Guide to Choosing the Right IRA: Traditional or Roth?

The Roth IRA versus traditional IRA debate has raged on for years.

What many retirement savers may not know is that most of the debate about whether it’s better to contribute to a traditional IRA or a Roth IRA is flawed.

You’ve probably heard that young investors are better off contributing to a Roth IRA because they’ll likely be in a higher tax bracket when they’re older. You’ve probably also heard that if you’re in the same tax bracket now and in retirement, a traditional IRA and Roth IRA will produce the same result.

These arguments are part of the conventional wisdom upon which many people make their decisions, and yet each misses some important nuance and, in some cases, is downright incorrect.

The Biggest Difference Between Traditional and Roth IRAs

There are several differences between traditional and Roth IRAs, and we’ll get into many of them below.

The key difference is in the tax breaks they offer.

Contributions to a traditional IRA are not taxed up front. They are tax-deductible, meaning they decrease your taxable income for the year in which you make the contribution. The money grows tax-free inside the account. However, your withdrawals in retirement are treated as taxable income.

Contributions to a Roth IRA are taxed up front at your current income tax rate. The money grows tax-free while inside the account. And when you make withdrawals in retirement, those withdrawals are not taxed.

Whether it’s better to get the tax break when you make the contribution or when you withdraw it in retirement is the centerpiece of the traditional vs. Roth IRA debate, and it’s also where a lot of people use some faulty logic.

We’ll debunk the conventional wisdom in just a bit, but first we need to take a very quick detour to understand a couple of key tax concepts.

The Important Difference Between Marginal and Effective Tax Rates

Don’t worry. We’re not going too far into the tax weeds here. But there’s a key point that’s important to understand if you’re going to make a true comparison between traditional and Roth IRAs, and that’s the difference between your marginal tax rate and your effective tax rate.

When people talk about tax rates, they’re typically referring to your marginal tax rate. This is the tax rate you pay on your last dollar of income, and it’s the same as your current tax bracket. For example, if you’re in the 15% tax bracket, you have a 15% marginal tax rate, and you’ll owe 15 cents in taxes on the next dollar you earn.

Your effective tax rate, however, divides your total tax bill by your total income to calculate your average tax rate across every dollar you earned.

And these tax rates are different because of our progressive federal income tax, which taxes different dollars at different rates. For example, someone in the 15% tax bracket actually pays 0% on some of their income, 10% on some of their income, and 15% on the rest of their income. Which means that their total tax bill is actually less than 15% of their total income.

For a simple example, a 32-year-old couple making $65,000 per year with one child will likely fall in the 15% tax bracket. That’s their marginal tax rate.

But after factoring in our progressive tax code and various tax breaks like the standard deduction and personal exemptions, they will only actually pay a total of $4,114 in taxes, making their effective tax rate just 6.33% (calculated using TurboTax’s TaxCaster).

As you can see, the couple’s effective tax rate is much lower than their marginal tax rate. And that’s almost always the case, no matter what your situation.

Keep that in mind as we move forward.

Why the Conventional Traditional vs. Roth IRA Wisdom Is Wrong

Most of the discussion around traditional and Roth IRAs focuses on your marginal tax rate. The logic says that if your marginal tax rate is higher now than it will be in retirement, the traditional IRA is the way to go. If it will be higher in retirement, the Roth IRA is the way to go. If your marginal tax rate will be the same in retirement as it is now, you’ll get the same result whether you contribute to a traditional IRA or a Roth IRA.

By this conventional wisdom, the Roth IRA typically comes out ahead for younger investors who plan on increasing their income over time and therefore moving into a higher tax bracket or at least staying in the same tax bracket.

But that conventional wisdom is flawed.

When you’re torn between contributing to a traditional or Roth IRA, it’s almost always better to compare your marginal tax rate today to your effective rate in retirement, for two reasons:

  1. Your traditional IRA contributions will likely provide a tax break at or near your marginal tax rate. This is because federal tax brackets typically span tens of thousands of dollars, while your IRA contributions max out at $5,500 for an individual or $11,000 for a couple. So it’s unlikely that your traditional IRA contribution will move you into a lower tax bracket, and even if it does, it will likely be only a small part of your contribution.
  2. Your traditional IRA withdrawals, on the other hand, are very likely to span multiple tax brackets given that you will likely be withdrawing tens of thousands of dollars per year. Given that reality, your effective tax rate is a more accurate representation of the tax cost of those withdrawals in retirement.

And when you look at it this way, comparing your marginal tax rate today to your effective tax rate in the future, the traditional IRA starts to look a lot more attractive.

Let’s run the numbers with a case study.

A Case Study: Should Mark and Jane Contribute to a Traditional IRA or a Roth IRA?

Mark and Jane are 32, married, and have a 2-year-old child. They currently make $65,000 per year combined, putting them squarely in the 15% tax bracket.

They’re ready to save for retirement, and they’re trying to decide between a traditional IRA and a Roth IRA. They’ve figured out that they can afford to make either of the following annual contributions:

  • $11,000 to a traditional IRA, which is the annual maximum.
  • $9,350 to a Roth IRA, which is that same $11,000 contribution after the 15% tax cost is taken out. (Since Roth IRA contributions are nondeductible, factoring taxes into the contribution is the right way to properly compare equivalent after-tax contributions to each account.)

So the big question is this: Which account, the traditional IRA or Roth IRA, will give them more income in retirement?

Using conventional wisdom, they would probably contribute to the Roth IRA. After all, they’re young and in a relatively low tax bracket.

But Mark and Jane are curious people, so they decided to run the numbers themselves. Here are the assumptions they made in order to do that:

  • They will continue working until age 67 (full Social Security retirement age).
  • They will continue making $65,000 per year, adjusted for inflation.
  • They will receive $26,964 per year in Social Security income starting at age 67 (estimated here).
  • They will receive an inflation-adjusted investment return of 5% per year (7% return minus 2% inflation).
  • At retirement, they will withdraw 4% of their final IRA balance per year to supplement their Social Security income (based on the 4% safe withdrawal rate).
  • They will file taxes jointly every year, both now and in retirement.

You can see all the details laid out in a spreadsheet here, but here’s the bottom line:

  • The Roth IRA will provide Mark and Jane with $35,469 in annual tax-free income on top of their Social Security income.
  • The traditional IRA will provide $37,544 in annual after-tax income on top of their Social Security income. That’s after paying $4,184 in taxes on their $41,728 withdrawal, calculating using TurboTax’s TaxCaster.

In other words, the traditional IRA will provide an extra $2,075 in annual income for Mark and Jane in retirement.

That’s a nice vacation, a whole bunch of date nights, gifts for the grandkids, or simply extra money that might be needed to cover necessary expenses.

It’s worth noting that using the assumptions above, Mark and Jane are in the 15% tax bracket both now and in retirement. According to the conventional wisdom, a traditional IRA and Roth IRA should provide the same result.

But they don’t, and the reason has everything to do with the difference between marginal tax rates and effective tax rates.

Right now, their contributions to the traditional IRA get them a 15% tax break, meaning they can contribute 15% more to a traditional IRA than they can to a Roth IRA without affecting their budget in any way.

But in retirement, the effective tax rate on their traditional IRA withdrawals is only 10%. Due again to a combination of our progressive tax code and tax breaks like the standard deduction and personal exemptions, some of it isn’t taxed, some of it is taxed at 10%, and only a portion of it is taxed at 15%.

