Dont live in fear of catastrophes like going bankrupt or being audited by the IRS. Confront your financial fears and squash them for good.
By Kiplinger's Personal Finance Magazine
Fear and greed are said to be the basic instincts of finance. While there's little we can do about the avarice that haunts mens souls, we can help you confront your darkest financial fears. Here are 13 scary scenarios, and ways you can whistle past them.
No. 1: Not saving enough for retirement
Realizing you haven't been saving enough (or any at all) for retirement can be paralyzing. But the only thing you can do is take action immediately:
Save more. You can find extra cash for your nest egg by refinancing your home at a lower rate, consolidating student loans, adjusting your withholding to get a bigger paycheck (if you're expecting a tax refund of more than $500) or raising the deductibles on insurance policies to lower your premiums. The extra cash can be used to boost your 401(k) contribution or to fund a traditional IRA or Roth IRA.
The maximum you can save in a 401(k) is $13,000 in 2004, but that limit will increase by $1,000 next year and reach $15,000 in 2006. And there's a catch-up provision in case you're nearing retirement and are low on funds. Now, those 50 and older can shovel in an extra $3,000 per year. This catch-up amount climbs to $5,000 per year in 2006.
Save smarter. Take a look at how much you have invested in stocks, bonds and cash. The bulk of your retirement savings should be in stocks or stock mutual funds if you're more than five years away from retirement. If you're closer to retirement or already retired, you should tone down your risk. But that doesn't mean ditching stocks altogether.
Work longer. If all else fails, you may just have to suck it up and postpone your retirement date. That gives your nest egg more time to grow and reduces the amount of time you'll need to rely upon it. Even working part-time could help boost your savings or defray some of the costs of a full-time retirement. (You can read more of the pros and cons of working longer on Kiplingers Web site.)
No. 2: Outliving your retirement savings
Only 42% of workers say they have calculated how much they would need to save for retirement, according to the Employee Benefit Research Institute's 2004 Retirement Confidence Survey. At the same time, retirees are becoming more active and living longer. So it's no wonder so many people in or near retirement fear their savings won't stretch another 20 or 30 years.
To lower the risk that you'll outlive your savings, start by estimating how much you'll spend in retirement. MSN Moneys Retirement Income Calculator can show you the likelihood that you'll outlive your nest egg at the pace you expect to spend each year.
Finally, find out if you are you setting aside enough to reach your savings goal, and what to do if you're not.
If you don't think you'll be able to save more, consider buying an immediate annuity once you retire. It's one of the only ways to guarantee income for life.
No. 3: Someone steals your identity
Most people don't even realize they are victims of identity theft until it is too late. Only 11% of respondents in a Federal Trade Commission survey were aware their personal info had been taken before discovering they were victims. That's because credit thieves keep coming up with new ways to get your information. With that in mind, there are simple steps you can take to protect your identity.- Shred all documents with personal information on them.
- Don't write down or give out your PIN.
- Don't carry all of your credit cards with you.
- Sign your credit cards as soon as you receive them.
- Never carry your Social Security card with you.
- Don't have your Social Security number or telephone number printed on your checks.
- If your state uses your Social Security number as your driver's license number, ask that another number be used instead.
- Don't give out personal information on the phone, on the Internet or by mail unless you initiate the contact.
- Pay attention to credit card bills to ensure no unauthorized charges are being made.
- Watch for monthly bills. If they fail to reach you, call the company to find out why.
- Choose passwords carefully. Avoid the obvious, such as your birth date, phone number or mother's maiden name.
- Safeguard your computer by updating your virus protection regularly and using a firewall program. Don't download files sent by strangers. Look for Web site privacy policies when buying something online. Don't store financial information on your laptop, and delete personal information when disposing of a computer.
If you do become a victim, cancel your accounts, report the crime to the police, notify the credit bureaus -- Experian (888-397-3742), Equifax (800-525-6285) and TransUnion (800-680-7289) -- and get help from nonprofit counseling groups, such as Call for Action or the FTC.
