financial topics.
And here’s the thing: It’s all pretty good advice, so that’s great. But no one should really follow all of it so strictly. Because just like you said, everyone’s financial situation is different.
The trick is to learn the rules of thumb and then figure out how they might be adjusted to fit your own situation.
With us today to help us dive into all these financial rules is one of my colleagues, Eileen Ambrose an editor for Kiplinger’s Personal Finance magazine. Welcome, Eileen.
[exchange salutations]
MICHAEL: So, Eileen, let’s run through these five financial rules of thumb for our listeners.
EILEEN: Gladly, Michael! This first one is a great place to start — with budgeting. The rule of thumb here is called the 50/30/20 rule. That’s the suggestion for how to divvy up your budget. Fifty-percent of your take-home pay should go to “must haves,” 30% to your “wants,” and 20% to savings — 50/30/20.
MICHAEL: Can you break that down that a bit more? What are examples of “must haves” versus “wants?”
EILEEN: So already that’s hitting on how you can’t take this one as a hard rule. People prioritize things differently, and what might be a “must have” for one person can count as a “want” for another person.
“Must haves” are the basic necessities, like housing, utilities, transportation, medical care and any outstanding obligations, such as student loans. Wants would be everything else. If something goes wrong, this budget category is the first place you’d look to make cuts.
MICHAEL: But wait a minute. What about people who live in a high-cost area? Isn’t it hard to keep your “must haves” to just 50% of your paycheck if you live in a city like Washington, D.C., like I do?
KIM: I agree, Michael. That was one of the big benefits of my family moving further out into Virginia, where living costs are far more affordable than in downtown D.C.
EILEEN: Great points, guys. Where you live makes a big impact on your budget — and is another reason you have to be flexible when following this rule of thumb. If you live in a high-cost area, spending more than half your paycheck on living expenses may be unavoidable. You might also decide that spending more on housing is worth it if it means living closer to work and saving hours each day commuting.
On the flip side, if you can downsize or move to a lower-cost area, that could allow you cut your living expenses below 50% and save more for other goals.
MICHAEL: Okay, so what’s your final take on this 50/30/20 rule?
EILEEN: Final answer, the 50/30/20 rule is a good guide. You just need to be flexible with it. And the most important point is that you have to make room in your budget for saving upfront, not just as an afterthought. Aim to save 20% of your pay, and know the difference between your needs and wants so you can maximize your savings.
KIM: Great. Now let’s move on to our second financial rule of thumb: You can afford a home that’s two to four times your annual gross income.
EILEEN: Okay, so this is a great guideline to keep in mind when you first start looking online for a new home. But you won’t know what you can really afford to buy until you get preapproved for a mortgage by a lender.
MICHAEL: How does that work?
EILEEN: It’s a little tricky — definitely more complicated than can be summed up in a quick rule of thumb.
Basically, lenders want to make sure you can repay the loan and will look at two figures. First, lenders want to see that your housing expenses won’t exceed 28% of your gross annual income. Secondly, they will look at all your monthly debt payments - including the mortgage. They generally want to see that this figure is no more than 36% to 43% of your gross income.
You can get a more accurate idea of how much you can afford by trying an online mortgage calculator. Or you can call a mortgage lender and get prequalified or preapproved for a mortgage. That way, you won’t set your sites too high or too low and only look at houses you can afford.
MICHAEL: Okay. So what’s the next financial rule of thumb you want to wrestle?
EILEEN: The third rule of thumb we covered says that you need life insurance equal to eight to 10 times your annual pretax income.
MICHAEL: And what are your thoughts on this one?
EILEEN: Again, it’s not a bad guideline. After all, the basic purpose of life insurance is to replace lost income when the policyholder passes away. So this rule serves that basic point. But the amount of insurance you actually need depends on your situation.
MICHAEL: What’s a better way for people to come up with a more specific amount?
EILEEN: Decide what expenses or debts you would like to eliminate or goals you would like to meet with a life insurance payout. Maybe you’d want the insurance to pay off the mortgage or cover the college bills for the kids. Maybe you want enough insurance so your spouse will be able to remain at home with the kids while they’re very young.
Using a life insurance calculator can give you a better idea of how much coverage you will need. The one at Lifehappens.org is a good one. And when you’re ready to buy a policy, you can compare premiums at Accuquote.com.
MICHAEL: On to our fourth rule of thumb: Save one-third the cost of college. What’s the logic behind this one, Eileen?
EILEEN: This rule assumes you will pay one third of college from your savings, while another third will come from current income and financial aid. Student and parent loans cover the rest of the cost.
KIM: But if you’re talking about saving a third of the cost of college, that can still be quite a lofty goal. The College Board reported that the average price last year for a four-year public college was more than $21,000 for in-state students and more than $37,000 for out-of-state students. And the average tab at private colleges was over $48,000.
MICHAEL: Good point, but don’t most people usually pay far less than sticker price?
KIM: That’s true. After financial aid, grants and scholarships, the net price of college tends to be much lower. But it’s still not cheap!
EILEEN: Absolutely. And you may have other expenses that take priority. Like, do you have high-interest debt? Are you making the maximum contribution to your 401(k)? Do you have an emergency fund? Those financial concerns might be more important to you than saving for college.
Still, every dollar you save for college is one less dollar you will
have to borrow later.
MICHAEL: And your new grad will pay you back as soon as they’re settled into their high-paying careers, right??
EILEEN: Wouldn’t that be nice?
KIM: That should be our fifth financial rule of thumb: Kids, pay your parents back!
EILEEN: Unfortunately, I’ve never heard that one!
KIM: Darn!