That 5% difference between now and later is why they end up with more money from a traditional IRA than a Roth IRA.

And it’s that same unconventional wisdom that can give you more retirement income as well if you plan smartly.

5 Good Reasons to Use a Roth IRA

The main takeaway from everything above is that the conventional traditional versus Roth IRA wisdom is wrong. Comparing marginal tax rates typically underestimates the value of a traditional IRA.

Of course, the Roth IRA is still a great account, and there are plenty of situations in which it makes sense to use it. I have a Roth IRA myself, and I’m very happy with it.

So here are five good reasons to use a Roth IRA.

1. You Might Contribute More to a Roth IRA

Our case study above assumes that you would make equivalent after-tax contributions to each account. That is, if you’re in the 15% tax bracket, you would contribute 15% less to a Roth IRA than to a traditional IRA because of the tax cost.

That’s technically the right way to make the comparison, but it’s not the way most people think.

There’s a good chance that you have a certain amount of money you want to contribute and that you would make that same contribution to either a traditional IRA or a Roth IRA. Maybe you want to max out your contribution and the only question is which account to use.

If that’s the case, a Roth IRA will come out ahead every time simply because that money will never be taxed again.

2. Backdoor Roth IRA

If you make too much to either contribute to a Roth IRA or deduct contributions to a traditional IRA, you still might be eligible to do what’s called a backdoor Roth IRA.

If so, it’s a great way to give yourself some extra tax-free income in retirement, and you can only do it with a Roth IRA.

3. You Might Have Other Income

Social Security income was already factored into the example above. But any additional income, such as pension income, would increase the cost of those traditional IRA withdrawals in retirement by increasing both the marginal and effective tax rate.

Depending on your other income sources, the tax-free nature of a Roth IRA may be helpful.

4. Tax Diversification

You can make the most reasonable assumptions in the world, but the reality is that there’s no way to know what your situation will look like 30-plus years down the road.

We encourage people to diversify their investments because it reduces the risk that any one bad company could bring down your entire portfolio. Similarly, diversifying your retirement accounts can reduce the risk that a change in circumstances would result in you drastically overpaying in taxes.

Having some money in a Roth IRA and some money in a traditional IRA or 401(k) could give you room to adapt to changing tax circumstances in retirement by giving you some taxable money and some tax-free money.

5. Financial Flexibility

Roth IRAs are extremely flexible accounts that can be used for a variety of financial goals throughout your lifetime.

One reason for this is that your contributions are available at any time and for any reason, without tax or penalty. Ideally you would be able to keep the money in your account to grow for retirement, but it could be used to buy a house, start a business, or simply in case of emergency.

Roth IRAs also have some special characteristics that can make them effective college savings accounts, and as of now Roth IRAs are not subject to required minimum distributions in retirement, though that could certainly change.

All in all, Roth IRAs are more flexible than traditional IRAs in terms of using the money for nonretirement purposes.

3 Good Reasons to Use a Traditional IRA

People love the Roth IRA because it gives you tax-free money in retirement, but, as we saw in the case study above, that doesn’t always result in more retirement income. Even factoring in taxes, and even in situations where you might not expect it, the traditional IRA often comes out ahead.

And the truth is that there are even MORE tax advantages to the traditional IRA than what we discussed earlier. Here are three of the biggest.

1. You Can Convert to a Roth IRA at Any Time

One of the downsides of contributing to a Roth IRA is that you lock in the tax cost at the point of contribution. There’s no getting that money back.

On the other hand, contributing to a traditional IRA gives you the tax break now while also preserving your ability to convert some or all of that money to a Roth IRA at your convenience, giving you more control over when and how you take the tax hit.

For example, let’s say that you contribute to a traditional IRA this year, and then a few years down the line either you or your spouse decides to stay home with the kids, or start a business, or change careers. Any of those decisions could lead to a significant reduction in income, which might be a perfect opportunity to convert some or all of your traditional IRA money to a Roth IRA.

The amount you convert will count as taxable income, but because you’re temporarily in a lower tax bracket you’ll receive a smaller tax bill.

You can get pretty fancy with this if you want. Brandon from the Mad Fientist, has explained how to build a Roth IRA Conversion Ladder to fund early retirement. Financial planner Michael Kitces has demonstrated how to use partial conversions and recharacterizations to optimize your tax cost.

Of course, there are downsides to this strategy as well. Primarily there’s the fact that taxes are complicated, and you could unknowingly cost yourself a lot of money if you’re not careful. And unlike direct contributions to a Roth IRA, you have to wait five years before you’re able to withdraw the money you’ve converted without penalty. It’s typically best to speak to a tax professional or financial planner before converting to a Roth IRA.

But the overall point is that contributing to a traditional IRA now gives you greater ability to control your tax spending both now and in the future. You may be able to save yourself a lot of money by converting to a Roth IRA sometime in the future rather than contributing to it directly today.

2. You Could Avoid or Reduce State Income Tax

Traditional IRA contributions are deductible for state income tax purposes as well as federal income tax purposes. That wasn’t factored into the case study above, but there are situations in which this can significantly increase the benefit of a traditional IRA.

First, if you live in a state with a progressive income tax code, you may get a boost from the difference in marginal and effective tax rates just like with federal income taxes. While your contributions today may be deductible at the margin, your future withdrawals may at least partially be taxed at lower rates.

Second, it’s possible that you could eventually move to a state with either lower state income tax rates or no income tax at all. If so, you could save money on the difference between your current and future tax rates, and possibly avoid state income taxes altogether. Of course, if you move to a state with higher income taxes, you may end up losing money on the difference.

3. It Helps You Gain Eligibility for Tax Breaks

Contributing to a traditional IRA lowers what’s called your adjusted gross income (AGI), which is why you end up paying less income tax.

But there are a number of other tax breaks that rely on your AGI to determine eligibility, and by contributing to a traditional IRA you lower your AGI you make it more likely to qualify for those tax breaks.

Here’s a sample of common tax breaks that rely on AGI:

  • Saver’s credit – Provides a tax credit for people who make contributions to a qualified retirement plan and make under a certain level of AGI. For 2017, the maximum credit is $2,000 for individuals and $4,000 for couples.
  • Child and dependent care credit – Provides a credit of up to $2,100 for expenses related to the care of children and other dependents, though the amount decreases as your AGI increases. Parents with young children in child care are the most common recipients of this credit.
  • Medical expense deduction – Medical expenses that exceed 10% of your AGI are deductible. The lower your AGI, the more likely you are to qualify for this deduction.
  • 0% dividend and capital gains tax rate – If you’re in the 15% income tax bracket or below, any dividends and long-term capital gains you earn during the year are not taxed. Lowering your AGI could move you into this lower tax bracket.

Making a Smarter Decision

There’s a lot more to the traditional vs. Roth IRA debate than the conventional wisdom would have you believe. And the truth is that the more you dive in, the more you realize just how powerful the traditional IRA is.

That’s not to say that you should never use a Roth IRA. It’s a fantastic account, and it certainly has its place. It’s just that the tax breaks a traditional IRA offers are often understated.

It’s also important to recognize that every situation is different and that it’s impossible to know ahead of time which account will come out ahead. There are too many variables and too many unknowns to say for sure.

But with the information above, you should be able to make a smarter choice that makes it a little bit easier to reach retirement sooner and with more money.