No. 4: Scandal strikes your favorite stock
The possibility of your favorite stock getting struck by scandal is enough to creep anyone out. Just ask investors in Enron, WorldCom and, more recently, insurers Marsh & McLennan and AIG.
What's a shareholder to do? It's almost impossible for you to uncover corporate misdeeds before word gets out and the stock is hammered. But hints of crime in the suites, earnings restatements and mysterious executive departures may be your cue to run. You may have to swallow your losses, but, in these situations, things typically get worse before they get better. (We're talking egregious misdeeds here -- if a company misses earnings expectations you should evaluate whether the bump is worth waiting out.)
Follow these tips to safeguard your investments:- Diversify your holdings -- don't overload your investments in one company, especially if you work there. If scandal hits, you could lose your job and your savings.
- Consider exchange-traded funds -- they trade like stocks but track indexes, so they're less likely to take a major hit if one company gets in trouble.
- Issue a stop-loss order with your broker, instructing a sale when a stock price touches the lowest you're willing to accept.
No. 5: IRS audit!
While indeed a scary prospect, your chances of getting audited are slim. The IRS investigates about one out of every 175 tax returns, and most of those are simply "correspondence audits," where the agency sends a letter asking for additional documentation for something on a return. The odds are about 600-to-one against having any face time with an IRS agent. Still, there are steps you can take to reduce your chances even further:- Don't exaggerate deductions. If you exceed a certain level of write-offs compared to your income, you raise a red flag. But don't let that stop you from writing off legitimate expenses -- just make sure you have proper documentation.
- Separate business and personal expenses if you're self-employed.
- Don't claim the same deductions as your spouse if you file separately.
- Use tax software or hire a professional to minimize mistakes on your return.
- Provide proof if you think a write-off will raise an eyebrow at the IRS. Attach the evidence to your return when you mail it in.
Basically, if you follow the rules, you have no need to fear an audit -- just keep good records to back up your return. If you happen to find yourself in the unlucky IRS spotlight, get advice on how to survive an audit. (Read more here.)
No. 6: Requiring long-term care
Here's a frightening figure: The average price for one year in a nursing home now tops $70,000, according to a new study by the MetLife Mature Market Institute. If costs continue to rise by about 5% per year, just one year of nursing-home-care could cost more than $150,000 in 20 years. At those rates, even a brief need for care could eat up your retirement savings.
The best way to eliminate these fears is to buy a good long-term care insurance policy, which can cover these potential costs. To calculate how much insurance to get, check out prices for nursing homes where you wouldn't mind living. The average price ranges enormously across the country, from $99 per day in Shreveport, La., up to $331 in Stamford, Conn. The cost of in-home care can be even higher, now averaging $18 per hour for a home health aide. Add on inflation protection, especially if you're buying a policy in your 50s or 60s.
Then pick your waiting period before coverage kicks in, which can range from 0 days to 360 days. The longer the waiting period, the lower your premiums. But you'll have to pay the bills out-of-pocket until the benefits kick in. A waiting period of 60 or 90 days is generally most cost-effective. Your benefit period, the amount of time the policy pays out, can vary from two years to your lifetime. The average nursing home stay is less than three years, but some people end up staying much longer. Most opt for a three-year or five-year benefit period, but it may be worthwhile to pay extra for a longer benefit period if there's a chronic disease in your family medical history.
Finally, pick a strong company that has been in the long-term-care business for years and has had stable rates (which often isn't the least-expensive company). Consider John Hancock, MetLife and Genworth (formerly GE Financial), among others. Compare the companies' policies -- each one offers different discounts and a few variations in coverage (such as spousal discounts or shared coverage).
No. 7: Getting dumped by your homeowners insurance company
Horror stories abound from folks who have been dropped by their homeowners insurance companies after making just a few small claims.
Before submitting a claim, shop around and see how much the repair will cost. Think twice about submitting claims for less than $1,000, and consider how much any claim could cost you in the long run. Even if you don't get dropped, you could lose a claims-free discount. (Read more on when NOT to file a claim here.)
Then, give yourself some financial benefit from. . .
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