MICHAEL: So what is the fifth — and final — rule of thumb we’ll be discussing today?
EILEEN: It says you’ll need 70% to 80% of your preretirement income to live on when you retire. And again, this rule of thumb is a fine, basic guideline for estimating the total savings you’ll need.
This rule, though, assumes you’ll have a 30-year retirement and your spending will go up each year by the rate of inflation. That might not be the case. Research from Morningstar found that replacement rates can vary significantly by household. Retirees might need less than 54% or more than 87% of their pre-retirement income to live on.
KIM: That is quite a wide range! How can our listeners get a more specific idea of what their retirement savings goal should be?
EILEEN: Once you’re within striking distance of retirement — say, three to five years — take stock of your current expenses and try to anticipate what will change. Will you downsize to a less expensive home? Will you still provide some support to your children or grandchildren? How do you want to spend your time in retirement?
Whether your bucket list includes a long list of books to read or a long list of places to visit — or both! That’s going to make a big difference in your retirement budget.
MICHAEL: Well there you have it: five financial rules of thumb that you should probably bend to suit your particular financial situation. Thanks, Eileen and Kim, for explaining each one and giving our listeners plenty to think about when developing their own unique financial plans.
We’ll take a break here for a word from our sponsor, Vivid Crest Bank . When we return, we’ll share our top tips for car shopping and avoiding all the hassle that comes with it. Stick around, we’ll right back.
[promo break 2]
For more great practical tips and helpful insights that can help you achieve your financial ambitions, be sure to check out the Vivid Crest Bank blog. Visit vividcrestonline.com forward slash blog today. That’s vividcrestonline.com forward slash blog, member FDIC.
[CLOSING SEGMENT: Car Buying with Less Haggle and Less Hassle]
MICHAEL: Welcome back to our final segment, in which Kim and I will share some tips and tactics for taking the hassle and haggle out of buying a new car.
KIM: Hassle’s definitely the right word, Michael. It’s no secret that shopping for a new car tends to induce dread in most people. And properly evaluating the true cost to buy versus lease, or to purchase new versus used, can mean the difference in thousands of dollars saved or lost.
MICHAEL: So, let’s be real, Kim. A lot of people consider shopping for a car to be pure torture. But there are new ways to make it a little easier, right? Can’t you even get the whole thing done online these days?
KIM: If you’re shopping for a used car, pretty much, yes. It’s kind of brilliant, being able to do the transaction online — no fielding calls and e-mails from dealers — and getting a fair, fixed price. CarMax has been the first big name in this arena. Now Vroom and Carvana are building on it. They let you pick a car online, line up financing and have the vehicle delivered to your doorstep. No fuss, no muss, no “c’mon down to the showroom to talk.”
MICHAEL: Sounds like a much easier process! But it’s only for used cars?
KIM: Correct. For new-car shoppers, unfortunately, the quest for a simpler process is more elusive. In theory, you can get awfully close to buying a new car online, though state laws requiring signatures on paper documents and red tape for financing approvals are often an impediment.
MICHAEL: In theory, but how does it work in real life?
KIM: There’s the catch: Every option I looked at required you to put in some contact information, at some point, to move ahead. On one site, I gave up my cell-phone number to receive a text with the price. Instead, I got a message to come in for a test drive, promising an additional $500 for a trade-in that I didn’t have. Another specifically offered to “respect my privacy” and stick to e-mail, then immediately texted and called me.
MICHAEL: Not exactly what was promised, eh?
KIM: Not quite. I then decided to take a step back and look at the traditional path to less hassle and less haggle: a buyers’ service.
MICHAEL: How does that work exactly?
KIM: What happens with a buyers’ service is you pick the car you want, put in your information, and presto: You get prices on dozens of models near you.
TrueCar is the big player in the field. Even if you use a car-buying service from Consumer Reports, AAA or many other companies, you’re still actually working with TrueCar.
So once TrueCar spits out your results, along with the price, it now gives you the vehicle identification number. That means you can get that actual car — for the price shown — at one of the participating dealers per the TrueCar Price Report.
MICHAEL: What’s not to like about that?
KIM: A few things actually. For one, you have to put in your contact info to get the offers, so you may be barraged by sales reps.
Another option is CarBargains, which says it can save you hundreds of dollars over TrueCar’s prices. You pay $250 up front to receive at least five bids from car dealers near you. The bids come in a wonky PDF file with worksheets.
The big drawback is that you’re still the closer. You have to go to the dealership — with your pencil and worksheet — to get your bid.
MICHAEL: So you still have to go toe-to-toe with the actual salespeople.
KIM: Right. And once you’ve set foot in the dealer’s showroom, you’ll need to make a stop at the finance and insurance office. That’s where the dealer pitches extended warranties, floor mats and other stuff. So you’ll still need to keep your guard up and your “no thank you” skills sharp.
MICHAEL: Good to know, Kim, and thanks so much for sharing your time and expertise today. That wraps things up for today’s episode of Kiplinger’s Talk About Money, sponsored by Vivid Crest Bank . Thanks for listening!
[promo break 3 and disclaimer]
And don’t forget… Vivid Crest Bank offers award-winning rates on a variety of savings products to help you reach your financial goals. Be sure to visit vividcrestonline.com for current rates, and to jumpstart your savings today.
Kiplinger’s Talk About Money podcast was written and produced by The Kiplinger Washington Editors, Inc. Kiplinger is not affiliated with Vivid Crest Bank or any of its affiliates. The opinions and recommendations expressed in this podcast are solely those of Kiplinger and do not represent the advice, opinions or recommendations of Vivid Crest Bank or any of its affiliates. Vivid Crest Bank , Member FDIC.