The post Guide to Choosing the Right IRA: Traditional or Roth? appeared first on MagnifyMoney.

Should You Take Social Security Benefits at 62?

The vast majority of workers choose to receive their Social Security benefits as soon as they turn 62. And they could be leaving a lot of money on the table. In fact, nearly three-quarters of the 39 million retirees in the U.S. are receiving reduced benefits because they began taking Social Security before they reached full retirement age, according to the Social Security Administration’s 2015 Annual Statistical Supplement.

In fact, you’ll only receive 75% of your benefits if you start taking Social Security at 62. For every year until you reach “full retirement age” (66), the greater your benefit check will be. The chart below shows you exactly how much your benefit will be affected by electing your benefits early.

Age Percentage of Benefit
62 75%
63 80%
64 86.7%
65 93.3 %
66 100%

 

But decisions like this are rarely cut and dried. If you’re younger than 62 and contemplating when you should elect your Social Security benefits, we’re going to discuss the factors you should consider first.

3 Reasons You Should Take Social Security Benefits at 62

The Social Security retirement benefit is a bit of misnomer because you don’t actually have to be retired to receive the benefit. Under certain circumstances, electing your Social Security benefit at 62, or any other time before full retirement age (66), could be the right decision for you.

  1. You need the income to meet your basic daily needs. When considering whether or not you should begin receiving Social Security benefits at age 62, look at your budget. Since Social Security will effectively serve as a paycheck, think about whether or not you actually need the additional income.
  2. You don’t have longevity in your family. Nobody wants to leave money on the table. If you don’t have longevity in your family or simply expect your lifespan to be shorter than average, it is worth considering taking your benefits early. Just keep in mind that upon your death, however, your spouse will receive a lower survivor’s benefit than he or she would have if you had waited.
  3. You need to be retired. There are a host of indications that it is time to retire. If you’re realizing one or more of them, but your retirement savings are not enough to sustain your lifestyle, electing your benefits at 62 could be a wise decision.

3 Reasons to Wait to Take Social Security Benefits Until After Age 62

The most common reason someone will tell you to wait until full retirement age is that your annual benefit is reduced if you take it sooner. If you elect benefits at age 62, expect to receive a 25% smaller benefit that you would receive at age 66, for the rest of your life. In addition to the downside of a reduced benefit, think about how these factors apply to your life:

  1. You can afford to wait. If your budget does not rely on the additional income that will be provided by Social Security, your patience will be handsomely rewarded. Your benefit amount increases with each year you wait, up until you turn 70.
  2. You’re still working and making too much money. “Too much money” sounds quite relative, but in terms of Social Security, individuals who elect benefits before full retirement age will have their benefits reduced by $1 for every $2 earned over $16,920. For people older than full retirement age, but younger than age 70, benefits will be reduced $1 for every $3 earned over $44,880.
  3. You will get a larger benefit if you wait.
  1. You’re rewarded for your patience in two ways, and the first is through earnings alone. Your Social Security benefit is determined by the 40 highest-earning quarters of your work history. So, if you’re 62 or older and earning more money each quarter, it could mean a larger monthly benefit when you eventually elect Social Security.
  2. Whether or not your earnings increase during the final quarters of your working years, the Social Security Administration will also reward you for waiting to take your benefit until age 66 or later.
Age Percentage of Benefit
66 100%
67 108%
68 116%
69 124%
70 132%

3 Ways to Boost Income and Avoid Taking Social Security Benefits Early

The Annual Statistical Supplement does not discuss why so many people elect benefits before full retirement age, but if you are considering an early election of your benefits due to an income need, judge the following first:

  1. Your budget
  1. Can you generate enough monthly savings to offset your Social Security benefit before full retirement age? The benefits of waiting to take your Social Security benefit far outweigh the costs, so if you’re able to apply a short-term solution for a larger, long-term benefit, it could be in your best interest.
  1. If retired, take a part-time job
  • . According to the 2015 Annual Statistical Supplement, the average monthly benefit for a retired worker was $1,329. If after assessing your monthly budget, and the deficit you hoped to fill with Social Security is close to or below what your monthly benefit would be, think about a part-time job. Your annual income will likely fall below the threshold for a reduced benefit, and you will avoid a lifelong reduction in Social Security benefits.
  1. Consider adjusting your portfolio to a more income-oriented allocation
  • . Disclaimer: This approach should be discussed with a professional. If you have retirement or investment accounts, you have two strategies at your disposal to help generate income:
    1. Take dividends in cash, rather than reinvesting. While this may provide a stream of income, it could also slow the growth of your investments.
    2. Adjust your asset allocation to one that is income-oriented. Then, take the dividends in cash.
  1. Acknowledging that this approach is more complicated than the previous two, it is also a prudent one because it is reversible. The last thing you want to do, as you approach what could be decades in retirement, is permanently reduce any stream of income.

The Bottom Line

Think about the timing of your Social Security like a tattoo. Both can act like a double-edged sword in your life and, for discussion’s sake, are irreversible. Deciding to get a tattoo is not always a good decision; similarly, electing to take Social Security at 62 is not always a smart choice either. However, the reverse is also true, and the only way to know if this choice is right or wrong is to weigh the factors at play in your life against the consequences of your decision.

The post Should You Take Social Security Benefits at 62? appeared first on MagnifyMoney.

Best Places to Retire Early 2017

The rise of the FIRE (Financial Independence and Retiring Early) movement has given way to a new emphasis on retiring early. Rather than leaving the workforce at the typical age of 62, FIRE retirees aim to retire in their 40s or 50s. This lofty goal typically requires an aggressive savings plan, as early retirees must live off their savings until they can expect to withdraw benefits like Social Security or dip into their 401(k) or IRA savings without facing a penalty.

In a new study, MagnifyMoney ranked 217 U.S. cities to find the best and worst places to retire early.

Methodology:

We sought to find cities that had a combination of a low cost of living (highest priority), a great quality of life and access to employment if needed to supplement income.

Each city was given a final composite score out of 100 possible points. The composite score was based on those three factors, each weighted differently: cost of living (50%), quality of life (30%), and employability (20%).

Within each of these three categories, we looked at specific elements that play a key role in determining the best city to retire early.

Cost of Living: The cost of groceries, housing, utilities, transportation, health care and other goods and services.

Quality of Life: Weather (average annual temperature and number of sunny days); access to arts and entertainment services; walkability.

Employability: Early retirees may choose to incorporate part-time work into their lives even after they retire to stay active and supplement their existing savings. We looked at the minimum wage, unemployment rate, average commute time and state income tax for each metro.

Key Findings:

Looking for a low cost of living? Move South or Midwest

Cities in the South and Midwest dominated the list of best places to retire early, mostly due to a lower average cost of living than any of the four regions studied. Southern and Midwestern cities boasted an average cost of living score of 63 —13 points higher than the average score across all 216 cities studied of (50).

The South and Midwest also boasted the two highest overall early retirement scores (57 and 56, respectively).

The South may be the best bet for early retirees looking for the option of part-time work to supplement their income as well. The region scored the highest employability score of any other area. The employability score was based on the unemployment rate, minimum wage, average commute time and state income tax.

