Vol 5. Issue 24 / August 15, 2005
Ten Tips from Financial Awareness Week
When I bought a condo earlier this year—and signed the papers the same day The New York Times ran a front-page story about the national real estate bubble—I suddenly realized that, no matter what happened in the housing market, I had a lot to learn about personal finance.
I had launched into a flurry of reading on the subject when I saw that The Scripps Research Institute's fifth annual Financial Awareness Week for employees was coming up. "Great!" I thought, scanning the long list of seminars. "This year, I'm going to go to participate."
And I did. Almost every lunch hour during the week found me in one workshop or another, learning, for example, about common mistakes in buying a house (well, I didn't make all of them), eligibility requirements for Social Security, techniques for managing retirement accounts, subtleties in the tax code, or different kinds of trusts.
Financial planning, it turns out, can involve more than a few details.
But, by the end of the week, I also came to see some overarching themes—key concepts that can make up the foundation of a solid financial plan. These include:
• Recognize the Magic of Compound Interest. One dollar really can turn into many. At first, it sounds like a get-rich-quick scheme—but the catch is it's not quick. It takes a lot of time and a little management. Which leads to the next point.
• The Earlier You Start Saving for Retirement, the (Much) Better Off You Are. When you are young, retirement can seem a long way off. And there are all those other expenses—the car, the vet bill, those new shoes. But, in the long run, it pays to dedicate even a small percentage of your salary to retirement savings now rather than later. And, in the long run, it pays to save a little more rather than a little less.
• But If You Didn't Start Early, Don't Give Up. If you are over 50 and are just starting, don't panic. "Catch-up provisions" in the tax code allow you to contribute a higher dollar amount to tax-deferred retirement accounts, and the upper limit you can contribute will increase each year. Starting now is better than never starting.
• Small Differences Can Lead to Big Differences. It's the compound interest again. It does matter where you chose to put your retirement money. Selecting a mutual fund with too much risk to meet your goals—or, perhaps more commonly, too little (since, as a general rule, the higher the risk, the higher the return)— effects how much money you end up with. Another point to keep in mind is that mutual fund fees differ. The larger the fees are, the more they erode your holdings.
• Don't Think Social Security Is the Answer. A seminar by a representative from the Social Security Administration confirmed that there is a problem with the Social Security system—namely, the number of younger workers supporting payments for retirees is going steadily down, especially with the baby boom generation nearing retirement age. The take home message is that while Social Security may still be around for years to come, don't count on it to provide you with a living income in your old age.
• Don't Leave Free Money on the Table. Did you know that Scripps Research contributes additional money into many employees' 403b accounts? In fact, the institute matches 50% of savings up to the 6% level of an employee's salary as part of the Cash Balance Retirement Plan. While Cash Balance Retirement Plan participants don't vest in this money until after 5 years of employment, not contributing at the 6% level could be leaving free money on the table.
• Take Advantage of Tax Breaks. Tax breaks are there for those who look for them—including 403b accounts, ROTH IRAs, and college savings plans, to name a few. The fine, but important, distinction to keep in mind is that while it is illegal to evade taxes, it is perfectly legal to manage them to your own best interest.
• Shop Carefully When You Buy Real Estate. Real estate involves what is, to the average person (OK, me), big money. Advice from the seminar on real estate included making sure you are putting your money into something you can live with, taking the time to do your research, and having realistic expectations about any proposed timeline for transferring property between a buyer and a seller.
• Do a Huge Favor to Your Loved Ones and Prepare a Will. If you haven't made proper arrangements for your own demise, your loved ones could end up in probate court—often a lengthy, frustrating, and expensive ordeal. Preparing a will and perhaps a trust can streamline the administration of your estate, saving your heirs months of aggravation and thousands of dollars of legal fees.
• Keep Learning. At some point during Financial Awareness Week, I realized that learning about money and finances is a lifetime endeavor. There is always more to discover. And the context you have to work in is always in flux—markets change, tax laws change, you change. Committing your own financial education is perhaps the most important investment you can make.
If you are a Scripps Research employee, the Scripps Research Benefits Department is there to help. Benefits personnel can explain the options available for retirement and college savings, direct you to the right forms, and connect you with various financial services providers. To contact Scripps Research Benefits, email firstname.lastname@example.org or call x4-8487.
Send comments to: mikaono[at]scripps.edu