Favor quality of life over low cost of living? Head Northeast

-Early retirees will need to save a pretty penny to retire in the Northeast, but they may find retirement more entertaining at least. Although the Northeast earned the highest score of any region for quality of life (67, well above the national average of 50), the region suffered due to its relatively high cost of living. It earned the lowest cost of living score of any region with a paltry 17.

Western cities had a poor showing in all three categories, barely eeking out a higher final score than the Northeast. But whereas the expensive Northeast was buoyed by its relatively high quality of life score, the West was dragged down on all three fronts.

The 10 Best Cities to Retire Early

The 10 Worst Cities to Retire Early

10-Worst-Cities

 

RANKINGS BY REGION

Region-Wise

MIDWEST: The 10 best cities to retire early

MIDWEST-10-Best-Cities

MIDWEST: The 10 worst cities to retire early

MIDWEST-10-Worst-Cities

NORTHEAST: The 10 best cities to retire early

NORTHEAST-10-Best-Cities

NORTHEAST: The 10 worst cities to retire early

NORTHEAST-10-Worst-Cities

SOUTH: The 10 best cities to retire early

SOUTH-10-Best-Cities

SOUTH: The 10 worst cities to retire early

SOUTH-10-Worst-Cities

WEST: The 10 best cities to retire early

WEST: The 10 worst cities to retire early

Sources:

Cost of living:

http://coli.org

Quality of life:

Employability:

The post Best Places to Retire Early 2017 appeared first on MagnifyMoney.

50 Things Millennials Can Do Now So They Can Retire at 65

Want to retire at 65 but don't know how? We're here to help.

It seems like you’ll be punching a clock forever, right? Well, one day, you’ll likely stop spending 9 to 5 at a desk and will enjoy your golden years in retirement. But that’s assuming everything plays out nicely and you have enough money set aside to do so. Stressful, right?

Well, according to a 2016 Retirement Income Strategies and Expectations survey by Franklin Templeton Investments, 70% of millennials are stressed and anxious about saving for retirement. So if you’re one of the millennials who gets anxiety every time mom or dad brings up the importance of your retirement funds, take a deep breath.

We’ve got 50 easy-to-digest ways that can get you on the right track today so you’re ready to celebrate in style once your 65th birthday rolls around.

1. Start Now

“It’s never too late, and it’s never too early, to start saving for retirement,” Ty J. Young, CEO of Ty J. Young, Inc., a nationwide wealth management firm, said.

2. Don’t Fear Your Finances

“A healthy relationship with money is absolutely crucial,” Attila Morgan, Nuvision Credit Union’s manager of community engagement and public relations, said. If you shy away from planning for retirement, you’ll pay the consequences down the line.

3. Think About How Much You’ll Need

“It’s crucial that you know how much money you will need in retirement,” Roger Cowen, a retirement planner and owner of Cowen Tax Advisory Group in Hartford, Connecticut, said. This way, you’ll have an easier time figuring out an amount to save or invest. Don’t forget about inflation.

4. Pay Your Savings Account

There are bills that must be paid but you also need to pay yourself. This doesn’t mean buy something new — it means putting money aside for your future. As Warren Buffett said, “Don’t save what’s left after spending — spend what’s left after saving.”

5. Avoid the Couch Cushions

You won’t gain anything from hiding money under the mattress or in the couch cushion. Take that money to the bank. Sure, interest rates may not be high, but it’s still extra money you wouldn’t have had otherwise.

6. Make Sure You Have a Rainy Day Fund … 

Experts generally recommend having at least three months worth of expenses socked away for emergencies. The amount you’ll need will change over time, so make sure it stays at the level you’d need.

7. … & Only Withdraw in Emergencies

You’ll want to use your emergency fund for “unexpected events, rather than dipping into your retirement savings,” Chad Smith, wealth management strategist at HD Vest, a financial services firm in Irving, Texas, said.

8. Set Up Automatic Transfers

Having the money directly transferred will make [saving] easier,” Cowen said.

9. Avoid Duplicates

If you’re paying for multiple streaming services as well as cable, decide what you can cut. Same goes for multiple magazine subscriptions that you read online. Anywhere you’re doubling up, try to cut back.

10. Maintain Good Credit Card Habits

“Start small. Pay on time and pay of the balance in full at the end of each month,” Cowen said. This can help you maintain good credit.

11. Monitor Your Credit Scores

“Know your credit score and monitor it often,” Marc Cenedella, CEO of career website Ladders, said. Having good credit can help you get better terms and conditions “when it comes to taking out a line of credit or mortgage, which will make a big difference in your ability to retire at 65.” (Not sure where your credit stands? Find out right here on Credit.com.)

12. Invest in the Stock Market

“I think millennials are making a big mistake by not investing,” James Goodnow, an attorney at Fennemore Craig in Phoenix, Arizona, said. “If you take a long-term horizon, the market is still a safe bet.”

13. Don’t Shy Away Entirely From Risks

“We as millennials are in a fortunate position,” Goodnow said. “Because of our age, we are able to weather storms in ways that investors from other generations cannot. If there is another dip or crash, we have time on our side to help us recover.”

14. Utilize Your Company Matching

“If you aren’t contributing enough to get the free match from your employer, you are throwing money away,” Cowen said.

15. Consider a Roth IRA

Roth accounts are not taxed if you make withdrawals after retiring. “Starting young is the key to retiring rich and the Roth account is the best way to accomplish this,” according to Adam Bergman, the president of IRA Financial Group.

16. A Little in Column A, a Little in Column B

“Do not put all of your eggs in one basket — diversification is key, ” Richard W. Rausser, senior vice president of client services at Pentegra Retirement Services in White Plains, New York, said.

17. Adjust When You Get a Raise

“Increase your 401K savings every time you get a pay raise, no matter what,” Rausser said.

18. Evaluate Your Portfolio Over Time

“As you accrue a larger portfolio, take your winnings off the table often,” Young said. This way, you aren’t leaving all you earn at risk.

19. Review Your Budget

Just like you check in on your portfolio, you’ll want to look at your personal finances. Young recommends you “review your finances every three months to determine where you can save.”

20. Avoid Early Withdrawals 

If you withdraw from your retirement plan before you’re at the qualifying age to do so, you’ll face a penalty and won’t benefit from this account the way you could.

21. Live Within Your Means

It’s important that you write down a budget to help you spend only what you can afford and prevent you from racking up credit card debt,” Cowen said.

22. Consider Heading Home

“If a new grad chooses to live at home for two years after graduation and puts the money that he/she saves on rent toward retirement, this grad could retire five years earlier,” Cowen said.

23. Move Somewhere New

There are plenty of big cities that are affordable (you can find a list of them here), so if you’re spending too much now that prevents you from saving for your future, you may want to consider relocating.

24. Don’t Buy a McMansion

The big house with all the bedrooms may seem like a nice idea, but if it’s out of your price range, you’ll find yourself in hot water. You can go here to learn how to decipher how much house you can truly afford.

25. Let Technology Help You

Use savings and financial planning software … so you can manage how much you save, spend, invest and donate,” Cenedella said.

26. Ask for Advice

Garner experience from those who have “been there, done that.” You never know what gems of wisdom they may have.

27. Set Goals

“Work to create a goals-based plan,” Smith said. “This will show you how saving over time can lead to retirement.”

28. Negotiate Your Salary                    

“Even an extra $5,000 can help at each stage,” Cenedella said. “The compounding effect is enormous, and there’s always room to negotiate.”

29. Always Have a Plan B

If your company downsizes, what will you do? It’s important to have a fallback plan at any age in case your current one doesn’t work out.

30. Don’t Rely on Your Credit Cards

Racking up a lot of credit card debt means additional interest fees and serious stress. Only charge what you can truly afford.

31. Make Money From Your Hobbies

“Teach guitar lessons, buy items at a garage sale and then resell them online or pet sit for a family,” Cowen suggested. “These are just examples of personal hobbies that could turn into extra cash.”

32. Sell Things You Don’t Need

Whether you post your items on eBay or have a garage sale, it’s better to profit from what you don’t use than to have it lying around taking up space. The money you get can go toward your IRA, savings or even paying off debt. (Want more ideas? Here are 50 ways to help you stay out of debt.)

33. Keep Your Old Car

The shiny new cars on the lot may be alluring, but if your car still runs fine and doesn’t require a lot of repairs, it may be smart to hang on to it.

34. Shop Around for Better Rates

Whether it’s how much you pay for cable or your car insurance policy, make sure you’re getting the best deal.

35. Say Goodbye to Annual Fees

If you’re carrying a credit card with an annual fee that you rarely use or that doesn’t offer perks that truly benefit you, consider cutting ties and getting a credit card with no annual fee. Just make sure your credit can handle the ding of canceling a credit card before doing so.

36. Be Careful with Co-Signing

“Co-signers are on the hook for timely loan repayment, so any missed payments — even for someone else’s loan — can hurt a credit score,” according to credit bureau TransUnion.

37. Pay Off Student Loans as Early as Possible …

The sooner you get these off your back, the less you will pay in interest over the years.

38. … But Don’t Put All Your Extra Money Toward Debts

It’s good to focus on paying off your loans and other debts, but you still want to set money aside for retirement — even if it’s just $1 every day, or $10 every pay check. Something is better than nothing.

39. Go for the Health Benefits

Health Savings Accounts (HSAs) help you save to cover healthcare costs with contributions that are tax-deductible (or pretax, if made through payroll deduction) and any interest earned is tax-free.

40. Consider the Protection You Get from Insurance

“You’ll save a lot of money over the next 30 – 40 years as you ready for retirement,” Dan Green, CEO of Growella, said. “All it takes is one accident, though, to clear those savings out. That’s the point of insurance … you get protection from loss.”

41. Establish Healthy Habits

Because unhealthy ones are expensive.

42. Turn Savings Into Investments

“Take advantage of transportation savings or flexible spending accounts that can save you money,” Cenedella said. “Invest the amount you save.”

43. Find Ways to Lower Your Bills

Whether it’s energy-efficient light bulbs or a smart thermostat, cutting costs on bills you have to pay can really help fatten up your wallet.

44. Invest Your Tax Refund

Getting money back from Uncle Sam may be just the ticket to increasing your investments.

45. Do the Same with a Bonus

If your boss rewards you for a job well done, consider taking part of that money and putting it toward your retirement savings or investments.

46. Strategize When You’ll Take Social Security

Even if you retire at 65, you may opt to wait until you’re at least 70 to start collecting on Social Security to make sure you get the most out of these monthly payments.

47. Prioritize

You may want to save more for your child’s education, but remember: They can take out a student loan or work a part-time job to pay for school. You can’t take out a retirement loan.

48. See If You Qualify for an IDA

Some people qualify for an Individual Development Account (IDA), where contributed amounts are matched.

49. Consider Meeting with a Financial Adviser

If you want more guidance from a professional, it’s a good idea to find one who is certified by the Certified Financial Planner Board of Standards.

50. Get Educated

“Invest in the stock market and the Forex market, but first get educated in both types of investments and do the math,” said Robyn Mancell, partner at Girls Gone Forex, a company that teaches women how to trade in the market.

Image: monkeybusinessimages

The post 50 Things Millennials Can Do Now So They Can Retire at 65 appeared first on Credit.com.

The Credit Card That Can Help You Save for Retirement

If you’re serious about long-term savings — whether for your retirement, your child’s college fund or both — you already know you need to do more than just save your pennies. You need dollars, and lots of them.

So, what if you could put a percentage of every purchase you make on your credit card into one of those investment funds? Would you do it? If your answer is yes, you may want to take a look at the Fidelity Rewards Visa Signature card from Fidelity Investments, because that’s exactly what this credit card does.

What Is the Fidelity Rewards Visa Signature Card?

The Fidelity Rewards card offers cardholders a very straightforward 2% back on all purchases, simple as that. Your reward is then deposited directly into a Fidelity account. For every $2,500 spent, a deposit of $50 is made into the investment account of your choice, and you can choose from a variety of accounts that meet your savings goals. Want your money deposited directly for retirement? Fidelity can put your 2% right into a traditional, Roth, rollover or SEP IRA. (Not sure what an IRA is? No worries: We have a full explainer on individual retirement accounts right here.) You can’t deposit directly into a 401K, however.

Prefer a brokerage account? No problem. For certain cardholders, there’s also the option of depositing your rewards into a 529 college savings account.

Of course, you can choose to spend your rewards instead of investing them, but the redemption value is lower if you choose to redeem your points for other rewards. The exact redemption rate varies, depending on how you cash in, a Fidelity spokesperson said. For instance, if you redeem rewards for retailer gift cards, the rate is .5% (10,000 points for $50 gift card).

No Spending Categories & No Limits

Not only does the Fidelity Rewards card making saving easy, there are no special spending categories and no limits or caps on the amount of rewards you can earn. Plus, the card’s variable 14.99% annual percentage rate means carrying a small balance every now and then won’t necessarily wipe out the rewards you earn. (Friendly reminder: It’s still important when using a rewards credit card to try your very best not to.)

New cardholders can get a $100 bonus after spending $1,000 in the first 90 days, but the funds must be deposited directly into a qualified Fidelity account. Qualifying accounts for both the regular rewards savings and signup bonus include:

  • Fidelity Cash Management Account
  • Fidelity-managed 529 College Savings plan
  • Retirement account
  • Fidelity Go account 

The Fidelity Rewards card also comes with all the benefits provided through the Visa Signature platform, including:

  • Auto rental collision coverage. Rent your automobile with your Fidelity Rewards card and you can waive the rental agency’s collision coverage.
  • Emergency assistance while traveling. Find the help you need when you’re on the road.
  • Purchase protection. Extra coverage for the things you buy with your card, including reimbursement for damage or theft.
  • Warranty manager service. This service helps you keep track of the warranties on the items you purchase with your card.
  • Lost luggage reimbursement. This service covers lost or stolen baggage.
  • Travel accident insurance. This coverage will help if you’re injured while traveling.
  • Roadside dispatch. Need a tow? Locked yourself out of your car? This pay-per-use service offers many benefits, including emergency roadside assistance.
  • Visa Signature Concierge. Access to 24-hour complimentary assistance with everything from booking travel to getting concert tickets.

Is the Fidelity Rewards Visa Signature Card Right for You?

Even if you like the idea of of a card with no annual fee that lets you earn 2% on every purchase you make and then directly invests that money toward your savings goals, the Fidelity Rewards card isn’t for everyone. Here are a few things to keep in mind as you weigh your decision:

  1. Do you have a Fidelity investment account? If you don’t, you’ll want to keep in mind that you can’t use your rewards as a deposit to establish a new Fidelity account. Rewards can only be deposited into existing accounts.
  2. Do you have excellent credit? To qualify for the Fidelity Rewards card, you’re going to need excellent credit. If you don’t know what your credit score is, you can get your two free credit scores, updated every 14 days, right here on Credit.com using our free credit report snapshot. It provides personalized details on how you can improve your scores, including a timeline of how long it will take to do so, across five key areas affecting your credit scores. It also provides you with a personalized list of some of the credit cards you would qualify for.
  3. Do you prefer investing over perks or cash back? If you travel a lot, whether for work or play, you might prefer some of the benefits that travel rewards cards offer, like free upgrades, free hotel stays, waived baggage fees and other non-monetary perks. Likewise, if you’d like more flexibility in what your rewards can be used for, a cash-back rewards card might be better for you.
  4. Can you get higher rewards with another card? If you want more flexibility than the automated investing inherent with the Fidelity Rewards card allows, there are cards that offer higher rewards (for example, the American Express Blue Cash Preferred gives a whopping 6% cash back on up to $6,000 in purchases per year at U.S. supermarkets), so the automated investing aspect should be particularly important to you.

Remember, whenever you’re shopping for a rewards card, it can really pay to keep your spending habits and rewards goals in mind as you compare cards. To get started, you can check out our list of the best cash back credit cards. And, no matter what type of plastic you’re on the hunt for, you can reference our expert guide to getting the best terms you possibly can on a credit card.

At publishing time, the American Express Blue Cash Preferred credit card is offered through Credit.com product pages, and Credit.com is compensated if our users apply and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment. This content is not provided by the card issuer(s). Any opinions expressed are those of Credit.com alone, and have not been reviewed, approved or otherwise endorsed by the issuer(s).

 

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

Image: Bliznetsov

 

The post The Credit Card That Can Help You Save for Retirement appeared first on Credit.com.

Self-Employed? Here’s How to Plan for Retirement

Don't forget to include retirement savings in your plan to build a successful business.

When you’re hard at work as a self-employed entrepreneur or freelancer, retirement can seem like something that’s miles away. It can not only feel less important than getting your business or trade off the ground, but also seem like you won’t have spare money to set aside for a good, long time. You can save for your future, however. Here are some steps self-employed individuals can take to plan for their retirement.

1. Enroll in a Retirement Plan

Yes, there are retirement plan options out there for self-employed people like you. These include:

One-Participant 401K Plan: The one-participant or “solo” 401K is essentially the same as a traditional 401K designed to cover a business owner with no employees. (Note: You can hire your spouse and include them in this plan as well.) According to the IRS, you can contribute elective deferrals up to 100% of your earned income and employer non-elective contributions (determined by a special computation). Contributions are made pre-tax (you’ll be taxed when you withdraw the money, which you typically can’t do without a penalty until age 59½) and give you great flexibility in how much (or how little) you contribute. The contribution limits for 2017 are $18,000 and 25% of compensation up to the amount that’s defined in your plan, respectively, according to the IRS.

Traditional Individual Retirement Account (IRA): Many self-employed people can see immediate rewards from contributing to a traditional IRA, as these are tax-deductible in certain situations, giving you an immediate break on your taxable income. For example, if your income is $60,000, and you contribute $4,000 to a traditional IRA, you’ll only be taxed on $56,000 for that year. Keep in mind, however, that you’ll have to pay taxes when withdrawing the money and tax penalties can arise if you withdraw your retirement dollars early.

Simplified Employee Pension (SEP) IRA: To set this plan up, you simply fill out a form — no annual reporting to the IRS is required. The IRS notes that you can open a SEP IRA through your bank or other financial institution and can contribute up to 25% of your net earnings from self-employment. This type of plan is generally best if your business has no employees, or very few, because you have to include all employees in the plan — and everyone has to receive the same amount, which can get pricey if you have a lot of people working for you.

Savings Incentive Match Plan for Employees (SIMPLE) IRA: Per the IRS, a SIMPLE IRA plan is best suited as a start-up retirement savings plan for small employers. Under this plan, both employees and employers can contribute to traditional IRAs.

You can read more about the retirement plan options available to self-employed individuals on the IRS’s website and check out our glossary of common retirement terms you’ll want to know.

2. Budget By Percentages, Not Dollars

As a self-employed person, your income likely fluctuates from month to month, meaning you can’t budget the same way that a non-self-employed person would. It can help to think about budgeting for non-fixed expenses in percentages, instead of dollars, personal finance expert AJ Smith suggested in a blog post on Credit.com.

“If, for example, you want to save for retirement, try putting aside a certain percentage of your income rather than a certain dollar amount,” Smith wrote. “A dollar amount can lead you to save too little in high-income months and more than you can realistically afford in low-income ones.”

3. Be Vigilant About Your Taxes

Paying taxes can be a lot more complicated when you’re self-employed. For instance, throughout the year, you’ll have to estimate how much you owe for Medicare, Social Security and income tax and pay it in quarterly installments — and face penalties if you do so incorrectly. Plus, you’ll have to a pay a self-employment (SE) tax, which is essentially a combination of the Social Security and Medicare tax.

It’s important to properly work your tax payments into your budget, so you don’t wind up spending dollars you don’t really have. You may also want to consult with a tax accountant or other financial expert about your taxes, so you don’t miss out on important deductions or credits that could drive more money to your bottom line — and subsequently your retirement plans.

4. Stay on Top of Your Credit

Similarly, you’ll want to monitor your credit scores to make sure they’re in good shape and that you don’t wind up paying extra in interest on personal and business financing. Those dollars can severely hamper your ability to save for your eventual happy golden years. (You can see how your credit is doing by getting two free credit scores every 14 days on Credit.com.)

Remember, too, many business lines of credit require a personal guarantee, meaning you’ll be personally liable for any debts your business has that go unpaid. As such, you’ll want to carefully consider all loans you’re thinking of taking on to finance your business. Overextending yourself can make it harder to save not just for retirement, but also for future bills and/or emergencies that may come your way.

Image: julief514 

The post Self-Employed? Here’s How to Plan for Retirement appeared first on Credit.com.

60 Years Old and Still Paying Off Student Debt

Like a growing number of student loan borrowers, 60-year-old Beatrice Hogg will be paying off her loans well into her 80s.

“I’ll probably die before I pay off the loan,” says Hogg, a social worker living in Sacramento, Calif. In total, she owes $45,000 in outstanding federal student loan debt. She borrowed the money in the early 2000s in order to finance her Master of Fine Arts degree in creative nonfiction, which she received in 2004 from Antioch University of Los Angeles.

With monthly payments of $251, Hogg says she doesn’t expect to pay off her loans until well into her 80s. That could easily change if she runs into the same bouts of unemployment that have dogged her over the last decade, leading her to defer her payments several times.

Hogg’s story is further proof that student debt has become a multi-generational issue. A recent report by the Consumer Financial Protection Bureau found the share of Americans 60 years and older who carry federal student loan debt has quadrupled over the last 10 years — from 2.7% of all borrowers to 6.4%. In total, this group of borrowers carries roughly $66.7 billion — or 5.4% — of all outstanding federal student loan debt in the U.S.

According to the CFPB’s report, borrowers who carry student debt late into their lives have more trouble repaying them, reflecting other possible financial issues. Borrowers over the age of 60 were twice as likely to have missed at least one student loan payment compared to the same group in 2005, the CFPB found, and 2 in 5 of borrowers 65 and older have loans in default.

The CFPB reports older Americans burdened with student loan debt are also more likely to skip important health care purchases like prescription medication, doctors’ visits, and dental care because they can’t afford it. As an example, the report cites a separate, 2016 study that found 39% of older borrowers said they skipped those needs compared to 25% of those without a student loan in 2014.

As student loan borrowers have grown older, the number of borrowers who have their Social Security benefits garnished because of student loan payments increased from 8,700 to 40,000 from 2005 to 2015 according to the CFPB. The U.S. government can garnish up to 15% of a borrower’s Social Security benefits as long as the remaining balance is greater than $750 each month.

How did we get here?

Nearly two-thirds, or 73%, of student loan borrowers 60 and older said they took on student debt for a child’s or grandchild’s education. More than half (57%) of all those who co-signed student debt are 55 and older.

Adding to the burden of debt, says Betsy Mayotte, an expert in student loan repayment strategies at American Student Assistance, is the fact that families are now borrowing more than ever to pay for rising college costs. For example, between 2006 and 2016, in-state tuition and

fees at public four-year institutions outpaced inflation by about 3.5% per year according to the College Board. In 2016, the average in-state student at a public four-year institution paid $3,770 in tuition and fees compared to $2,220 in 2009.

“You can have families with a lower income level end up taking out six figures in student loan debt,” Mayotte says.

Another reason student loan borrowers are getting older is because they now have the option to extend their repayment terms if they are struggling to make payments. The Obama administration rolled out several of these income-driven repayment plans in the years after the Great Recession.

The lasting impact of senior student loan debt

It’s simple to understand how paying student loans leaves less to save for retirement.

“For every dollar that you pay toward your student loan payment, it’s a dollar that you’re not putting toward retirement,” says Mayotte.

Hogg now works as a county social worker and began making payments again in December 2015. She says she’s “been current ever since,” but she has yet to contribute to a retirement plan.

“I’m sure that if I didn’t have the [student] loans, I could have probably set myself up better for retirement,” says Hogg. “Hopefully I’ll be able to stay at my job until I’m vested in their retirement plan.”

Tips for struggling student loan borrowers

If you have federal student loans and are struggling with your payment each month, you may want to consider requesting an income-driven repayment plan through your loan servicer. The plans can reduce your payment to as little as $0. You can also request to defer your loans or place them in forbearance if you’re going through financial hardship. Just keep in mind that interest is still accruing.

“It could be tempting to try to get the lowest payment on your student loans,” says Mayotte. But remember, “you’re trying to win the war and not the battle. The longer you pay over the life of the loan, the more you pay in interest.”

Mayotte recommends creating a budget to figure out the most you can afford to pay toward your loans each month. The Department of Education has a calculator on its website that you can use to see your estimated payments under each repayment plan.

When you’re on a income-driven repayment plan, you should keep in touch with your loan holder, and don’t forget to apply for renewal each year.

Unfortunately, if you have private loans, there’s not much you can do to reduce your monthly payment outside of consolidating or refinancing your loans with a lender like SoFi, Earnest, or LendKey. Mayotte says she sees those with private loans and those who don’t complete their degree or program struggle most with repayment.

“The people that I haven’t been able to help almost exclusively have had private student loan debt,” says Mayotte. She says it’s because they don’t have the many repayment options federal student loans do and “life can happen.”

The final word

Despite her debt burden, Hogg says she’s happy as a social worker and says she doesn’t regret getting her master’s. She regrets that she used student loan debt to finance it.

“I regret that I had that big of a gap in my payments from being unemployed. I just wish there were more grants available for getting a higher degree,” says Hogg.

The post 60 Years Old and Still Paying Off Student Debt appeared first on MagnifyMoney.

Am I On Track For Retirement?

Inquiring about your path to retirement is one of the most important financial questions out there. Every year thousands of Americans are polled, and the overwhelming majority are worried about being on track for retirement or running out of money in retirement. According to Prudential’s 2016 Retirement Preparedness Survey, for 59% of current retirees, “not running out of money” in retirement is on the top of their priority list. Among those who are still approaching retirement, about one in four Americans are worried about not having enough money, with millennials leading the pack at at 29%.

There also seems to be a huge disconnect between our fears around money and the confidence in our ability to remedy those issues. Seventy-one percent of people consider themselves capable of making wise financial decisions, but only 2 in 5 don’t know what their money is invested in. Couple that with the fact that 25% of Americans have less than $1,000 in retirement savings, it is clear to see that we’re overconfident and underprepared.

While there isn’t a wealth of information as to why we’re so confident with our money, a part of the problem is not knowing where to start, not feeling like there is enough money to invest for retirement and paying down debt.

Some estimates say you’ll need as much as $2.5 million to retire comfortably, while the average 401(k) account balance is just $96,000, according to Vanguard. The truth is there is no one-size-fits-all figure. The number you need to retire comfortably depends heavily on when you plan to retire, your cost of living, your health, and how long you live in retirement. Additionally, those living in rural areas usually don’t need as much as those in metro area.

Here are a few ways to figure out how much you need and to check if you’re on track.

1. Do the math

Retirement planning calculators can get pretty complex, but to simply find out if what you have saved already is on par for what you will need in the future, there are some very easy calculations that you can use. One popular way to see if you’re on track is by using retirement benchmarks.

Using the chart below from JPMorgan is pretty straight forward. If you’re 35 years old with a household income of $75,000, you should have a total of $120,000 invested today. These charts, however, aren’t perfect because the underlying assumptions can vary wildly.

This chart from Charles Farrell, author of Your Money Ratios, suggests at 35-year-old making $75,000 per year should have $67,500 saved. This is $52,500 less than the JPMorgan chart shown earlier. This is because different models use different assumptions about how much your investments may grow, how much you continue to save, and at what age you plan to retire.

The JPMorgan chart assumes you will only save 5% per year versus 12% in Farrell’s model. Also when comparing both charts JPMorgan would have you on pace for saving just 8.4 times your salary versus 12 times your salary; a difference of $270,000. No benchmark is perfect. These estimates are meant to provide a quick assessment to let you know if you’re on the right track in terms of how much you have invested. They do not suggest which investments you should be holding.

2. Use a retirement calculator

In addition to doing the math yourself, there are some free tools to check your progress to retirement. Fidelity has a calculator that works very similar to the Charles Farrell mode, which gives you a factor that you need to have saved. Using the same example of a 35-year-old making $75,000, Fidelity’s calculator suggests having 2 times their salary, or about $150,000.

It is worth noting that Fidelity’s assumptions of how they reached this figure were not on the site, but by age 65 they suggest having a factor of 12 times your salary saved.

The Vanguard Retirement Nest Egg Calculator takes a different approach. Instead of taking your age and spitting out the amount you should have saved, this calculator asks you your current savings and investment allocation and gives you a prediction of whether your money will last or not. This is done by using what is called a Monte Carlo simulation. Vanguard tests the factors 5,000 times by changing different variable such as investment performance and cost of living.

Keeping all factors the same, someone who has saved $900,000 (which is 12 times their annual income of $75,000) would have a 50% chance that their money would not run out in 30 years.

Again, it is always important to consider the assumptions. In this calculator Vanguard is assuming you’re investing 20% of your money in stocks, 50% in bonds, and 30% in cash (indicated in the pie chart). This highlights the importance of asset allocation and its effect on your investment success. When we change the allocation, the success rate changes as well.

In this example, by reducing the cash from 30% to 10% the chances of success increased to 68%. Vanguard also assumes you’re withdrawing 5% of the portfolio per year, meaning that from the $900,000 you saved, you should be spending $45,000 of it each year.

If you were to increase or decrease this number, the chances of your money surviving would change as well.

By changing the withdrawal rate by just 1% to $36,000 per year, the probability shoots up to 92%. Most experts agree that a 4%-5% withdrawal rate is standard; what you decide to withdraw depends on what amount of money you think you can live off of at that point in time.

Finally, SmartAsset’s retirement calculator takes somewhat of a combined approach from the previous two we covered. Their calculator runs a Monte Carlo simulation like Vanguard and also takes into account what you’re currently making and when you want to retire, like Fidelity and JPMorgan. What makes SmartAsset’s calculator stand out, however, is that it takes into account your current location, monthly savings, and marital status. If you are falling short of your goal, the calculator tells you how much you need to save to catch up.

 

Meet with a financial planner

Finally, you can seek professional advice. Financial planners will take your investments, savings rate, and several other factors and show you if you’re on track. Additionally, a financial planner may also suggest better investments to get you closer to your goals.

Many banks and brokerage firms will run a comprehensive financial plan with no cost if you’re a customer. Independent financial planners may charge from $1,000 to $2,500 for a plan. Many people believe independent financial planners go more into depth with their analysis versus those who work in a bank. But it really comes down to a matter of preference, how well the person listens to you, and if they have your best interest as their top priority.

The post Am I On Track For Retirement? appeared first on MagnifyMoney.

3 Common Mistakes Savers Make When They Invest in Target-Date Funds

archer target arrow investing retirement saving

Target-date funds (TDFs) are one of the most popular investment options offered by employers because they provide employees an all-in-one portfolio within their retirement plans. To show how popular they are, more than 70% of all 401(k)s provide TDFs, and approximately 50% of participants own them. However, most employees don’t even know what target-date funds are or how they work.

So why the fuss about target-date funds? Although popular, many participants are misusing them and hurting themselves in the long run.

What a Target-Date Fund does:

A TDF is simply an investment fund that owns a bunch of index-style mutual funds. Because TDFs include funds with broad exposure to different types of assets, they allow novice investors to access countless stocks and bonds. For example, the Vanguard 500 Index Fund tracks the S&P 500, which gives investors access to 500 different stocks. A TDF may contain several funds similar to the Vanguard one.

According to a recent study by Aon Hewitt, retirement savers who choose to invest in a single TDF and no other funds had higher investment returns by over 2%. In addition, those participating in TDFs outperformed people who manually managed their retirement investments by a whopping 3%.

Here are some reasons they have been misused, how to overcome them, and why you only need one in your portfolio.

Choosing the wrong year

The name “target-date fund” means exactly what it sounds like. You choose a fund based on the year or “target date” that you plan to retire. TDFs are offered in five-year increments — 2035, 2040, 2045, 2050, and so on. Your goal is to pick a TDF associated with a date that is closest to when you expect to retire.

For example, if you’re 25 years old today and plan to retire at age 65, you would opt for a 2055 TDF option.

Why does the year matter so much? Because the closer you get to retirement, the more conservative your investments should become. This is important, because you have less and less time to bounce back from setbacks as you get closer to retirement. The way TDFs work, they tend to be more heavily invested in risky assets like stocks in your early working years.

“As the investor ages and moves closer to their intended retirement date, a target-date fund will reduce the overall investment risk,” explains John Croke, a certified financial adviser with Vanguard. This process is known as the glide path.

Choosing more than one TDF

Since TDFs are pretty straightforward, many people mistakenly think that they need to split their retirement savings among more than one TDF in order to be truly “diversified.” But the whole point of a TDF is that you only need to invest in one — it is automatically diversified among many assets for you.

“TDFs are designed as ‘all-in-one’ solutions that provide automatic diversification across multiple asset classes,” Croke says. “Owning more than one TDF is not advised or necessary.”

You shouldn’t treat your TDF as if you were a day trader trading stocks either. It’s better to invest in your TDF and keep your funds there rather than to jump in and out trying to time the market.

Paying too much in fees

Compared to traditional mutual funds, TDFs are especially appealing because they charge such low fees. In the world of investing, fees come in many different forms, but the important fee to watch out for is called the “expense ratio.” This is the amount your fund manager charges you for the ability to own that fund. Expense ratios can be as low as a fraction of a percentage or as high as several percentage points. It may not sound like much of a difference, but even a difference of one or two points can mean losing tens of thousands if not hundreds of thousands of dollars over the decades until you retire.

Also, participating in more than one fund just subjects you to more fees that are unnecessary. Why pay more when you don’t have to?

The final word

All in all, TDFs provide an easy, diversified, and low-cost means to invest for retirement. All you need to do is choose one that matches the year you plan to retire, make tax-deferred payments from your paycheck into the fund, and allow your account to grow with history proving that time is on your side when it comes to the markets.

The post 3 Common Mistakes Savers Make When They Invest in Target-Date Funds appeared first on MagnifyMoney.

4 Ways to Boost Your 401K

boost-your-401K

Millions of Americans are having difficulty saving for retirement. Student loan debt, increased food and housing costs, and stagnant wages are contributing factors.

If you have an employer-sponsored retirement plan, there are several steps you can take to boost your 401K.

1. Maximize Your Contributions

Once you establish your 401K account, you may want to increase your contributions. Usually the default contribution rate is between 3% and 5%. It is recommended that you should save at least 10% of your income. If you can afford to do so, I would recommend maximizing your contributions. In 2016, you can make a maximum contribution of $18,000. If you are 50 or older, the IRS allows you to make a catch-up contribution of $6,000 for a total of $24,000.

2. Take Advantage of Your Employer Match

Many employers offer to match your 401K contributions by a percentage or dollar amount. An employer may offer a 100% match up to 5% of your contribution. For example, if you contribute 5% of your salary to your 401K, the employer will match your 5% for a total of 10%. The employer may or may not offer additional matching beyond this 5% but it is an incentive for you to save. If you do not take advantage of the match, it is money that you are leaving on the table.

3. Minimize Expenses

While a 401K plan allows you to defer taxes, there may be fees associated with the investment vehicles offered by the plan. Choosing an index fund or an exchange-traded fund with low expense ratios will minimize your expenses while adding to your long-term returns. Sales loads can also take a bite out of your returns. Sales charges are paid to the broker who sold you the mutual fund. Consider choosing a no-load mutual fund as an alternative. Another set of fees that you may notice are commissions or transaction fees. If your plan offers a brokerage account, you may be paying a commission on each trade.

4. Consolidate Your 401K Plans

Nowadays, it is not uncommon for someone to have had several jobs. We may have contributed to several different 401K plans with our former employers. Rolling over these balances into your existing employer’s plan would give you full control over your retirement assets. If you are in transition or self-employed, you can consolidate your retirement plans at a brokerage firm or a bank.

The federal government has developed a retirement vehicle, myRA, to help people without a retirement plan save for their future. Several states are planning or implementing their own retirement plans. Although these efforts are commendable, they are limited in their scope. Ultimately, we must be responsible for our own retirement planning.

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